form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
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OR
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM _______________ TO
________________.
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Commission
file number: 001-33807
EchoStar
Corporation
formerly
known as EchoStar Holding Corporation
(Exact
name of registrant as specified in its charter)
Nevada
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26-1232727
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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90
Inverness Circle E.
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Englewood,
Colorado
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80112
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (303) 706-4444
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Exchange on Which Registered
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Class
A common stock, $0.001 par value
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes
£
No T
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.
Yes
£
No T
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Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes £ No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. £
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Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £ Accelerated
filer £
Non-accelerated filer T Smaller
reporting company £
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Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes £
No T
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As
of June 29, 2007, the registrant’s common stock was not publicly
traded.
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As
of February 19, 2008, the Registrant’s outstanding common stock consisted
of 42,026,585 shares of Class A common stock and 47,687,041 shares of
Class B common stock, each $0.001 par value.
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DOCUMENTS
INCORPORATED BY REFERENCE
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The
following documents are incorporated into this Form 10-K by
reference:
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Portions
of the Registrant’s definitive Proxy Statement to be filed in connection
with its 2008 Annual Meeting of Shareholders are incorporated by reference
in Part III.
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PART I
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i
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Item
1.
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1
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Item
1A.
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23
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Item
1B.
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36
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Item
2.
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36
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Item
3.
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37
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Item
4.
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40
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PART
II
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Item
5.
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Item
6.
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40
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Item
7.
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42
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Item
7A.
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60
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Item
8.
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61
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Item
9.
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61
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Item
9A.
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61
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Item
9B.
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61
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PART
III
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Item
10.
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61
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Item
11.
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62
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Item
12.
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62
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Item
13.
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62
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Item
14.
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62
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PART
IV
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Item
15.
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62
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66
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F-1
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 throughout this report. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or
“anticipate” will occur and other similar statements), you must remember that
our expectations may not be correct, even though we believe they are
reasonable. We do not guarantee that any future transactions or
events described herein will happen as described or that they will happen at
all. You should read this report completely and with the
understanding that actual future results may be materially different from what
we expect. Whether actual events or results will conform with our
expectations and predictions is subject to a number of risks and
uncertainties. For further discussion see Item 1A. Risk
Factors. The risks and uncertainties include, but are not
limited to, the following:
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We
may not realize the potential benefits that we expect from our separation
(“Spin-off”) from DISH Network. Certain of these benefits
depend upon market acceptance of our separation from DISH Network which we
cannot predict and which may be affected by significant cross-ownership by
our Chairman and Chief Executive Officer as well as interlocks between
management and the board of directors of us and DISH
Network.
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We
will incur significant costs as a newly independent company, which may
exceed our estimates. There will also be negative effects
arising from our separation from DISH Network, including loss of access to
its financial resources.
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We
currently depend on DISH Network and Bell ExpressVu for substantially all
of our revenue, and the loss of, or a significant reduction in orders
from, or a decrease in selling prices of set-top boxes to either of these
two customers would significantly reduce our revenue and adversely impact
our operating results.
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We
currently have substantial unused satellite capacity. Future
costs associated with this excess capacity will negatively impact our
margins if we do not generate revenue to offset these costs. In
addition, because a substantial portion of the capacity of each of our
AMC-15, AMC-16 and EchoStar IX satellites remains without long-term
anticipated use by DISH Network, there is a significant risk that in the
future, in addition to reporting lower than expected revenues and
profitability we could be required to record a substantial impairment
charge relating to one or more of these satellites. We
currently estimate that these potential charges could aggregate up to $250
million, which, if incurred would have a material adverse effect on our
reported operating results and financial
position.
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Our
historical combined financial information included in this report is not
indicative of our future financial position, future results of operations
or future cash flows, nor does it reflect what our financial position,
results of operations or cash flows would have been as a stand-alone
company during the periods presented. We were not profitable
during the years ended December 31, 2007, 2006 and 2005, as our operations
have historically been dedicated primarily to support DISH Network and we
provided our products and services to DISH Network at
cost.
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We
may face actual or perceived conflicts of interest with DISH Network in a
number of areas relating to our past and ongoing relationships, including
(i) cross-officerships, directorships and stock ownership, (ii)
intercompany transactions, (iii) intercompany agreements, and (iv)
business responsibilities.
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Our
ability to decrease our losses or to generate revenues will depend in part
on our ability to grow our business. This may require
significant additional capital that may not be available on terms that
would be attractive to us or at all. In particular, current
dislocations in the credit markets, which have significantly impacted the
availability and pricing of financing, particularly in the high yield debt
and leveraged credit markets, may significantly constrain our ability to
obtain financing to support our growth initiatives. These
developments in the credit markets may have a significant effect on our
cost of financing and our liquidity position and may, as a result, cause
us to defer or abandon profitable business strategies that we would
otherwise pursue if financing were available on acceptable
terms.
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We
may also use a significant portion of our existing cash and marketable
securities to fund stock buyback programs. Our board of
directors has approved a program in which we may repurchase up to $1.0
billion of our Class A common stock during
2008.
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If
DISH Network enters into a business combination transaction, or if Mr.
Ergen no longer controls a majority of the voting power of DISH Network or
of us, our relationship with DISH Network could be terminated or
substantially curtailed with little or no advance notice. Any
material reduction in our sales to DISH Network as a result of a change in
control of DISH Network would have a significant material adverse effect
on our business and financial
position.
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Our
future success may depend on our ability to identify and successfully
exploit opportunities to acquire other businesses or technologies to
complement, enhance or expand our current business or products or
otherwise offer us growth opportunities. We may not be able to
pursue these growth opportunities
successfully.
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We
have entered into certain strategic transactions and investments, and we
may increase our strategic investment activity in the United States and in
international markets. These investments, which we believe
could become substantial over time, involve a high degree of risk, are
concentrated in a few companies and could expose us to significant
financial losses if the underlying ventures are not
successful. These investments may also cause us to defer or
suspend share repurchases.
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Our
business relies on intellectual property, some of which is owned by third
parties, and we may inadvertently infringe their patents and proprietary
rights. We may be required to cease developing or marketing
infringing products, to obtain licenses from the holders of the
intellectual property at a material cost, or to redesign those products in
such a way as to avoid infringing the patent claims of
others.
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We
depend on sales of set-top boxes for nearly all of our revenue, and if
sales of our set-top boxes decline, our business and financial position
will suffer.
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Our
commercial success in selling our set-top boxes to cable television
operators depends significantly on our ability to obtain licenses to use
the conditional access systems deployed by these operators in our set-top
boxes. The owners of these conditional access systems are in
many cases competitors of ours. There can be no assurance we
will be able to obtain such licenses on acceptable terms or at
all.
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In
order to grow our revenue and business and to build a large customer base,
we believe we will be required to increase our sales of set-top boxes in
international markets. We have limited experience selling our
set-top boxes internationally. To succeed in expanding these
sales efforts, we believe we must hire additional sales personnel and
develop and manage new relationships with cable operators and other
providers of digital television in international
markets.
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Our
set-top boxes are extremely complex and can have defects in design,
manufacture or associated software. We could incur significant
expenses, lost revenue, and reputational harm if we fail to detect or
effectively address such issues through design, testing or warranty
repairs.
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We
obtain many components for our set-top boxes from a single supplier or a
limited group of suppliers. Our reliance on a single or limited
group of suppliers, particularly foreign suppliers, and our increasing
reliance on subcontractors, involves several risks. These risks
include a potential inability to obtain an adequate supply of required
components, and reduced control over pricing, quality, and timely delivery
of these components.
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Future
demand for our set-top boxes will depend significantly on the growing
market acceptance of high definition television, or HDTV. The
effective delivery of HDTV will depend on digital television operators
developing and building infrastructure to provide wide-spread HDTV
programming.
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If
we are unsuccessful in subsequent appeals in the Tivo case or in defending
against claims that our alternate technology infringes on Tivo’s patent,
we could be prohibited from distributing DVRs or be required to modify or
eliminate certain user-friendly DVR features that we currently offer to
consumers. The adverse affect on our business could be
material. To the extent that DISH Network does not indemnify
us, we could also have to pay substantial additional
damages.
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The
fixed satellite services industry is highly competitive and is
characterized by long-term leases and high switching costs. It will be
difficult to displace customers from their current relationships with our
competitors and we may face competition from others in the
future.
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Satellites
are subject to significant operational risks while in orbit. While we
believe that our satellite fleet is generally in good condition, certain
satellites in our fleet have experienced malfunctions or anomalies, some
of which have had a significant adverse impact on their commercial
operation. There can be no assurance that we can recover critical
transmission capacity in the event one or more of our in-orbit satellites
were to fail. Therefore, the loss of a satellite or other satellite
malfunctions or anomalies could have a material adverse effect on
us.
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We
are subject to comprehensive governmental regulation by the FCC for our
domestic satellite operations. We are also regulated by other federal
agencies, state and local authorities and the International
Telecommunication Union. Domestic and international regulations regarding
the licensing, authorization and operations of satellite communications
providers may restrict our fixed satellite services
operations.
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We
do not anticipate carrying insurance for any of the in-orbit satellites
that we will own, and we will bear the risk of any failures in our
in-orbit satellites. Because we bear this risk, failures in our
in-orbit satellites could have a material adverse effect on our reported
operating results and financial
position.
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We
may face other risks described from time to time in periodic and current
reports we file with the Securities and Exchange Commission
(“SEC”).
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All
cautionary statements made herein should be read as being applicable to all
forward-looking statements wherever they appear. In this connection,
investors should consider the risks described herein and should not place undue
reliance on any forward-looking statements. We assume no
responsibility for updating forward-looking information contained or
incorporated by reference herein or in other reports we file with the
SEC.
In this
report, the words “EchoStar,” the “Company,” “we,” “our” and “us” refer to
EchoStar Corporation and its subsidiaries, unless the context otherwise
requires. The words “DISH Network,” refers to DISH Network
Corporation and its subsidiaries, unless the context otherwise
requires.
OVERVIEW
Our
Business
EchoStar
Corporation (“EchoStar,” the “Company,” “we,” “us” and/or “our”), formerly known
as EchoStar Holding Corporation, is a newly formed entity which
had not conducted any operations prior to its Spin-off from DISH Network on
January 1, 2008. We were incorporated in Nevada on October 12,
2007 to effect the Spin-off. We had no material assets or activities
as a separate corporate entity until the contribution of assets to us by DISH
Network immediately prior to the completion of the Spin-off. We have
historically operated a digital set-top box business that comprises
substantially all of our historical revenue. We intend to develop a
fixed satellite services business using our fleet of owned and leased in-orbit
satellites.
Our
set-top box business designs, develops and distributes set-top boxes and related
products for direct-to-home (”DTH”) satellite service providers. Most
of our set-top boxes are sold to DISH Network, but we also sell a significant
number of set-top boxes to Bell ExpressVu and other international
customers. We currently employ over 700 engineers in our set-top box
and related businesses.
We intend
to develop our fixed satellite services business using our eight owned or leased
in-orbit satellites and related FCC licenses, a network of seven full service
digital broadcast centers, and leased fiber optic capacity with points of
presence in approximately 150 cities. We expect that our primary
customer initially will be DISH Network. However, we also expect to
lease capacity in the spot market and to government and enterprise
customers.
We have
entered into commercial agreements with DISH Network pursuant to which we will
have the obligation to sell set-top boxes and related products and provide fixed
satellite services to DISH Network at set prices for a period of two
years. However, DISH Network is under no obligation to purchase our
set-top boxes and related products during or after this two-year period and DISH
Network may terminate the agreements to receive fixed satellite services upon 60
days notice.
As part
of DISH Network, we competed with many of our potential customers. We
believe our separation from DISH Network may expand our opportunities to enter
into commercial relationships with these and other new customers, although there
can be no assurance that we will be successful in entering into any of these
commercial relationships.
Other
Information
We were
organized in October 2007 as a corporation under the laws of the State of
Nevada. Our Class A common stock is publicly traded on the Nasdaq
Global Select Market under the symbol “SATS.” Our principal executive
offices are located at 90 Inverness Circle E., Englewood, Colorado 80112 and our
telephone number is (303) 706-4444.
We were
formerly a wholly-owned subsidiary of DISH Network. On September 25,
2007, DISH Network announced its intention to pursue the disposition of 100% of
its shareholdings in us through a tax-free distribution to DISH Network’s
shareholders. Effective as of the distribution date of January 1, 2008, DISH
Network completed the distribution of our common shares to its
shareholders. The distribution was effectuated through a pro-rata
dividend to DISH Network’s shareholders consisting of 0.20 of a share of the
same class of our common stock for each share of common stock owned by DISH
Network shareholders on December 27, 2007, the record date for the
Spin-off.
Our
Relationship with Dish Network
Following
the Spin-off, our company and DISH Network will operate independently, and
neither will have any ownership interest in the other. In order to govern
certain of the ongoing relationships between our company and DISH Network after
the Spin-off and to provide mechanisms for an orderly transition, we and DISH
Network entered into certain agreements pursuant to which we will obtain certain
services and rights from DISH Network, DISH Network will obtain certain services
and rights from us, and we and DISH Network will indemnify each other against
certain liabilities arising from our respective businesses. The key terms
of these agreements are summarized under “Certain Intercompany
Agreements” set forth in our Proxy Statement for the 2008 Annual Meeting of
Shareholders under the caption “Certain Relationships and Related
Transactions.”
In the
near term, we expect that DISH Network will remain our principal customer.
Pursuant to the commercial agreements we entered into with DISH Network,
we will sell equipment, including set-top boxes to DISH Network and we will
provide broadcast services and other products and services to DISH Network, in
each case at cost plus an additional amount equal to an agreed percentage of our
cost, which will vary depending on the nature of the products and services
provided. We determined that, on a pro forma basis, the weighted average
margin over cost for these sales was approximately 13.1% for the year ended
December 31, 2007. This margin over cost was determined based on
specific margins over cost for various categories of equipment that we sold to
DISH Network in the relevant period, applying in each case the applicable margin
over cost as to which we and DISH Network agreed pursuant to our commercial
agreements. Because of continual advancements in the technology and
functionality of the equipment and services we will provide to DISH Network as
well as DISH Network’s right under our commercial agreements to terminate on 60
days’ notice, the implied margins derived from our pro forma financial
statements do not necessarily reflect the margins we will earn on equipment
sales to DISH Network in the future, and we expect that the margins we will earn
on sales to DISH Network in the future will likely be based largely on the
results of periodic negotiations between us and DISH Network that will reflect,
among other things, the equipment and services that best meet DISH Network’s
then current needs and its sales and marketing priorities, the product and
service alternatives available to DISH Network from other suppliers, and our
ability to respond to DISH Network ’s requirements and to continue to
differentiate ourselves from other suppliers on bases other than
pricing.
BUSINESS
SEGMENTS
We will
operate two primary businesses, a digital set-top box business and a fixed
satellite services business. Our set-top box business designs,
develops and distributes set-top boxes and related products primarily for
satellite service providers and consumers. Our fixed satellite
services business will be developed using assets which were contributed to us by
DISH Network in connection with the Spin-off.
Digital
Set-Top Business
Set-top
Boxes and Related Products
Our
set-top boxes permit consumers to watch, control and record television
programming through digital video recorder, or DVR, technology integrated with
satellite receivers. Certain of our set-top boxes are also capable of
incorporating internet protocol television, or IPTV, functionality, which allows
consumers to download movies, music and other content from the internet through
an Ethernet connection.
Our
current set-top box lineup includes:
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Standard-definition (“SD”)
basic digital set-top boxes: These devices allow
consumers who subscribe to television service from multi-channel video
distributors to access encrypted digital video and audio content and make
use of a variety of interactive applications. These applications include
an on-screen interactive program guide, pay-per-view offerings, the
ability to support V-chip type technology, games and shopping and parental
control.
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SD-DVR digital set-top
boxes: In addition to the functionality of a SD basic
digital set-top box, these devices enable subscribers to pause, stop,
reverse, fast forward, record and replay live or recorded digital
television content using a built-in hard drive capable of storing up to
200 hours of content. They also include the ability to support
video-on-demand, or VOD,
services.
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High-Definition (“HD”) digital
set-top boxes: These devices enable subscribers to
access the enhanced picture quality and sound of high-definition content,
in addition to the functionality of a SD digital set-top
box.
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HD-DVR digital set-top
boxes: These devices combine the functionality of the HD
set-top box and the DVR digital set-top box into a single device. Our
most-advanced HD-DVR set-top boxes are capable of storing up to 350 hours
of SD, or 55 hours of HD, content, contain IPTV functionality, and allow
users to greatly increase their DVR storage capacity through the use of
external hard drives.
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In
addition to set-top boxes we also design and develop related products such
as satellite dishes, remote controls and other devices and accessories,
and we will soon begin offering new digital-to-analog converter boxes,
which will allow consumers to view, record and play back local
over-the-air analog and digital broadcasts on analog TV
sets.
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Sling
Media, Inc. (“Sling Media”) was acquired in October 2007 by Dish Network and was
transferred to us as part of the Spin-off. Sling Media is the maker of the
Slingbox™, which allows consumers to watch and control their television
programming at any time, from any location, using personal computers, personal
digital assistants, smartphones and other digital media
devices.
We
operate six owned and two leased in-orbit satellites. We also have one owned and
one leased satellite under construction.
We also
operate a number of digital broadcast centers in the United States. Our
principal digital broadcast centers are located in Cheyenne, Wyoming and
Gilbert, Arizona. We also have five regional digital broadcast centers that
allow us to utilize the spot beam capabilities of our satellites. Programming
and other data is received at these centers by fiber or satellite, processed,
and then “uplinked” to our satellites for transmission to consumers. Equipment
at our digital broadcast centers also performs compression and encryption of our
customers’ programming signals.
Our
transponder capacity is currently used for a variety of
applications:
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Broadcasting
Services. We lease satellite transponder capacity to
broadcasters and programmers who use our satellites to deliver their
programming to U.S. cable systems and cable households. Our satellites are
also used for the transmission of live sporting events and satellite news
gathering services.
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Government
Services. We lease satellite capacity and provide
technical services to US government agencies and contractors. We believe
the U.S. government may increase its use of commercial satellites for
Homeland Security, emergency response, continuing education, distance
learning, and training.
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Network
Services. We lease satellite transponder capacity and
provide terrestrial network services to corporations. These networks are
dedicated private networks that allow delivery of video and data services
for corporate communications. Our satellites can be used for point to
point or point to multi-point one-way or two-way
communications.
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Satellite
IP. We currently aggregate content at our digital
broadcast centers and offer transport services for over 300 channels of
MPEG IV IP encapsulated standard-definition and high-definition
programming from our satellite located at the 85 degree orbital location.
We intend to offer these wholesale programming transport services to
telecommunication companies, rural cable operators, local exchange
carriers and wireless broadband
providers.
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Other
Business Opportunities
DISH
Network has entered into agreements to construct and launch an S-band satellite
and to lease its transponder capacity to a Hong Kong joint venture, which in
turn will sublease a portion of such transponder capacity to an affiliate of a
Chinese governmental entity to support the development of satellite-delivered
mobile video services in China. DISH Network also has recently
completed several other strategic investments, and we intend to evaluate new
strategic development opportunities both in the United States and in other
international markets. These investments have been transferred to us
as part of the Spin-off, and are part of our strategy to expand our business and
support the development of new satellite-delivered services, such as mobile
video services. The expertise we obtain through these investments may
also help us to improve and expand the services that we provide to our existing
customers.
However,
these investments involve many significant risks, including, among other things,
the risks that required regulatory approvals and other conditions may not be
obtained or satisfied, that we may not be able to enter into necessary
distribution and other relationships, and that the companies in which we invest
or with whom we partner may not be able to compete effectively in their markets
or that there may be insufficient demand for the new services planned by these
companies.
During
2007 DISH Network participated in an FCC auction for licenses in the 1.4 GHz
band and was the winning bidder for several licenses with total winning bids of
$57 million. DISH Network transferred these licenses to us in the
Spin-off. Subsequent to the Spin-off, as described below, we entered
into a commercial agreement with TerreStar Corporation and TerreStar Networks
Inc. regarding these licenses.
On
February 7, 2008, we completed several transactions under a Master Investment
Agreement, dated as of February 5, 2008 between us on the one hand, and
TerreStar Corporation and TerreStar Networks on the other hand. Under
the Master Investment Agreement, we acquired $50 million in aggregate principal
amount of TerreStar Networks’ 6½% Senior Exchangeable Paid-in-Kind Notes due
June 15, 2014; and $50 million aggregate principal amount of TerreStar Networks’
15% Senior Secured Paid-in-Kind Notes due February 15, 2014.
The
Exchangeable Notes are guaranteed by TerreStar License Inc. and TerreStar
National Services, Inc. and will mature on June 15, 2014. The
Exchangeable Notes are exchangeable for shares of TerreStar Corporation common
stock based on a price of $5.57 per share following effectiveness of TerreStar
Corporation stockholder approval. TerreStar Networks may be obligated
to repurchase all or a part of the Exchangeable Notes under certain
circumstances, including upon a change of control of TerreStar Networks or if
stockholder approval of the issuance of TerreStar Corporation common stock is
not effective by July 23, 2008. The Exchange Notes will bear interest
at 6.5% per annum, with such interest being payable in additional Exchangeable
Notes through March 2011. Additional cash interest may be payable in
the event that certain milestones leading to the effectiveness of the
stockholder approval are not met.
We also
entered into a Purchase Money Credit Agreement with TerreStar and Harbinger
Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special
Situations Fund LP (collectively, “Harbinger”), in which we and Harbinger have
each committed to provide up to $50 million in secured financing, the proceeds
of which may be advanced to TerreStar Networks from time to time as required for
TerreStar Networks to make required payments in connection with a communications
satellite to be constructed and launched for TerreStar
Networks. Pursuant to a Security Agreement, dated as of February 5,
2008, from TerreStar Networks in favor of US Bank National Association, as
Collateral Agent, TerreStar Networks granted a security interest to the
Collateral Agent in certain of TerreStar Networks’ assets to be financed by the
proceeds of the loan, including, among other things, the communications
satellite and related raw materials, work-in-progress, and finished
goods.
We also
entered into a Spectrum Agreement with TerreStar Corporation and TerreStar
Networks. Under the Spectrum Agreement, one of our subsidiaries will
enter into a lease, with TerreStar Corporation as lessee, of the 1.4 GHz
spectrum that we acquired in 2007. TerreStar Corporation will also
have the option exercisable on or before July 23, 2008, to acquire the
intermediate holding company through which we hold the spectrum, in exchange for
the issuance by TerreStar Corporation of 30 million shares of its common
stock. The issuance of these common shares and exercise by TerreStar
Corporation of its option will be subject to shareholder approval of the
issuance of these shares.
Expand set-top
box business to additional customers. We believe our
separation from DISH Network could enhance our opportunities to sell set-top
boxes to a broader group of multi-channel video distributors. Historically, many
of our potential customers have perceived us as a competitor due to our
affiliation with DISH Network. As a result of our recent separation from DISH
Network, we believe that we could have opportunities to enter into commercial
relationships with other multi-channel video distributors. There can
be no assurance, however, that we will be successful in entering into any of
these commercial relationships (particularly if we continue to be perceived as
affiliated with DISH Network as a result of common ownership and related
management).
Leverage
satellite capacity and related infrastructure. Our fixed
satellite services business benefits from excess satellite and fiber capacity
that we believe was in large part created through innovation and operational
efficiencies. While we expect that DISH Network will initially be our primary
customer for fixed satellite services, we believe market opportunities exist to
utilize our capacity to provide digital video distribution, satellite-delivered
IP, corporate communications and government services to a broader customer
base.
Offer
comprehensive network infrastructure solutions. We intend to
leverage our over 700 engineers to customize infrastructure solutions for a
broad base of customers. For example, we could offer a customer the ability to
deliver a fully integrated video programming solution, incorporating our
satellite and backhaul capacity, customized set-top boxes and network design and
management.
Capitalize on
change in regulations. Changes in
federal law and regulations applicable to the set-box industry may create
opportunities for us to expand our business.
·
|
Digital
transition. Congress has mandated that by February 2009
all network broadcasts be transmitted digitally, which will require
households that receive over-the-air broadcast signals with an analog
television to obtain a digital converter device. This digital
converter device is a new product and we believe that we are in a position
to develop and market devices that could allow us to effectively compete
in this new market.
|
·
|
Removable security
systems. The Federal Communications Commission, or FCC,
mandated that by July 2007 cable providers use removable security modules
to provide conditional access security for television
content. The FCC intends for this regulation to spur
competition in the retail set-top box market, providing an even playing
field between leased cable set-top boxes and retail-bought, cable-ready
TVs and set-top box equipment. We believe this new regulation
may create an opportunity for us to compete on a more level field in the
domestic market for cable set-top
boxes.
|
Exploit
international opportunities. We believe that
direct-to-home satellite service is particularly well-suited for countries
without extensive cable infrastructure, and we intend to continue to try to
secure new customer relationships from international direct-to-home satellite
service providers.
Pursue strategic
partnerships, joint ventures and acquisitions. We intend to
selectively pursue partnerships, joint ventures and strategic acquisition
opportunities that we believe may allow us to increase our existing market
share, expand into new markets, broaden our portfolio of products and
intellectual property, and strengthen our relationships with our
customers.
Act on the set-top
box replacement cycle. The broader
adoption of high definition television by consumers will require more advanced
compression (e.g., MPEG-4) and security technologies within set-top
boxes. This may launch a replacement cycle, particularly among
direct-to-home and cable providers with substantial bases of legacy equipment,
which may create additional market opportunities for us.
Customers
Digital
Set-top Box Business
Historically,
the primary customer of our digital set-top box business has been DISH
Network. For the fiscal years ended December 31, 2007, 2006 and 2005,
DISH Network accounted for approximately 83.8%, 84.5% and 85.6% of our total
historical revenue, respectively. In addition, Bell ExpressVu, a
direct-to-home satellite service provider in Canada, accounted for 10.7%, 12.2%
and 11.4%, respectively, of our historical total revenue for the fiscal years
ended December 31, 2007, 2006 and 2005. We also currently sell our
set-top boxes to other international direct-to-home satellite service providers,
although these customers do not account for a significant amount of our total
revenue.
In the
near term, we expect to rely on DISH Network to remain the primary customer of
our set-top box business and the primary source of our total
revenue. We have entered into commercial agreements with DISH Network
pursuant to which we are obligated to sell set-top boxes and related products to
DISH Network at set prices for a period of two years. However, DISH
Network is under no obligation to purchase our set-top boxes or related products
during or after this two-year period. In addition, a substantial
majority of our international revenue during the years ended December 31, 2007
and 2006, respectively, was attributable to sales of set-top boxes to Bell
ExpressVu. We cannot provide assurance that we will
continue to make sales to Bell ExpressVu at historical levels, or at
all. In addition, because of the competitive nature of the set-top
box business and the short-term nature of our binding purchase orders with Bell
ExpressVu, we could in the future be required to reduce the average
selling-prices of our set-top boxes to Bell ExpressVu, which in turn would
adversely affect our gross margins and profitability. We are
currently in discussions with Bell ExpressVu regarding an extension to our
current arrangements for the sale of set-top boxes and there can be no assurance
that these discussions will enable us to maintain our sales to Bell ExpressVu or
that if we are able to maintain our sales to Bell ExpressVu that we will not be
required to sell equipment at lower margins or enter into other arrangements
that may affect our revenues or earnings from our Bell ExpressVu
relationship.
Fixed
Satellite Services
We lease
transponder capacity on our satellite fleet primarily to DISH Network, but also
to a small number of government and enterprise customers, telecommunications
companies and other users. In the near term, due to our limited base
of customers, we expect to have a substantial amount of excess
capacity. For the year ended December 31, 2007, DISH Network
accounted for approximately 93.9% of our pro forma total fixed satellite
services revenue. We have entered into certain transitional
commercial agreements with DISH Network pursuant to which we are obligated to
provide DISH Network with fixed satellite services at fixed prices for up to two
years. However, DISH Network may terminate these agreements upon 60
days notice. While we expect to continue to provide satellite
services to DISH Network, its satellite capacity requirements may change for a
variety of reasons, including DISH Network’s ability to launch its own
satellites. Any termination or reduction in the services we provide
to DISH Network may increase excess capacity on our satellites and require that
we aggressively pursue alternative sources of revenue for this
business. Our other fixed satellite service sales are generally
characterized by shorter-term contracts or spot market sales.
Future
costs associated with our excess capacity will negatively impact our margins if
we do not generate revenue to offset these costs. In addition,
because a substantial portion of the capacity of each of our AMC-15, AMC-16 and
EchoStar IX satellites remains without long-term anticipated use by DISH
Network, there is a significant risk that in the future, in addition to
reporting lower than expected revenues and profitability, we could be
required to record a substantial impairment charge relating to one or more of
these satellites. We currently estimate that these potential charges
could aggregate up to $250 million, which, if incurred would have a material
adverse effect on our reported operating results and financial position. We
performed a preliminary assessment of the recoverability of the satellites
contributed by DISH Network assuming the Spin-off had been consummated and
preliminarily concluded that the recoverability of the satellites was not
impaired as of the distribution date.
Historically,
our sales and marketing efforts have been limited in scope and focused on
international opportunities because the majority of our products and services
were provided to DISH Network pursuant to purchase orders and not long term
contracts. In addition, we historically did not actively seek
opportunities with other multi-channel video providers in light of our
relationship with DISH Network, which is a competitor to many of these video
providers. Therefore, to successfully implement our business strategy
we will need to significantly expand our marketing and sales capabilities both
domestically and internationally. In particular, we will need to
expand our marketing and sales capabilities with domestic multi-channel video
providers other than DISH Network.
Manufacturing
and Material Sources
Although
we design, engineer and distribute set-top boxes and related products, we are
not generally engaged in the manufacturing process. Instead we
outsource the manufacturing of our set-top boxes and related products to third
party manufacturers who manufacture our products according to specifications
supplied by us. We depend on a few manufacturers, and in some cases a
single manufacturer, for the production of set-top boxes and related
products. Although there can be no assurance, we do not believe that
the loss of any single manufacturer would materially impact our
business. Sanmina-SCI Corporation and Jabil Circuit, Inc. currently
manufacture the majority of our set-top boxes.
For the
fiscal years ended December 31, 2007, 2006 and 2005, we have invested
approximately $79 million, $56 million and $46 million, respectively, in
research and development primarily related to our set-top box
business.
Digital
Set-top box Business
As we
seek to establish ourselves in the digital set-top box industry as an
independent business we will face substantial competition. Many of
our primary competitors, such as Motorola and Cisco, which recently acquired
Scientific Atlanta, have established longstanding relationships with their
customers. In addition, some of these competitors own the conditional
access technology deployed by their customers, which creates an additional
barrier to entry for us. We may not be able to license this
technology from these competitors on favorable terms or at all. In
addition, we may face competition from international developers of set-top box
systems who may be able to develop and manufacture products and services at
costs that are substantially lower than ours. Our ability to compete
in the digital set-top box industry will also depend heavily on our ability to
successfully bring new technologies to market to keep pace with our
competitors.
Fixed
Satellite Services Business
We
compete against larger, well-established fixed satellite service companies, such
as Intelsat, SES Americom and Telesat Canada, in an industry that is
characterized by long-term leases and high switching costs. Therefore, it will
be difficult to displace customers from their current relationships with our
competitors. Intelsat and SES Americom maintain key North American orbital slots
which may further limit competition and competitive pricing. In addition, our
fixed satellite service business could face significant competition from
suppliers of terrestrial communications capacity.
While we
believe that there may be opportunities to capture new business as a result of
market trends such as the digital transition and the increased communications
demands of homeland security initiatives, there can be no assurance that we will
be able to effectively compete against our competitors due to their significant
resources and operating history.
As
discussed above, we have six owned and two leased in-orbit satellites, and one
owned and one leased satellite currently under construction. While we
believe that overall our satellite fleet is generally in good condition, during
2007 and prior periods certain satellites in our fleet have experienced
anomalies, some of which have had a significant adverse impact on their
commercial operation. There can be no assurance that we can recover
critical transmission capacity in the event one or more of our in-orbit
satellites were to fail. We do not anticipate carrying insurance for
any of the in-orbit satellites that we will own, and we will bear the risk
associated with any in-orbit satellite failures.
|
|
|
|
Degree
|
|
Useful
|
|
|
Launch
|
|
Orbital
|
|
Life/
|
Satellites
|
|
Date
|
|
Location
|
|
Lease
Term
|
Owned:
|
|
|
|
|
|
|
EchoStar
III
|
|
October
1997
|
|
61.5
|
|
12
|
EchoStar
IV
|
|
May
1998
|
|
77
|
|
N/A
|
EchoStar
VI
|
|
July
2000
|
|
110
|
|
12
|
EchoStar
VIII
|
|
August
2002
|
|
110
|
|
12
|
EchoStar
IX
|
|
August
2003
|
|
121
|
|
12
|
EchoStar
XII
|
|
July
2003
|
|
61.5
|
|
10
|
|
|
|
|
|
|
|
Leased:
|
|
|
|
|
|
|
AMC-15
|
|
December
2004
|
|
105
|
|
10
|
AMC-16
|
|
January
2005
|
|
85
|
|
10
|
|
|
|
|
|
|
|
Under
Construction:
|
|
|
|
|
|
|
CMBStar
(owned)
|
|
Late
2008
|
|
|
|
|
AMC-14
(leased)
|
|
March 2008
|
|
|
|
|
Owned
Satellites
EchoStar
III. EchoStar III was
originally designed to operate a maximum of 32 transponders at approximately 120
watts per channel, switchable to 16 transponders operating at over 230 watts per
channel, and was equipped with a total of 44 transponders to provide
redundancy. As a result of past traveling wave tube amplifier
(“TWTA”) failures, only 18 transponders are currently available for
use. Due to redundancy switching limitations and specific channel
authorizations, we can only operate on 15 of the 19 FCC authorized frequencies
at the 61.5 degree location. While we do not expect a large number of
additional TWTAs to fail in any year, and the failures have not reduced the
original minimum 12-year design life of the satellite, it is likely that
additional TWTA failures will occur from time to time in the future, and those
failures will further impact commercial operation of the
satellite. See discussion of evaluation of impairment in “Long-Lived Assets” in Note 3
in the Notes to the Statement of Net Assets to be Contributed by DISH Network in
Item 15 of this Annual Report on Form 10-K.
EchoStar
IV. EchoStar IV
currently operates at the 77 degree orbital location, which is licensed by the
government of Mexico to a venture in which we hold a minority
interest. The satellite was originally designed to operate a maximum
of 32 transponders at approximately 120 watts per channel, switchable to 16
transponders operating at over 230 watts per channel. As a result of
past TWTA failures, only six transponders are currently available for use and
the satellite has been fully depreciated. There can be no assurance
that further material degradation, or total loss of use, of EchoStar IV will not
occur in the immediate future. See discussion of evaluation of
impairment in “Long-Lived
Assets” in Note 3 in the Notes to the Statement of Net Assets to be
Contributed by DISH Network in Item 15 of this Annual Report on Form
10-K.
EchoStar
VI. EchoStar VI was
originally equipped with 108 solar array strings, approximately 102 of which are
required to assure full power availability for the original minimum 12-year
useful life of the satellite. Prior to 2007, EchoStar VI experienced
anomalies resulting in the loss of 17 solar array strings. During the
fourth quarter 2007, five additional solar array strings failed, reducing the
number of functional solar array strings to 86. While the useful life
of the satellite has not been affected, commercial operability has been
reduced. The satellite was designed to operate 32 transponders at
approximately 125 watts per channel, switchable to 16 transponders operating at
approximately 225 watts per channel. The power reduction resulting
from the solar array failures which currently limits us to operation of a
maximum of 26 transponders in standard power mode, or 13 transponders in high
power mode, is expected to decrease to 25 and 12, respectively, by September
2008. The number of transponders to which power can be provided is
expected to continue to decline in the future at the rate of approximately one
transponder every three years. See discussion of evaluation of
impairment in “Long-Lived
Assets” in Note 3 in the Notes to the Statement of Net Assets to be
Contributed by DISH Network in Item 15 of this Annual Report on Form
10-K.
EchoStar
VIII. EchoStar VIII
was designed to operate 32 transponders at approximately 120 watts per channel,
switchable to 16 transponders operating at approximately 240 watts per
channel. EchoStar VIII also includes spot-beam
technology. This satellite has experienced several anomalies since
launch, but none have reduced the 12-year estimated useful life of the
satellite. However, there can be no assurance that future anomalies
will not cause further losses which could materially impact its commercial
operation, or result in a total loss of the satellite. See discussion
of evaluation of impairment in “Long-Lived Assets” in Note 3
in the Notes to the Statement of Net Assets to be Contributed by DISH Network in
Item 15 of this Annual Report on Form 10-K.
EchoStar
IX. EchoStar IX was
designed to operate 32 fixed satellite services transponders operating at
approximately 110 watts per channel, along with transponders that can provide
services in the Ka-Band (a “Ka-band payload”). The satellite also
includes a C-band payload which is owned by a third party. Prior to
2007, EchoStar IX experienced the loss of one of its three momentum wheels, two
of which are utilized during normal operations. A spare wheel was
switched in at the time and the loss did not reduce the 12-year estimated useful
life of the satellite. During September 2007, the satellite
experienced anomalies resulting in the loss of three solar array
strings. An investigation of the anomalies is
continuing. The anomalies have not impacted commercial operation of
the satellite to date. However, there can be no assurance future
anomalies will not cause further losses, which could impact the remaining life
or commercial operation of the satellite. See discussion of
evaluation of impairment in “Long-Lived Assets” in Note 3
in the Notes to the Statement of Net Assets to be Contributed by DISH Network in
Item 15 of this Annual Report on Form 10-K.
EchoStar
XII. EchoStar XII was
designed to operate 13 transponders at 270 watts per channel in CONUS mode,
which provides service to the entire continental United States, or 22 spot beams
using a combination of 135 and 65 watt TWTAs. We currently operate
the satellite in CONUS mode. EchoStar XII has a total of 24 solar
array circuits, approximately 22 of which are required to assure full power for
the original minimum 12-year design life of the satellite. Since late
2004, eight solar array circuits on EchoStar XII have experienced anomalous
behavior resulting in both temporary and permanent solar array circuit
failures. The cause of the failures is still being
investigated. The design life of the satellite has not been
affected. However, these temporary and permanent failures have
resulted in a reduction in power to the satellite which will preclude us from
using the full complement of transponders on EchoStar XII for the 12-year design
life of the satellite. The extent of this impact is being
investigated. There can be no assurance future anomalies will not
cause further losses, which could further impact commercial operation of the
satellite or its useful life. See discussion of evaluation of
impairment in “Long-Lived
Assets” in Note 3 in the Notes to the Statement of Net Assets to be
Contributed by DISH Network in Item 15 of this Annual Report on Form
10-K.
AMC-15. AMC-15 commenced
commercial operation during January 2005 and currently operates at the 105
degree orbital location. This SES Americom fixed satellite services
satellite is equipped with 24 Ku fixed satellite services transponders that
operate at approximately 120 watts per channel and a Ka-band payload consisting
of 12 spot beams.
AMC-16. AMC-16 commenced
commercial operation during February 2005 and currently operates at the 85
degree orbital location. This SES Americom fixed satellite services
satellite is equipped with 24 Ku-band transponders that operate at approximately
120 watts per channel and a Ka-band payload consisting of 12 spot
beams.
Satellites
Under Construction
CMBStar. The CMBStar
satellite is an S-band satellite intended to be used in our mobile video project
in China and is scheduled to be completed during the second half of
2008. If the required regulatory approvals are obtained and
contractual conditions are satisfied, the transponder capacity of that satellite
will be leased to a Hong Kong joint venture, which in turn will sublease a
portion of the transponder capacity to an affiliate of a Chinese regulatory
entity. There can be no assurance that the regulatory approvals will
be obtained or contractual conditions satisfied.
AMC-14. AMC-14 will
launch and commence commercial operation in March 2008 at the 61.5
degree orbital location. The satellite is being equipped with
transmit antennas optimized for multiple orbital locations, providing greater
backup flexibility in the event certain other in-orbit satellites fail. DISH
Network expects to enter into an initial ten-year lease for all of the capacity
of AMC-14.
We are
also parties to contracts for the construction of three additional Ka and/or Ku
band satellites which are expected to be completed between 2009 and
2011.
We are
subject to comprehensive regulation by the FCC for our domestic
operations. We are also regulated by other federal agencies, state
and local authorities and the International Telecommunication Union
(“ITU”). Depending upon the circumstances, noncompliance with
legislation or regulations promulgated by these entities could result in
suspension or revocation of our licenses or authorizations, the termination or
loss of contracts or the imposition of contractual damages, civil fines or
criminal penalties.
The
following summary of regulatory developments and legislation in the United
States is not intended to describe all present and proposed government
regulation and legislation affecting the satellite and set-top box equipment
markets. Government regulations that are currently the subject of
judicial or administrative proceedings, legislative hearings or administrative
proposals could change our industry to varying degrees. We cannot
predict either the outcome of these proceedings or any potential impact they
might have on the industry or on our operations.
Regulations
Applicable to Satellite Operations
FCC Jurisdiction
over our Satellite Operations. The
Communications Act gives the FCC broad authority to regulate the operations of
satellite operators. Specifically, the Communications Act gives the
FCC regulatory jurisdiction over the following areas relating to communications
satellite operations:
·
|
the
assignment of satellite radio frequencies and orbital
locations;
|
·
|
licensing
of satellites, earth stations, the granting of related authorizations, and
evaluation of the fitness of a company to be a
licensee;
|
·
|
approval
for the relocation of satellites to different orbital locations or the
replacement of an existing satellite with a new
satellite;
|
·
|
ensuring
compliance with the terms and conditions of such assignments and
authorizations, including required timetables for construction and
operation of satellites and other due diligence
requirements;
|
·
|
avoiding
interference with other radio frequency emitters;
and
|
·
|
ensuring
compliance with other applicable provisions of the Communications Act and
FCC rules and regulations governing the operations of satellite
communications providers.
|
In order
to obtain FCC satellite licenses and authorizations, satellite operators must
satisfy strict legal, technical and financial qualification
requirements. Once issued, these licenses and authorizations are
subject to a number of conditions including, among other things, satisfaction of
ongoing due diligence obligations, construction milestones, and various
reporting requirements. Applications for new or modified satellites
and earth stations are necessary for further development and expansion of
satellites services. Necessary federal approval of these applications
may not be granted, or may not be granted in a timely manner.
Overview of Our
Satellites Licenses and Authorizations. This overview
describes our satellite licenses and authorizations.
Our
satellites are located in orbital positions, or slots, that are designated by
their western longitude. An orbital position describes both a
physical location and an assignment of spectrum in the applicable frequency
band. Each transponder on our satellites typically exploits one
frequency channel. Through digital compression technology, we can
currently transmit up to 13 standard-definition digital video channels from each
transponder. Several of our satellites also include spot-beam
technology which enables us to provide services on a local or regional basis,
but reduces the number of video channels that could otherwise be offered across
the entire United States.
We have
U.S. DBS licenses for 30 frequencies at the 61.5 degree orbital location,
capable of providing service to the Eastern and Central United
States. We are also currently operating on the two unassigned
frequencies at the 61.5 degree orbital location under a conditional special
temporary authorization. That authority requires periodic
renewal. The licensing of those two channels is under FCC review, and
also subject to an FCC moratorium on new DBS applications. The FCC
has previously found that existing DBS providers will not be eligible for the
two unassigned channels at the 61.5 degree orbital location. EchoStar
Satellite L.L.C. has a pending reconsideration petition of that
decision.
We also
have the right to use 32 frequencies at a Mexican DBS orbital slot at the 77
degree orbital location and hold licenses or have entered into agreements to
lease capacity on satellites at the following fixed satellite services orbital
locations including:
·
|
500
MHz of Ku spectrum divided into 32 frequencies at the 121 degree orbital
location, capable of providing service to CONUS, plus 500 MHz of Ka
spectrum at the 121 degree orbital location capable of providing service
into select spot beams;
|
·
|
500
MHz of Ku spectrum divided into 24 frequencies at the 105 degree orbital
location, currently capable of providing service to CONUS, Alaska and
Hawaii, plus approximately 720 MHz of Ka spectrum capable of providing
service through spot beams to CONUS, Alaska and Hawaii;
and
|
·
|
500
MHz of Ku spectrum divided into 24 frequencies at the 85 degree orbital
location, currently capable of providing service to CONUS, plus
approximately 720 MHz of Ka spectrum capable of providing service through
spot beams to CONUS.
|
We also
hold authorizations to construct additional satellites at other orbital
locations. Specifically, we hold Ka-band licenses at the 97 and 113
degree orbital locations. More recently, we were granted authority
for a “tweener” DBS satellite at the 86.5 degree orbital
location. That authorization will be conditioned on final FCC
licensing and service rules in the “tweener” proceeding, in which the FCC is
examining permitting satellites to operate from orbital locations 4.5 degrees
(half of the usual 9 degrees) away from traditional DBS
satellites. The FCC has also granted authorizations to Spectrum Five
for a tweener satellite at the 114.5 degree orbital
location. EchoStar Satellite L.L.C. has challenged the Spectrum Five
authorization, and Telesat Canada, a Canadian satellite operator, has challenged
our authorization.
Use of
these licenses and conditional authorizations is subject to certain technical
and due diligence requirements, including the requirement to construct and
launch satellites according to specific milestones and
deadlines. There can be no assurance that we will develop acceptable
plans to meet these deadlines, or that we will be able to utilize these orbital
slots.
Duration of our
Satellite Licenses. Generally
speaking, all of our satellite licenses are subject to expiration unless renewed
by the FCC. The term of each of our DBS licenses is 10 years; fixed
satellite services licenses generally are for 15 year terms. In
addition, our special temporary authorizations are granted for periods of only
180 days or less, subject again to possible renewal by the
FCC.
Opposition and
other Risks to our Licenses. Several third
parties have opposed, and we expect them to continue to oppose, some of our FCC
satellite authorizations and pending requests to the FCC for extensions,
modifications, waivers and approvals of our licenses. In addition, we
may not have fully complied with all of the FCC reporting and filing
requirements in connection with our satellite authorizations. Consequently, it
is possible the FCC could revoke, terminate, condition or decline to extend or
renew certain of our authorizations or licenses.
FCC Rulemaking
Affecting our Licenses and Applications. A number of our
other applications have been denied or dismissed without prejudice by the FCC,
or remain pending. We cannot be sure that the FCC will grant any of
our satellite applications, or that the authorizations, if granted, will not be
subject to onerous conditions. Moreover, the cost of building,
launching and insuring a satellite can be as much as $300 million or more, and
we cannot be sure that we will be able to construct and launch all of the
satellites for which we have requested authorizations. The FCC has
also imposed a $3 million bond requirement for our fixed satellite services
satellite licenses, all or part of which would be forfeited by a licensee that
does not meet its diligence milestones for a particular
satellite.
Reverse Band
(17/24 GHz BSS) Spectrum. The FCC has
recently announced licensing and service rules for the 17/24 GHz BSS or “reverse
band” spectrum, which could create substantial additional capacity for satellite
providers. It could also result in additional satellite competition
from new entrants. Under FCC rules, we are eligible for up to five
orbital locations. Our final application filed during the first
quarter 2008 included the following five orbital locations: 110.4
degree west longitude, 107 degree west longitude, 79 degree west longitude, 75
degree west longitude and 61.15 degree west longitude. We cannot
predict when, or whether, the FCC will grant our applications. Other
applicants’ selected orbital locations that might limit the utility of this new
spectrum for our operations, i.e., splitting the available
frequencies at an orbital location with another applicant. Our
ability to take advantage of U.S. spectrum may also be constrained by satellite
licensees from other nations that may have international priority over U.S.
licensees. The FCC has also imposed a $3 million bond requirement for
Reverse Band satellites, all or part of which would be forfeited by a licensee
that does not meet its diligence milestones for a particular
satellite.
Interference from
Other Services Sharing Satellite Spectrum. The FCC has
adopted rules that allow non-geostationary orbit fixed satellite services to
operate on a co-primary basis in the same frequency band as DBS and
Ku-band-based fixed satellite services. The FCC has also authorized
the use of terrestrial communication services (“MVDDS”) in the DBS
band. MVDDS licenses were auctioned in 2004. Despite
regulatory provisions to protect DBS operations from harmful interference, there
can be no assurance that operations by other satellite or terrestrial
communication services in the DBS band will not interfere with our DBS
operations and adversely affect our business.
International
Satellite Competition and Interference. As noted above,
we have received authority to provide service from a Mexican orbital slot at 77
degrees. The possibility that the FCC will allow service to the U.S.
from additional foreign slots may permit additional competition against us from
other satellite providers. For instance, DIRECTV recently obtained
FCC authority to provide service to the United States from a Canadian DBS
orbital slot. It may also provide a means by which to increase our
available satellite capacity in the United States. In addition, a
number of administrations, such as Great Britain and The Netherlands, have
requested to add orbital locations serving the U.S. close to our licensed
slots. Such operations could cause harmful interference into our
satellites and constrain our future operations at those slots if such “tweener”
operations are approved by the FCC. The risk of harmful interference
will depend upon the final rules adopted in the FCC’s “tweener”
proceeding.
Emergency Alert
System. The Emergency
Alert System (“EAS”) requires participants to interrupt programming during
nationally declared emergencies and to pass through emergency-related
information. The FCC requires satellite carriers to participate in
the “national” portion of EAS, and is considering whether to mandate that
satellite carriers also interrupt programming for local emergencies and weather
events. We cannot be sure that this requirement will not affect us
adversely by requiring us to devote additional resources to complying with EAS
requirements.
The International
Telecommunication Union. Our satellites
also must conform to the International Telecommunication Union (“ITU”)
requirements and regulations. We have cooperated, and continue to
cooperate, with the FCC in the preparation of ITU filings and
responses. “Requests for modification” that have been filed by the
United States government for our satellites are pending or in various stages of
completion. We cannot predict if all the required requests will be
made or when the ITU will act upon them.
Regulations
Applicable to Set-top box Operations
FCC Jurisdiction
over Set-top Box Operations. Our set-top
boxes and similar devices must also comply with FCC technical standards and
requirements. The FCC has specific Part 15 regulations for television
broadcast receivers and television interface devices.
Plug and
Play. Cable companies
were required to separate the security functionality from their set-top boxes to
increase competition and encourage the sale of set-top boxes in the retail
market by July 1, 2007. Traditionally, cable service providers sold
or leased set-top boxes with integrated security functionality to subscribers.
DBS providers are not currently subject to the removable security
requirements. The development of a retail market for cable set-top
boxes could provide us with an opportunity to expand operations providing
set-top box equipment to non-DBS households. The FCC has an open
proceeding addressing the need to expand the scope of the cable “plug and play”
rules, and the need for all-video provider set-top box solutions. If
the FCC were to extend or expand its separate security rules to include DBS
providers, sales of our set-top boxes to DBS providers may be negatively
impacted. Specifically, if a retail DBS set-top box market develops
capable of accepting the security modules, we risk reduced sales if competitors
produce DBS set-top boxes.
NTIA Digital
Converter Box Program. The Commerce
Department’s National Telecommunications and Information Administration (“NTIA”)
has established a coupon program allowing U.S. households to request up to two
coupons, worth $40 each, to be used toward the purchase of up to two,
digital-to-analog converter boxes as part of the February 2009 digital
television transition. This program is necessary to ensure that
consumers with analog televisions will continue to be able to view over-the-air
broadcast signals after the digital transition. Our converter box
(“TR-40”) was approved by NTIA on December 19, 2007. We intend to
actively market and sell our TR-40 box to households that are likely to purchase
digital-to-analog converter boxes through the NTIA coupon
program.
Export
Control Regulation
We are
required to obtain import and export licenses from the United States government
to receive and deliver components of direct-to-home satellite television
systems. In addition, the delivery of satellites and the supply of
related ground control equipment, technical data, and satellite
communication/control services to destinations outside the United States is
subject to strict export control and prior approval requirements from the United
States government (including prohibitions on the sharing of certain
satellite-related goods and services with China).
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 related to those that we will offer. In general, if a court
determines that one or more of our products infringes on intellectual property
held by others, we may be required to cease developing or marketing those
products, obtain licenses from the holders of the intellectual property at a
material cost, or redesign those products in such a way as to avoid infringing
the patent claims. If those intellectual property rights are held by
a competitor, we may be unable to obtain the intellectual property at any price,
which could adversely affect our competitive position.
We may
not be aware of all intellectual property rights that our products may
potentially infringe. In addition, patent applications in the United
States are confidential until the Patent and Trademark Office issues a patent
and, accordingly, our products may infringe claims contained in pending patent
applications of which we are not aware. Further, the process of
determining definitively whether a claim of infringement is valid often involves
expensive and protracted litigation, even if we are ultimately successful on the
merits.
We cannot
estimate the extent to which we may be required in the future to obtain
intellectual property licenses or the availability and cost of any such
licenses. Those costs, and their impact on our results of operations,
could be material. Damages in patent infringement cases may also
include treble damages in certain circumstances. To the extent that
we are required to pay unanticipated royalties to third parties, these increased
costs of doing business could negatively affect our liquidity and operating
results. We are currently defending multiple patent infringement
actions. We cannot be certain the courts will conclude these
companies do not own the rights they claim, that our products do not infringe on
these rights, that we would be able to obtain licenses 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 to avoid infringement. See “Legal
Proceedings.”
ENVIRONMENTAL
REGULATIONS
We are
subject to the requirements of federal, state, local and foreign environmental
and occupational safety and health laws and regulations. These
include laws regulating air emissions, water discharge and waste
management. We attempt to maintain compliance with all such
requirements. We do not expect capital or other expenditures for
environmental compliance to be material in 2007 or
2008. Environmental requirements are complex, change frequently and
have become more stringent over time. Accordingly, we cannot provide
assurance that these requirements will not change or become more stringent in
the future in a manner that could have a material adverse effect on our
business.
GEOGRAPHIC
AREA DATA AND TRANSACTIONS WITH MAJOR CUSTOMERS
For
principal geographic area data and transactions with major customers for 2007,
2006 and 2005, see Note 8 in the Notes to the Combined Financial Statements in
Item 15 of this Annual Report on Form 10-K.
We have
approximately 1,500 employees. In addition, DISH Network provides us
with certain management and administrative services, which will include the
services of certain employees of DISH Network. See “Certain
Intercompany Agreements — Management Services Agreement” set forth in our
Proxy Statement for the 2008 Annual Meeting of Shareholders under the caption
“Certain Relationships and Related Transactions.”
WHERE
YOU CAN FIND MORE INFORMATION
We are
subject to the informational requirements of the Exchange Act and accordingly
file an annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, proxy statements and other information with the Securities
and Exchange Commission (“SEC”). The Public may read and copy any
materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for
further information on the Public Reference Room. As an electronic
filer, our public filings are also maintained on the SEC’s Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address
of that website is http://www.sec.gov.
WEBSITE
ACCESS
Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act also may be accessed free of charge through
our website as soon as reasonably practicable after we have electronically filed
such material with, or furnished it to, the SEC. The address of that
website is http://www.echostar.com.
We have
adopted a written code of ethics that applies to all of our directors, officers
and employees, including our principal executive officer and senior financial
officers, in accordance with the Sarbanes-Oxley Act of 2002 and the rules of the
Securities and Exchange Commission promulgated thereunder. Our code
of ethics is available on our corporate website at www.echostar.com. In
the event that we make changes in, or provide waivers of, the provisions of this
code of ethics that the SEC requires us to disclose, we intend to disclose these
events on our website.
EXECUTIVE
OFFICERS OF THE REGISTRANT
(furnished
in accordance with Item 401 (b) of Regulation S-K, pursuant to General
Instruction G(3) of Form 10-K)
The
following table sets forth the name, age and offices with EchoStar Corporation
(“EchoStar”) of each of our executive officers, the period during which each
executive officer has served as such, and each executive officer’s business
experience during the past five years:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Charles
W. Ergen
|
|
54
|
|
Chairman,
Chief Executive Officer and Director
|
R.
Stanton Dodge
|
|
40
|
|
Executive
Vice President, General Counsel and Secretary
|
Bernard
L. Han
|
|
43
|
|
Executive
Vice President and Chief Financial Officer
|
Mark
W. Jackson
|
|
47
|
|
President,
EchoStar Corporation
|
Dean
A. Olmstead
|
|
52
|
|
President,
Satellite Services
|
Steven
B. Schaver
|
|
53
|
|
President,
EchoStar International Corporation
|
Charles W.
Ergen. Mr. Ergen has been Chairman of the Board of Directors
and Chief Executive Officer of DISH Network since its formation and, during the
past five years, has held various executive officer and director positions with
DISH Network’s subsidiaries. Mr. Ergen has also been the Chairman of
the Board of Directors and Chief Executive Officer of EchoStar since October
2007. Mr. Ergen, along with his spouse and James DeFranco, was a
co-founder of DISH Network in 1980.
R.
Stanton Dodge. Mr. Dodge is currently the Executive Vice
President, General Counsel and Secretary of DISH Network
and EchoStar and is
responsible for all legal affairs of DISH Network, EchoStar and their
subsidiaries. Mr. Dodge serves as our Executive Vice President,
General Counsel and Secretary pursuant to a management services agreement
between DISH Network and EchoStar that was entered into in connection with the
Spin-off of EchoStar from DISH Network. Since joining DISH Network in
November 1996, he has held various positions in DISH Network’s
legal department. Prior to joining DISH Network, Mr.
Dodge was a law clerk to the Hon. Jose D.L. Marquez of the Colorado Court of
Appeals. He received his J.D., magna cum laude, from Suffolk
University Law School in 1995 and his B.S. in accounting from the University of
Vermont in 1991.
Bernard L. Han. Mr. Han was
named Executive Vice President and Chief Financial Officer of DISH Network in
September 2006 and is currently responsible for all accounting, finance and
information technology functions of DISH Network and EchoStar. Mr.
Han serves as our Executive Vice President and Chief Financial Officer pursuant
to a management services agreement between DISH Network and EchoStar that was
entered into in connection with the Spin-off of EchoStar from DISH
Network. From October 2002 to May 2005, Mr. Han served as Executive
Vice President and Chief Financial Officer of Northwest Airlines,
Inc. Prior to October 2002, he held positions as Executive Vice
President and Chief Financial Officer and Senior Vice President and Chief
Marketing Officer at America West Airlines, Inc.
Mark W.
Jackson. Mr. Jackson is currently the President of EchoStar
and oversees all day to day operations of EchoStar. Mr. Jackson
served as the President of EchoStar Technologies Corporation from June 2004
through December 2007 and Senior Vice President from April 2000 until June
2004.
Dean A. Olmstead. Mr.
Olmstead joined EchoStar as President of Satellite Services in January 2008 and
is responsible for all aspects of our satellite services
business. From May 2006 until January 2008, Mr. Olmstead served as an
advisor to Loral Space & Communications (“Loral”) on strategic and growth
opportunities for Loral’s satellite service businesses, which completed a merger
with Telesat in October 2007, and he served on Loral’s Board of
Directors. From March 2005 to September 2006, he was President of
Arrowhead Global Solutions, which was acquired by CapRock Communications in May
2007. From November 2001 to September 2004, Mr. Olmstead was
President and CEO of SES Americom and a member of the SES Global Executive
Committee, where he led SES’ expansion from Europe to become one of the top
global providers of satellite communications.
Steven B.
Schaver. Mr. Schaver was named President of EchoStar
International Corporation in April 2000. Mr. Schaver served as DISH
Network’s Chief Financial Officer from February 1996 through August 2000 and
served as DISH Network’s Chief Operating Officer from November 1996 until April
2000.
There are
no arrangements or understandings between any executive officer and any other
person pursuant to which any executive officer was selected as
such. Pursuant to the Bylaws of EchoStar, executive officers serve at
the discretion of the Board of Directors.
THE
ECHOSTAR SPIN-OFF
On
January 1, 2008, DISH Network completed the Spin-off of our technology and
certain infrastructure assets. DISH Network and EchoStar now operate
as separate publicly-traded companies, and neither entity has any ownership
interest in the other.
Unaudited
Pro Forma Combined and Adjusted Financial Information
Our
audited historical combined financial statements reflect the historical
financial position and results of operations of entities included in the
consolidated financial statements of DISH Network, principally representing only
the digital set-top box business, using the historical results of operations and
historical bases of assets and liabilities of this business. Our
historical combined financial statements reflect sales to DISH Network at cost
and do not include certain satellites, uplink and satellite transmission assets,
real estate and other assets and related liabilities that were contributed to us
by DISH Network in the Spin-off. These assets and liabilities, which
primarily comprise our fixed satellite services business, have been separately
audited and are included in the Statement of Net Assets to be Contributed by
DISH Network and the Unaudited Pro Forma Combined and Adjusted Financial
Information included herein. DISH Network acquired
Sling Media on October 19, 2007 and contributed to us in the
Spin-off. Our historical financial data includes financial
information for Sling Media from the acquisition date through December 31,
2007. We have prepared unaudited pro forma combined financial
statements, which include Sling Media’s financial information from January 1,
2007 to the acquisition date, to make adjustments for and give effect to the
Spin-off.
The
Unaudited Pro Forma Combined and Adjusted Financial Information give effect
to:
|
·
|
the
contribution by DISH Network to us of the net assets to primarily be used
in our fixed satellite services
business;
|
|
·
|
the
contribution by DISH Network to us of $1.0 billion in
cash;
|
|
·
|
the
results of operations and other expenses, including depreciation expenses,
related to the assets contributed to us by DISH Network comprising our
fixed satellite services business;
|
|
·
|
the
impact of the transition services and commercial agreements between us and
DISH Network; and
|
|
·
|
the
distribution of approximately 89.7 million shares of our common stock to
holders of DISH Network stock.
|
The share
numbers are based on DISH Network share numbers as of December 31, 2007, and the
settlement amount is based on our balances as of December 31, 2007.
The
unaudited pro forma combined financial statements presented below have been
derived in part from our audited combined financial statements for the year
ended December 31, 2007. These unaudited pro forma combined financial
statements should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our combined
financial statements and the notes to those statements included elsewhere in
this Annual Report on Form 10-K.
The
unaudited pro forma combined statement of operations for the year ended December
31, 2007 have been prepared as if the transactions described above occurred as
of January 1, 2007. The unaudited pro forma combined balance sheet as
of December 31, 2007 has been prepared as if these transactions occurred as of
December 31, 2007. The pro forma adjustments are based upon available
information and assumptions that management believes are reasonable based on our
current plans and expectations. Our historical financial, pro forma
and other data included in this report are not necessarily indicative of our
future financial position, future results of operations or future cash flows,
nor do they reflect what our financial position, results of operations or cash
flows would have been as a stand-alone company during the periods
presented.
Our
unaudited pro forma combined statement of operations does not give effect to
initial expenses directly attributable to the Spin-off because of their
non-recurring nature. A significant portion of these non-recurring
charges to effect the separation were incurred by DISH Network, such as outside
legal and accounting fees relating to the Spin-off, office move costs, costs to
separate information systems and temporary consulting costs. We will
incur separation costs that have a future benefit to our company such as
employee compensation expenses and temporary labor used to develop ongoing
processes. See “Certain Intercompany
Agreements” set forth in our Proxy
Statement for the 2008 Annual Meeting of Shareholders under the caption “Certain
Relationships and Related Transactions.”
ECHOSTAR
CORPORATION
UNAUDITED
PRO FORMA COMBINED AND ADJUSTED STATEMENTS OF OPERATIONS
For
the Year Ended December 31, 2007
(In
thousands, except per share data)
|
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
EchoStar
|
|
|
Spin
|
|
|
|
EchoStar
|
|
|
Sling
Media
|
|
|
Acquisition
|
|
|
|
Combined
and
|
|
|
|
Historical
(1)
|
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
Historical
(2)
|
|
|
Adjustments
|
|
|
|
Adjusted
|
|
|
|
(In
thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and other sales - DISH Network
|
|
$ |
1,294,215 |
|
|
$ |
169,931 |
|
(a)
|
|
$ |
1,464,146 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
$ |
1,464,146 |
|
Equipment
sales
|
|
|
249,850 |
|
|
|
- |
|
|
|
|
249,850 |
|
|
|
23,220 |
|
|
|
- |
|
|
|
|
273,070 |
|
FSS
- DISH Network
|
|
|
- |
|
|
|
316,881 |
|
(b)
|
|
|
316,881 |
|
|
|
- |
|
|
|
- |
|
|
|
|
316,881 |
|
FSS
- other
|
|
|
- |
|
|
|
20,567 |
|
(c)
|
|
|
20,567 |
|
|
|
- |
|
|
|
- |
|
|
|
|
20,567 |
|
Other
- DISH Network
|
|
|
- |
|
|
|
13,592 |
|
(d)
|
|
|
13,592 |
|
|
|
- |
|
|
|
- |
|
|
|
|
13,592 |
|
Total
revenue
|
|
|
1,544,065 |
|
|
|
520,971 |
|
|
|
|
2,065,036 |
|
|
|
23,220 |
|
|
|
- |
|
|
|
|
2,088,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of equipment and other sales
|
|
|
1,451,704 |
|
|
|
4,080 |
|
(e)
|
|
|
1,455,784 |
|
|
|
16,201 |
|
|
|
- |
|
|
|
|
1,471,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FSS
cost of sales (exclusive of depreciation and amortization
(f))
|
|
|
- |
|
|
|
155,859 |
|
(f)
|
|
|
155,859 |
|
|
|
- |
|
|
|
- |
|
|
|
|
155,859 |
|
Marketing
and sales
|
|
|
6,731 |
|
|
|
- |
|
|
|
|
6,731 |
|
|
|
21,210 |
|
|
|
|
|
|
|
|
27,941 |
|
Research
and development
|
|
|
78,790 |
|
|
|
- |
|
|
|
|
78,790 |
|
|
|
13,095 |
|
|
|
2,492 |
|
(m)
|
|
|
94,377 |
|
General
and administrative
|
|
|
83,514 |
|
|
|
13,047 |
|
(g)
|
|
|
96,561 |
|
|
|
5,307 |
|
|
|
749 |
|
(m)
|
|
|
102,617 |
|
Depreciation
and amortization
|
|
|
9,705 |
|
|
|
225,885 |
|
(h)
|
|
|
235,590 |
|
|
|
10 |
|
|
|
10,930 |
|
(n)
|
|
|
246,530 |
|
Total
costs and expenses
|
|
|
1,630,444 |
|
|
|
398,871 |
|
|
|
|
2,029,315 |
|
|
|
55,823 |
|
|
|
14,171 |
|
|
|
|
2,099,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(86,379 |
) |
|
|
122,100 |
|
|
|
|
35,721 |
|
|
|
(32,603 |
) |
|
|
(14,171 |
) |
|
|
|
(11,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
10,459 |
|
|
|
54,605 |
|
(i)
|
|
|
65,064 |
|
|
|
395 |
|
|
|
- |
|
|
|
|
65,459 |
|
Interest
expense, net of amounts capitalized
|
|
|
(796 |
) |
|
|
(33,907 |
) |
(j)
|
|
|
(34,703 |
) |
|
|
(10 |
) |
|
|
- |
|
|
|
|
(34,713 |
) |
Other
|
|
|
(6,479 |
) |
|
|
(127 |
) |
|
|
|
(6,606 |
) |
|
|
(516 |
) |
|
|
- |
|
|
|
|
(7,122 |
) |
Total
other income (expense)
|
|
|
3,184 |
|
|
|
20,571 |
|
|
|
|
23,755 |
|
|
|
(131 |
) |
|
|
- |
|
|
|
|
23,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(83,195 |
) |
|
|
142,671 |
|
|
|
|
59,476 |
|
|
|
(32,734 |
) |
|
|
(14,171 |
) |
|
|
|
12,571 |
|
Income
tax (provision) benefit, net
|
|
|
(2,105 |
) |
|
|
48,983 |
|
(k)
|
|
|
46,878 |
|
|
|
(103 |
) |
|
|
33,820 |
|
(o)
|
|
|
80,595 |
|
Net
income (loss)
|
|
$ |
(85,300 |
) |
|
$ |
191,654 |
|
|
|
$ |
106,354 |
|
|
$ |
(32,837 |
) |
|
$ |
19,649 |
|
|
|
$ |
93,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.04 |
|
Diluted
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.03 |
|
Pro
forma shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,712 |
|
Diluted
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
Sling Media financial data from the acquisition date (October 19, 2007)
through December 31, 2007
|
(2)
|
Includes
Sling Media financial data from January 1, 2007 through the acquisition
date, October 19, 2007.
|
ECHOSTAR
CORPORATION
UNAUDITED
PRO FORMA COMBINED AND ADJUSTED BALANCE SHEET
As
of December 31, 2007
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EchoStar
|
|
|
|
|
|
|
Net
Assets
|
|
|
EchoStar
|
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
EchoStar
|
|
|
to
be
|
|
|
Historical
|
|
|
Spin
|
|
|
|
Combined
and
|
|
|
|
Historical
|
|
|
Contributed
|
|
|
Combined
|
|
|
Adjustments
|
|
|
|
Adjusted
|
|
|
|
(In
thousands, except for per share amounts)
|
|
|
ASSETS
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
41,082 |
|
|
$ |
1,000,000 |
|
|
$ |
1,041,082 |
|
|
$ |
- |
|
|
|
$ |
1,041,082 |
|
Marketable
investment securities
|
|
|
491,185 |
|
|
|
- |
|
|
|
491,185 |
|
|
|
- |
|
|
|
|
491,185 |
|
Trade
accounts receivable net of allowance for doubtful accounts
|
|
|
34,154 |
|
|
|
3,900 |
|
|
|
38,054 |
|
|
|
- |
|
|
|
|
38,054 |
|
Inventories,
net
|
|
|
21,043 |
|
|
|
9,957 |
|
|
|
31,000 |
|
|
|
- |
|
|
|
|
31,000 |
|
Current
deferred tax assets
|
|
|
- |
|
|
|
5,731 |
|
|
|
5,731 |
|
|
|
1,813 |
|
(p)
|
|
|
7,544 |
|
Other
current assets
|
|
|
23,290 |
|
|
|
7,951 |
|
|
|
31,241 |
|
|
|
- |
|
|
|
|
31,241 |
|
Total
current assets
|
|
|
610,754 |
|
|
|
1,027,539 |
|
|
|
1,638,293 |
|
|
|
1,813 |
|
|
|
|
1,640,106 |
|
Restricted
cash and marketable investment securities
|
|
|
- |
|
|
|
3,150 |
|
|
|
3,150 |
|
|
|
- |
|
|
|
|
3,150 |
|
Property
and equipment, net
|
|
|
213,837 |
|
|
|
1,302,767 |
|
|
|
1,516,604 |
|
|
|
- |
|
|
|
|
1,516,604 |
|
FCC
authorizations
|
|
|
42,873 |
|
|
|
123,121 |
|
|
|
165,994 |
|
|
|
- |
|
|
|
|
165,994 |
|
Intangible
assets, net
|
|
|
71,646 |
|
|
|
142,898 |
|
|
|
214,544 |
|
|
|
- |
|
|
|
|
214,544 |
|
Goodwill
(Note 2)
|
|
|
248,428 |
|
|
|
- |
|
|
|
248,428 |
|
|
|
|
|
|
|
|
248,428 |
|
Investments
in affiliates
|
|
|
59,160 |
|
|
|
- |
|
|
|
59,160 |
|
|
|
- |
|
|
|
|
59,160 |
|
Other
noncurrent assets, net
|
|
|
14,212 |
|
|
|
20,335 |
|
|
|
34,547 |
|
|
|
- |
|
|
|
|
34,547 |
|
Total
assets
|
|
$ |
1,260,910 |
|
|
$ |
2,619,810 |
|
|
$ |
3,880,720 |
|
|
$ |
1,813 |
|
|
|
$ |
3,882,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNER'S EQUITY (DEFICIT)
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$ |
22,786 |
|
|
$ |
- |
|
|
$ |
22,786 |
|
|
$ |
(16,961 |
) |
(r) |
|
$ |
5,825 |
|
Deferred
revenue
|
|
|
4,055 |
|
|
|
- |
|
|
|
4,055 |
|
|
|
|
|
|
|
|
4,055 |
|
Accrued
expenses
|
|
|
22,191 |
|
|
|
15,800 |
|
|
|
37,991 |
|
|
|
(1,585 |
) |
(r)
|
|
|
36,406 |
|
Current
portion of long-term debt
|
|
|
1,365 |
|
|
|
39,168 |
|
|
|
40,533 |
|
|
|
- |
|
|
|
|
40,533 |
|
Total
current liabilities
|
|
|
50,397 |
|
|
|
54,968 |
|
|
|
105,365 |
|
|
|
(18,546 |
) |
|
|
|
86,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations, net of current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,344 |
|
|
|
339,542 |
|
|
|
341,886 |
|
|
|
- |
|
|
|
|
341,886 |
|
Deferred
tax liabilities
|
|
|
651 |
|
|
|
239,971 |
|
|
|
240,622 |
|
|
|
(62,650 |
) |
(p)
|
|
|
177,972 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
Total
long-term obligations, net of current portion
|
|
|
2,995 |
|
|
|
579,513 |
|
|
|
582,508 |
|
|
|
(62,650 |
) |
|
|
|
519,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
53,392 |
|
|
|
634,481 |
|
|
|
687,873 |
|
|
|
(81,196 |
) |
|
|
|
606,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment in EchoStar (Owner's Equity (Deficit)):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock of EchoStar, $.001 par value, 20,000,000 shares
authorized
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
EchoStar
Class A common stock, $.001 par value, 1,600,000,000 shares
authorized
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
42 |
|
(q)
|
|
|
42 |
|
EchoStar Class
B common stock, $.001 par value, 800,000,000 shares
authorized
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
48 |
|
(q)
|
|
|
48 |
|
Accumulated
other comprehensive income (loss)
|
|
|
66,696 |
|
|
|
- |
|
|
|
66,696 |
|
|
|
- |
|
|
|
|
66,696 |
|
Owner's
net investment
|
|
|
1,140,822 |
|
|
|
- |
|
|
|
1,140,822 |
|
|
|
2,068,248 |
|
(r)
|
|
|
3,209,070 |
|
Net
assets to be contributed
|
|
|
- |
|
|
|
1,985,329 |
|
|
|
1,985,329 |
|
|
|
(1,985,329 |
) |
(r)
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net investment in EchoStar (Owner's equity (deficit))
|
|
|
1,207,518 |
|
|
|
1,985,329 |
|
|
|
3,192,847 |
|
|
|
83,009 |
|
|
|
|
3,275,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and net investment in EchoStar (Owner's equity
(deficit))
|
|
$ |
1,260,910 |
|
|
$ |
2,619,810 |
|
|
$ |
3,880,720 |
|
|
$ |
1,813 |
|
|
|
$ |
3,882,533 |
|
ECHOSTAR
CORPORATION
UNAUDITED
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
Adjustments
to Pro Forma Combined Statements of Operations:
The pro
forma adjustments for the Spin-off represent the estimated incremental revenue
and expenses of EchoStar associated with operating as a stand-alone company,
primarily consisting of the results of operations and other expenses, including
depreciation expenses, associated with the net assets contributed to us by DISH
Network to primarily be used in our fixed satellite services business and our
commercial agreements with DISH Network (see “Certain Intercompany
Agreements” set forth in our Proxy
Statement for the 2008 Annual Meeting of Shareholders under the caption “Certain
Relationships and Related Transactions”).
(a)
|
Represents
incremental revenue on equipment sales to DISH Network at cost plus an
additional amount that is equal to an agreed percentage of our cost, which
will vary depending on the nature of the equipment
provided. The additional amount was determined for purposes of
the pro forma income statement based on specific margins over cost for
different categories of equipment as to which we and DISH Network have
reached an understanding. We calculated pro forma revenues by
applying these margins to the mix of equipment supplied to DISH Network
for the year ended December 31, 2007, thus determining a weighted average
margin over cost for these sales of approximately 13.1% for the year ended
December 31, 2007. Applying these weighted average margins over
cost to the historical cost of equipment and other sales to DISH Network
for the year ended December 31, 2007, we calculated pro forma adjustments
to revenue of $170 million for the year ended December 31,
2007.
|
Our
margin over cost for sales to DISH Network on a pro forma basis depended to a
significant extent on the nature of equipment supplied to DISH Network and
therefore may be subject to change based on changes in the mix of our equipment
sales to DISH Network, although we do not expect any such change to be
material. Future margins will depend on this product mix as well as
other factors that may lead to future changes in product margins from those as
to which we and DISH Network reached an initial understanding, including
performance capabilities and technical specifications of the equipment we supply
to DISH Network, which may affect the weighted average margin over
cost. Had the margin over cost on equipment supplied to DISH Network
on a pro forma basis been 1% higher or lower than was originally determined, our
pro forma revenues and pro forma operating income would have increased or
decreased, respectively, by $12.9 million for the year ended December 31,
2007.
(b)
|
Represents
revenue for sales of services to DISH Network related to the satellites,
uplink and satellite transmission assets to be contributed to us by DISH
Network, including uplink, telemetry, tracking and control, and
professional engineering services.
|
(c)
|
Represents
revenue for sales of services to third-parties related to the satellites,
uplink and satellite transmission assets to be contributed to us by DISH
Network.
|
(d)
|
Primarily
represents rental revenue related to buildings contributed to us by DISH
Network, and leased back to DISH
Network.
|
(e)
|
Represents
incremental cost of sales related to the purchase of remanufactured
receivers from DISH Network, which are resold to third parties, pursuant
to our receiver agreement with DISH
Network.
|
(f)
|
Represents
cost of sales related to services sold to DISH Network and other
third-parties related to the satellites, uplink and satellite transmission
assets to be contributed to us by DISH Network, including satellite
leasing, uplink, telemetry, tracking and control
services. These amounts are exclusive of depreciation and
amortization expense.
|
ECHOSTAR
CORPORATION
UNAUDITED
NOTES TO PRO FORMA COMBINED FINANCIAL DATA -
Continued
Depreciation
and amortization expense consists of the following:
|
|
For
the Year Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Satellites
|
|
|
139,132 |
|
Furniture,
fixtures, equipment and other
|
|
|
64,233 |
|
Identifiable
intangible assets subject to amortization
|
|
|
17,905 |
|
Buildings
and improvements
|
|
|
4,615 |
|
Total
depreciation and amortization
|
|
$ |
225,885 |
|
(g)
|
Represents
additional general and administrative expenses primarily related to
corporate overhead expenses and related employee benefits charged to us by
DISH Network.
|
(h)
|
Represents
additional depreciation and amortization expense primarily associated with
the satellites, uplink and satellite transmission assets and certain other
real estate assets contributed to us by DISH
Network.
|
(i)
|
Represents
interest income primarily related to the $1.0 billion of cash contributed
to us by DISH Network. The amount of interest income was
calculated assuming that $1.0 billion was contributed on January 1, 2007
and was invested in marketable instruments similar to those held by DISH
Network in its marketable investment securities portfolio, using DISH
Network’s weighted-average interest rate earned on that portfolio of
approximately 5.3% for the year ended December 31, 2007. We
intend to use this cash for, among other things, satellite construction,
strategic investments and other initiatives. We expect that following the
Spin-off, our working capital requirements will be funded primarily by
cash flow generated from operations. We may also use a portion
of these funds to repurchase shares of our Class A common
stock.
|
(j)
|
Represents
additional interest expense primarily associated with the satellite
capital leases for AMC-15 and AMC-16 contributed to us by DISH
network.
|
(k)
|
Represents
the tax effect of pro forma adjustments using our blended Federal, state
and international statutory tax rate adjusted for permanent differences
and the release of our valuation allowance of $72 million in
2007. The release of the valuation allowance is based on our
commercial agreements with DISH Network, which, together with existing
third-party contracts, is expected to result in EchoStar having taxable
income for the foreseeable future. As a result, we expect to
use all of our federal net operating losses before they
expire. Additionally, we expect sufficient capital gains to
offset any realized capital losses within the statutory period related to
the impairments included in the deferred tax
assets.
|
(l)
|
The
calculation of pro forma basic earnings per share and shares outstanding
is based on the number of shares of DISH Network common stock outstanding
as of December 31, 2007 adjusted for the distribution ratio of one share
of EchoStar common stock for every five shares of DISH Network common
stock. The calculation of pro forma diluted earnings per share
and shares outstanding for the period presented is based on the number of
shares of DISH Network common stock outstanding as of December 31, 2007
and diluted shares of common stock outstanding as of December 31, 2007
adjusted for the same distribution ratio. This calculation may
not be indicative of the dilutive effect that will actually result from
the replacement of DISH Network stock-based awards held by our employees
and employees of DISH Network or the grant of new stock based
awards.
|
(m)
|
Represents amortization, based on vesting
requirements, of prepaid compensation expense related to the acquisition
of Sling Media.
|
(n)
|
Represents additional amortization expense related
to the purchase price allocation for the acquisition of Sling Media.
See the purchase price allocation in Note 2 in the Notes to Combined
Financial Statements in Item 15 of this Annual Report on Form
10-K.
|
The pro
forma adjustments for the acquisition of Sling Media are as
follows:
|
(o)
|
Primarily represents
the reversal of Sling Media’s deferred tax asset valuation allowance and
the change in deferred taxes for the pro forma adjustment. The
release of the valuation allowance based on our commercial agreements with
DISH Network, which, together with existing third-party contracts, are
expected to result in EchoStar having taxable income for the foreseeable
future. As a result, we expect to use all of our federal net
operating losses before they expire, including those attributable to Sling
Media.
|
ECHOSTAR
CORPORATION
UNAUDITED
NOTES TO PRO FORMA COMBINED FINANCIAL DATA - Continued
Adjustments
to Pro Forma Combined Balance Sheet:
Further
information regarding the Net Assets to be Contributed can be found in the
audited Statement of Net Assets included in this Annual Report on Form
10-K. The pro forma balance sheet adjustments for the Spin-off
represent the following:
(p)
|
Represents
the tax effect of pro forma adjustments using our pro forma blended
Federal and state statutory tax rate, the reduction of net operating
losses and credits not transferred to EchoStar as part of the transaction
and the release of our valuation allowance. The release of the
valuation allowance based on our commercial agreements with DISH Network,
which, together with existing third-party contracts, are expected to
result in EchoStar having taxable income for the foreseeable
future. As a result, we expect to use all of our federal net
operating losses before they expire. Additionally, we expect
sufficient capital gains to offset any realized capital losses within the
statutory period as related to the impairments included in the deferred
tax assets.
|
(q)
|
Represents
the distribution of approximately 89.7 million shares of our common stock
to holders of DISH Network common
stock.
|
(r)
|
Represents
the elimination of DISH Network’s net investment in us and the
contribution of $1.0 billion of cash and other net assets by DISH Network
to us.
|
The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties that we are unaware of or that we currently believe to be
immaterial also may become important factors that affect
us. If any
of the following events occur, our business, financial condition or results of
operation could be materially and adversely affected.
General
Risks Affecting Our Business
We
currently depend on DISH Network and Bell ExpressVu for substantially all of our
revenue and DISH Network accounted for over 80% of our revenue in the years
ended December 31, 2007, 2006 and 2005; the loss of, or a significant reduction
in orders from, either of DISH Network or Bell ExpressVu would significantly
reduce our revenue and adversely impact our operating
results.
DISH
Network accounted for approximately 83.8%, 84.5% and 85.6% of our revenue in the
years ended December 31, 2007, 2006 and 2005, respectively. In
addition, Bell ExpressVu accounted for approximately 10.7%, 12.2% and 11.4% of
our revenue in the years ended December 31, 2007, 2006 and 2005,
respectively. Any reduction in sales to DISH Network or Bell
ExpressVu or in the prices they pay for the products and services they purchase
from us would have a significant negative impact on our
business. Moreover, because our sales to these customers are made
pursuant to standard purchase orders, these customers have no future obligation
to purchase set-top boxes from us and existing orders may be cancelled or
reduced on short notice. Cancellations or reductions of customer orders
could result in the loss of anticipated sales without allowing us sufficient
time to reduce our inventory and operating expenses. In addition, the
timing of orders from these two customers could vary significantly depending on
equipment promotions these customers offer to their subscribers, changes in
technology, and their use of remanufactured set-top boxes, which may cause our
revenue to vary significantly quarter over quarter and could expose us to the
risks of inventory shortages or excess inventory. These inventory
risks are particularly acute during end product transitions in which a new
generation of set-top boxes is being deployed and inventory of older generation
set-top boxes is at a higher risk of obsolescence. This in turn could
cause our operating results to fluctuate significantly. Furthermore,
because of the competitive nature of the set-top box business and the short-term
nature of our purchase orders with these two customers, we could in the future
be required to reduce the average selling-prices of our set-top boxes to these
two customers, which in turn would adversely affect our gross margins and
profitability.
In
addition, because substantially all of our revenue is tied to DISH Network and
Bell ExpressVu, our success also depends to a significant degree on the
continued success of DISH Network and Bell ExpressVu in attracting new
subscribers or in marketing programming packages to subscribers that will
require the purchase of new set-top boxes.
There is
a relatively small number of potential new customers for our set-top boxes and
fixed satellite services, and we expect this customer concentration to continue
for the foreseeable future. Therefore, our operating results will
likely continue to depend on sales to a relatively small number of customers, as
well as the continued success of these customers. In addition, we may
from time to time enter into customer agreements providing for exclusivity
periods during which we may sell a specified product only to that
customer. If we do not develop relationships with new customers, we
may not be able to expand our customer base or maintain or increase our
revenue.
We
currently have substantial unused satellite capacity; our results of operations
could be materially adversely affected if we are not able to utilize all of this
capacity.
While we
are currently evaluating various opportunities to make profitable use of our
satellite capacity (including, but not limited to, supplying satellite capacity
for new international ventures), we do not have firm plans to utilize all of our
satellite capacity. In addition, there can be no assurance that we
can successfully develop the business opportunities we currently plan to pursue
with this capacity. Future costs associated with our excess satellite
capacity will negatively impact our margins if we do not generate revenue to
offset the costs of this capacity.
·
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In
addition, we currently have leased minimal capacity on our two leased
satellites, AMC-15 and AMC-16, and have substantial unleased capacity on
one of our owned satellites, EchoStar IX. Each of our satellites, must be
reviewed for possible impairment whenever events or changes in
circumstances indicate that their carrying value may not be
recoverable. In the event that we are unsuccessful in marketing
capacity on these satellite assets and do not achieve sufficient
utilization and prices, in addition to reporting lower than expected
revenues and profitability, we could be required to record a substantial
impairment charge relating to one or more of these
satellites. We currently estimate that these potential charges
could aggregate up to $250 million, which, if incurred would have a
material adverse effect on our reported operating results and financial
position. We performed a preliminary assessment of the recoverability of
the satellites to be contributed by DISH Network as if the Spin-off had
been consummated and concluded that the recoverability of the satellites
were not impaired as of the distribution
date.
|
Our
financial information included in this report is not necessarily indicative of
our future financial position, future results of operations or future cash flows
nor do they reflect what our financial position, results of operations or cash
flows would have been as a stand-alone company during the periods
presented.
The
combined financial information included in this report does not reflect the
financial condition, results of operations or cash flows we would have achieved
as an independent publicly-traded company during the periods presented or those
results we will achieve in the future. This is primarily a result of
the following factors:
·
|
We
have never been profitable as the majority of our operations have
historically been in support of DISH Network and we provided our products
and services to DISH Network at cost. We cannot assure you that
we can achieve or sustain profitability, or that we can grow our business
profitably or at all.
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·
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The
financial condition and results of operations of our fixed satellite
services business are reflected only in our pro forma combined financial
information included herein, and not in our historical combined financial
information included herein, because our fixed satellite services business
was operated as an integral part of DISH Network’s subscription television
business and did not constitute a “business” in the historical financial
statements of DISH Network.
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·
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Our
plans with respect to the fixed satellite services business are being
developed and we have not historically obtained significant revenues with
respect to our fixed satellite services
business.
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·
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Sling
Media is a recent acquisition and we have not operated that business for a
significant period of time.
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·
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Our
combined financial results reflect allocations of corporate expenses from
DISH Network. Those allocations may be different from the comparable
expenses we would have incurred had we operated as an independent
publicly-traded company.
|
·
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Our
working capital requirements and capital required for our general
corporate purposes historically have been satisfied as part of the
corporate-wide cash management policies of DISH Network. As a
result of the Spin-off, DISH Network will no longer provide us with funds
to finance our working capital or other cash requirements. Without the
opportunity to obtain financing from DISH Network, we may in the future
need to obtain additional financing from banks, or through public
offerings or private placements of debt or equity securities, strategic
relationships or other arrangements. Such financing may not be available
to us on acceptable terms, or at all. We may have a credit rating that is
lower than DISH Network’s credit rating and may incur debt on terms and at
interest rates that will not be as favorable as those historically enjoyed
by DISH Network.
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·
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Significant
changes may occur in our cost structure, management, financing and
business operations as a result of our operating as an independent public
company.
|
The
acquisition of DISH Network by a third party could have a material adverse
effect on our business and financial position.
Our sales
to DISH Network accounted for approximately 83.8%, 84.5% and 85.6% of our
revenue in the years ended December 31, 2007, 2006 and 2005,
respectively. Because our future sales to DISH Network will primarily
be made pursuant to short-term contracts, DISH Network will have no material
obligation to continue to purchase our principal products and
services. Therefore, if DISH Network enters into a business
combination transaction, or Mr. Ergen no longer controls a majority of the
voting power of DISH Network or of us, our relationship with DISH Network could
be terminated or substantially curtailed with little or no advance
notice. Any material reduction in our sales to DISH Network would
have a significant adverse effect on our business, results of operations and
financial position.
Furthermore,
because there are a relatively small number of potential customers for our
products and services, if we lose DISH Network as a customer, it will be
difficult for us to obtain alternative customer relationships that would replace
our historical revenues from DISH Network.
We
may not be able to obtain additional capital on acceptable terms or at all in
order to grow and to increase earnings.
Our
ability to increase earnings will depend in part on our ability to grow our
business. While we expect our need for funds to meet our growth plans
to be satisfied from our existing cash and marketable investment securities and
cash we generate from operations and future financings, we cannot assure you
that we will generate sufficient cash from operations or that additional
financing will be available on acceptable terms, or at all, if needed in the
future.
In
particular, current dislocations in the credit markets, which have significantly
impacted the availability and pricing of financing, particularly in the high
yield debt and leveraged credit markets, may significantly constrain our ability
to obtain financing to support our growth initiatives. These
developments in the credit markets may have a significant effect on our cost of
financing and our liquidity position and may, as a result, cause us to defer or
abandon profitable business strategies that we would otherwise pursue if
financing were available on acceptable terms.
In
addition, we currently have contracts to construct, and conditional licenses and
pending FCC applications for, a number of Ku-band, Ka-band and extended Ku-band
satellites. We may need to raise additional capital to construct,
launch, and insure these satellites. Depending on market conditions
and our results of operations and financial condition we may not be able to
raise such additional capital on acceptable terms or at all. We also
periodically evaluate various strategic initiatives, the pursuit of which also
could require us to raise significant additional capital. We may also
use a significant portion of our existing cash to fund a potential stock buyback
program of up to $1.0 billion of our Class A common stock.
We also
have substantial satellite-related payment obligations under our various
satellite service agreements.
We
could be exposed to significant financial losses if our investments are
unsuccessful.
We have
entered into certain strategic transactions and investments in the United
States, Asia and elsewhere, and we expect to increase our strategic investment
activity. These investments, which we expect could become
substantial, involve a high degree of risk and could diminish our ability to
fund our stock buyback program. These investments could also expose
us to significant financial losses, and may restrict our ability to make other
investments or limit alternative uses of our capital resources, particularly if
the underlying ventures are not successful. In particular, the laws,
regulations and practices of certain countries may make it harder for our
investments to be successful.
In
addition, the companies in which we invest or with whom we partner may not be
able to compete effectively or there may be insufficient demand for the services
and products offered by these companies.
We
may pursue new acquisitions, joint ventures and other transactions to complement
or expand our business which may not be successful.
We may
not be able to complete such transactions and such transactions, if executed,
pose significant risks and could have a negative effect on our
operations. Our future success may depend on opportunities to buy
other businesses or technologies that could complement, enhance or expand our
current business or products or that might otherwise offer us growth
opportunities. Any transactions that we are able to identify and
complete may involve a number of risks, including:
·
|
the
diversion of our management’s attention from our existing business to
integrate the operations and personnel of the acquired or combined
business or joint venture;
|
·
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possible
adverse effects on our operating results during the integration process;
and
|
·
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our
possible inability to achieve the intended objectives of the
transaction.
|
In
addition, we may not be able to successfully or profitably integrate, operate,
maintain and manage our newly acquired operations or employees. We
may not be able to maintain uniform standards, controls, procedures and
policies, and this may lead to operational inefficiencies.
Our
business relies on intellectual property, some of which is owned by third
parties, and we may inadvertently infringe their patents and proprietary
rights.
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 related to those that we offer. In general, if a court
determines that one or more of our products infringes on intellectual property
held by others, we may be required to cease developing or marketing those
products, obtain licenses from the holders of intellectual property, or redesign
those products in such a way as to avoid infringing the patent claims, each of
which may require material expenditures by us. If those intellectual
property rights are held by a competitor, we may be unable to obtain the
intellectual property at any price, which could adversely affect our competitive
position.
If
we fail to protect our intellectual property rights, it could harm our business
and competitive position.
Our
business relies on intellectual property rights to stay competitive in the
market place. We rely on a combination of patent, trademark and
copyright laws, trade secrets, confidentiality procedures and contractual
provisions to protect our intellectual property rights and the obligations we
have to third parties from whom we license intellectual property
rights. Nevertheless, these afford only limited protection and
policing unauthorized use of proprietary technology can be difficult and
expensive. We may not be able to take appropriate steps to enforce
our intellectual property rights and this could have a material adverse effect
on our business, operating results and financial condition.
We
are a newly independent company and our accounting and other management systems
and resources may not be adequately prepared to meet the financial reporting and
other requirements to which we are subject. If we are unable to
achieve and maintain effective internal controls, our business, financial
position and results of operations could be adversely
affected.
Our
financial results previously were included within the consolidated results of
DISH Network, and our reporting and control systems were appropriate for those
of subsidiaries of a public company. However, we were not directly
subject to reporting and other requirements of the Securities Exchange Act of
1934, as amended, which we refer to as the Exchange Act. As a result of our
Spin-off from DISH Network, we are now directly subject to these requirements,
including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
which requires annual management assessments of the effectiveness of our
internal control over financial reporting and a report by our independent
registered public accounting firm addressing these controls. These
reporting and other obligations will place significant demands on our management
and administrative and operational resources, including accounting
resources. To comply with these requirements, we anticipate that we
will need to upgrade our systems, including information technology, implement
additional financial and management controls, reporting systems and procedures
and hire additional accounting and finance staff. If we are unable to
upgrade our financial and management controls, reporting systems, information
technology and procedures in a timely and effective fashion, our ability to
comply with our financial reporting requirements and other rules that apply to
reporting companies could be impaired.
We
have not been an independent company for a significant amount of time and we may
be unable to make, on a timely or cost-effective basis, the changes necessary to
operate as an independent company.
Prior to
our Spin-off from DISH Network, our business was operated by DISH Network as
part of its broader corporate organization, rather than as an independent
company. DISH Network’s senior management oversaw the strategic
direction of our businesses and DISH Network performed various corporate
functions for us, including, but not limited to:
·
|
selected
human resources related functions;
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·
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selected
legal functions, as well as external
reporting;
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·
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treasury
administration, investor relations, internal audit and insurance
functions; and
|
·
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selected
information technology and telecommunications
services.
|
Because
we are now an independent company, neither DISH Network nor any of its
affiliates have any obligation to provide these functions to us other than those
services that will be provided for a limited period of time by DISH Network
pursuant to the services agreement between us and DISH Network. See
“Certain Intercompany Arrangements — Services Agreement” set forth in our Proxy
Statement for the 2008 Annual Meeting of Shareholders under the caption “Certain
Relationships and Related Transactions.” If, once this services
agreement terminates, we do not have in place our own systems and business
functions, we do not have agreements with other providers of these services or
we are not able to make these changes cost effectively, we may not be able to
operate our business effectively and our profitability may
decline. If DISH Network does not continue to perform effectively the
services that are called for under the services agreement, we may not be able to
operate our business effectively.
Changes
in existing technologies or the emergence of new products or technologies could
significantly harm our business.
Our
businesses change rapidly as new technologies are developed. These
new technologies may cause our services and products to become
obsolete. Changes in existing technologies could also cause demand
for our products and services to decline. For example, if changes in
technology allow digital television subscribers to use devices such as personal
computers, cable ready televisions and network based digital video recording
services in place of set-top boxes, our customers may not need to purchase our
set-top boxes to provide their digital television subscribers with digital video
recording and other set-top box features. One or more new
technologies also could be introduced that compete favorably with our set-top
boxes or that cause our set-top boxes to no longer be of significant benefit to
our customers.
We and
our suppliers also may not be able to keep pace with technological
developments. Alternatively, if the new technologies on which we
intend to focus our research and development investments fail to achieve
acceptance in the marketplace, we could suffer a material adverse effect on our
future competitive position that could cause a reduction in our revenues and
earnings. Our competitors could also obtain or develop proprietary
technologies that are perceived by the market as being superior to
ours. Further, after we have incurred substantial research and
development costs, one or more of the technologies under our development, or
under development by one or more of our strategic partners, could become
obsolete prior to its introduction. Finally, delays in the delivery
of components or other unforeseen problems may occur that could materially and
adversely affect our ability to generate revenue, offer new services and remain
competitive.
Technological
innovation is important to our success and depends, to a significant degree, on
the work of technically skilled employees. Competition for the
services of these types of employees is intense. We may not be able
to attract and retain these employees. If we are unable to attract
and maintain technically skilled employees, our competitive position could be
materially and adversely affected.
We
intend to make significant investments in new products and services that may not
be profitable.
We have
made and will continue to make significant investments in research, development,
and marketing for new products, services, and technologies, including new
set-top box designs and entry into new business areas. Investments in
new technology are inherently speculative and commercial success depends on many
factors including novelty, service and support, and effective sales and
marketing. We may not achieve significant revenue from new product
and service investments for a number of years, if at all. Moreover,
new products and services may not be profitable, and even if they are
profitable, operating margins for new products and businesses may be
minimal.
We
rely on key personnel.
We
believe that our future success will depend to a significant extent upon the
performance of Charles W. Ergen, our Chairman and Chief Executive Officer and
certain other executives. Mr. Ergen and certain of these executives
will also continue to devote significant time to their employment at DISH
Network. The loss of Mr. Ergen or of certain other key executives or
their ability to devote sufficient time and effort to our business could have a
material adverse effect on our business, financial condition and results of
operations. Although all of our executives will execute agreements
limiting their ability to work for or consult with competitors if they leave us,
we do not have employment agreements with any of them.
Risks
Affecting Our Set-Top Business
We
depend on sales of set-top boxes for nearly all of our revenue, and if sales of
our set-top boxes decline, our business and financial position will
suffer.
Our
historical revenues consist primarily of sales of our set-top
boxes. In addition, we currently derive, and expect to continue to
derive in the near term, nearly all of our revenue from sales of our set-top
boxes to DISH Network and Bell ExpressVu. Continued market acceptance of our
set-top boxes is critical to our future success. If we are not able
to expand sales of our set-top boxes to other providers of digital television,
including cable operators, our growth prospects will be limited, and our
revenues will be substantially impacted if sales of our set-top boxes to
providers of satellite-delivered digital television decline.
Our
business may suffer if direct-to-home satellite service providers, who currently
comprise our customer base, do not compete successfully with existing and
emerging alternative platforms for delivering digital television, including
terrestrial networks, internet protocol television and cable television
operators.
Our
existing customers are direct-to-home satellite video providers, which compete
with cable television operators and terrestrial broadcasters for the same pool
of viewers. As technologies develop, other means of delivering
information and entertainment to television viewers are evolving. For
example, some telecommunications companies, such as AT&T Inc. and Verizon
Communications, are seeking to compete with terrestrial broadcasters, cable
television network operators and direct-to-home satellite services by offering
internet protocol television, which allows telecommunications companies to
stream television programs through telephone lines or fiber optic
lines. To the extent that the terrestrial television networks,
telecommunications companies and cable television network operators compete
successfully against direct-to-home satellite services for viewers, the ability
of our existing customer base to attract and retain subscribers may be adversely
affected. As a result, demand for our satellite television set-top
boxes could decline and we may not be able to sustain our current revenue
levels.
Our
future financial performance depends on our ability to penetrate new markets for
set-top boxes.
Our
products were initially designed for, and have been deployed mostly by,
providers of satellite-delivered digital television. To date, we have
not made any sales of our set-top boxes to cable operators. In addition, the
cable set-top box market is highly competitive and we expect competition to
intensify in the future. In particular, we believe that most cable
set-top boxes are sold by a small number of well entrenched competitors who have
long-standing relationships with cable operators. This competition
may make it more difficult for us to sell cable set-top boxes, and may result in
pricing pressure, small profit margins, high sales and marketing expenses and
failure to obtain market share, any of which would likely seriously harm our
business, operating results and financial condition.
Our
ability to sell our set-top boxes to cable television operators depends on our
ability to obtain licenses to use the conditional access systems utilized by
these cable television operators.
Our
commercial success in selling our set-top boxes to cable television operators
depends significantly on our ability to obtain licenses to use the conditional
access systems deployed by these operators in our set-top boxes. In
many cases, the intellectual property rights to these conditional access systems
are owned by the set-top box manufacturer that currently provides the cable
television operator with its set-top boxes. We cannot assure you that
we will able to obtain required licenses on commercially favorable terms, if at
all. If we do not obtain the necessary licenses, we may be delayed or
prevented from pursuing the development of some potential products with cable
television operators. Our failure to obtain a license to any
technology that we may require to develop or commercialize our set-top boxes
with cable television operators will significantly and negatively affect our
business.
Growth
in our set-top box business likely requires expansion of our sales to
international customers; we may be unsuccessful in expanding international
sales.
We
believe that in order to grow our set-top box revenue and business and to build
a large customer base, we must increase sales of our set-top boxes in
international markets. We have limited experience selling our set-top
boxes internationally. To succeed in these sales efforts, we believe
we must hire additional sales personnel and develop and manage new relationships
with cable operators and other providers of digital television in international
markets. If we do not succeed in our efforts to sell to these target
markets and customers, the size of our total addressable market may be
limited. This, in turn, would harm our ability to grow our customer
base and revenue.
The
set-top box business is extremely competitive.
Currently,
there are many significant competitors in the set-top box business including
several established companies who have sold set-top boxes to major cable
operators in the United States for many years. These competitors
include companies such as Motorola, Cisco Systems, which recently acquired
Scientific Atlanta, and Pace. In addition, a number of rapidly
growing companies have recently entered the market, many of them with set-top
box offerings similar to our existing satellite set-top box
products. We also expect additional competition in the future from
new and existing companies who do not currently compete in the market for
set-top boxes. As the set-top box business evolves, our current and
potential competitors may establish cooperative relationships among themselves
or with third parties, including software and hardware companies that could
acquire significant market share, which could adversely affect our
business. We also face competition from set-top boxes that have been
internally developed by digital video providers. Any of these
competitive threats, alone or in combination with others, could seriously harm
our business, operating results and financial condition.
Our
set-top boxes are highly complex and may experience quality or supply
problems.
Our
set-top boxes are extremely complex and can have defects in design, manufacture
or associated software. Set-top boxes often contain “bugs” that can
unexpectedly interfere with their operation. Defects may also occur
in components and products that we purchase from third-parties. There
can be no assurance that we will be able to detect and fix all defects in the
set-top boxes that we sell. We could incur significant expenses, lost
revenue, and harm to our reputation if we fail to detect or effectively address
such issues through design, testing or warranty repairs.
The
average selling price of our set-top boxes may decrease, which could negatively
impact our operating results.
Prior to
our Spin-off from DISH Network, we sold set-top boxes to our largest customer,
DISH Network, at our cost. In order to operate a profitable business
we will be required to sell our set-top boxes to DISH Network and other
customers at higher prices. It is possible that our ability to
increase the average selling prices of our set-top boxes will be limited and
that prices may decrease in the future in response to competitive pricing
pressures, new product introductions by us or our competitors or other
factors. If we are unable to increase or at least maintain the
average selling prices of our set-top boxes, or if such selling prices decline,
and we are unable to respond in a timely manner by developing and introducing
new products and continually reducing our product costs, our revenues and gross
margin may be negatively affected, which will harm our business and results of
operations.
If
significant numbers of television viewers are unwilling to pay for premium
programming packages that utilize set-top boxes, we may not be able to sustain
our current revenue level.
Our
revenues are derived entirely from direct-to-home satellite service providers
who purchase our set-top boxes for their subscribers. Therefore, we
are substantially dependent upon the ability of these providers to promote the
delivery of premium programming packages that utilize technology incorporated
into our set-top boxes, such as DVR technology and IPTV, to generate future
revenues.
However,
direct-to-home satellite service providers may be unsuccessful in promoting
value-added services or may promote alternative packages, such as free
programming packages, in lieu of promoting packages that utilize our high-end
set-top box offerings. Subscribers of direct-to-home satellite
services have historically purchased stand-alone satellite receivers without the
advanced set-top box functionality that we offer. If direct-to-home
satellite service providers are unable to develop compelling reasons for their
subscribers to purchase our more advanced set-top boxes, it will be difficult
for us to sustain our historical revenues.
Our
reliance on several key components used in our set-top boxes could restrict
production and result in higher set-top box costs.
We obtain
many components for our set-top boxes from a single supplier or a limited group
of suppliers. Our reliance on a single or limited group of suppliers,
particularly foreign suppliers, and our increasing reliance on subcontractors,
involves several risks. These risks include a potential inability to
obtain an adequate supply of required components, and reduced control over
pricing, quality, and timely delivery of these components. We do not
generally maintain long-term agreements with any of our suppliers or
subcontractors. An inability to obtain adequate deliveries or any
other circumstances requiring us to seek alternative sources of supply could
affect our ability to ship our set-top boxes on a timely basis, which could
damage our relationships with current and prospective customers and harm our
business, resulting in a loss of market share, and reduce revenues and
income.
We
generally maintain low inventory levels and do not make binding long-term
commitments to suppliers. As a result, it may be difficult in the
future to obtain components required for our products or to increase the volume
of components if demand for our products increases.
Our
future growth depends on market acceptance of HDTV.
Future
demand for our set-top boxes will depend significantly on the growing market
acceptance of high definition television, or HDTV. The effective
delivery of HDTV will depend on digital television operators developing and
building infrastructure to provide wide-spread HDTV programming. If
the introduction or adoption of HDTV or the deployment of HDTV is not as
widespread or as rapid as we or our customers expect, our revenue growth will be
limited.
During
January 2008, the U.S. Court of Appeals upheld a Texas jury verdict that certain
of our digital video recorders, or DVRs, infringed a patent held by
Tivo.
If we are
unsuccessful in subsequent appeals or in defending against claims that our
alternate technology does not infringe on Tivo’s patent, we could be prohibited
from distributing DVRs or be required to modify or eliminate certain
user-friendly DVR features that we currently offer to consumers. In
that event, we would be at a significant disadvantage to our competitors who
could offer this functionality and, while we would attempt to provide that
functionality through other manufacturers, the adverse affect on our business
could be material. To the extent that DISH Network does not indemnify
us, we could also have to pay substantial additional damages.
Risks
Affecting Our Fixed Satellite Services Business
We
currently face competition from established competitors in the fixed satellite
service business and may face competition from others in the
future.
In our
fixed satellite services business, we will compete against larger,
well-established fixed satellite service companies, such as Intelsat, SES
Americom and Telesat Canada. Because the satellite services industry
is relatively mature, our growth strategy depends largely on our ability to
displace current incumbent providers, which often have the benefit of long-term
contracts with customers. These long-term contracts and other factors
result in relatively high switching costs for customers, making it more
difficult for us to displace customers from their current relationships with our
competitors. In addition, the supply of satellite capacity has
increased in recent years, which will make it more difficult for us to sell our
services in certain markets and to price our capacity at acceptable
levels. Competition may cause downward pressure on prices and further
reduce the utilization of our fleet capacity, both of which would have an
adverse effect on our financial performance. Our fixed satellite
services business also competes with fiber optic cable and other terrestrial
delivery systems, which may have a cost advantage, particularly in
point-to-point applications where such delivery systems have been
installed.
Our
satellites are subject to significant operational risks.
Satellites
are subject to significant operational risks while in orbit. These
risks include malfunctions, commonly referred to as anomalies, that have
occurred in our satellites and the satellites of other operators as a result of
various factors, such as satellite manufacturers’ errors, problems with the
power systems or control systems of the satellites and general failures
resulting from operating satellites in the harsh environment of
space.
Although
we work closely with the satellite manufacturers to determine and eliminate the
cause of anomalies in new satellites and provide for redundancies of many
critical components in the satellites, we may experience anomalies in the
future, whether of the types described above or arising from the failure of
other systems or components.
Any
single anomaly or series of anomalies could materially and adversely affect our
operations and revenues and our relationship with current customers, as well as
our ability to attract new customers for our satellite services. In
particular, future anomalies may result in the loss of individual transponders
on a satellite, a group of transponders on that satellite or the entire
satellite, depending on the nature of the anomaly. Anomalies may also
reduce the expected useful life of a satellite, thereby reducing the revenue
that could be generated by that satellite, or create additional expenses due to
the need to provide replacement or back-up satellites.
Meteoroid
events pose a potential threat to all in-orbit satellites. The
probability that meteoroids will damage those satellites increases significantly
when the Earth passes through the particulate stream left behind by
comets. Occasionally, increased solar activity also poses a potential
threat to all in-orbit satellites.
Some
decommissioned spacecraft are in uncontrolled orbits which pass through the
geostationary belt at various points and present hazards to operational
spacecraft, including our satellites. We may be required to perform
maneuvers to avoid collisions and these maneuvers may prove unsuccessful or
could reduce the useful life of the satellite through the expenditure of fuel to
perform these maneuvers. The loss, damage or destruction of any of
our satellites as a result of an electrostatic storm, collision with space
debris, malfunction or other event could have a material adverse effect on our
business, financial condition and results of operations.
Our
satellites have minimum design lives of 12 years, but could fail or suffer
reduced capacity before then.
Our
ability to earn revenue depends on the usefulness of our
satellites. Each satellite has a limited useful life. A
number of factors affect the useful lives of the satellites, including, among
other things, the quality of their construction, the durability of their
component parts, the ability to continue to maintain proper orbit and control
over the satellite’s functions, the efficiency of the launch vehicle used, and
the remaining on-board fuel following orbit insertion. Generally, the
minimum design life of each of our satellites is 12 years. We can
provide no assurance, however, as to the actual useful lives of the
satellites.
In the
event of a failure or loss of any of our satellites, we may relocate another
satellite and use it as a replacement for the failed or lost satellite, which
could have a material adverse effect on our business, financial condition and
results of operations. Such a relocation would require FCC approval
and, among other things, a showing to the FCC that the replacement satellite
would not cause additional interference compared to the failed or lost
satellite. We cannot be certain that we could obtain such FCC
approval.
Our
satellites are subject to risks related to launch.
Satellite
launches are subject to significant risks, including launch failure, incorrect
orbital placement or improper commercial operation. Certain launch
vehicles that may be used by us have either unproven track records or have
experienced launch failures in the past. The risks of launch delay
and failure are usually greater when the launch vehicle does not have a track
record of previous successful flights. Launch failures result in
significant delays in the deployment of satellites because of the need both to
construct replacement satellites, which can take more than two years, and to
obtain other launch opportunities. Such significant delays could
materially and adversely affect our ability to generate revenues. If
we were unable to obtain launch insurance, or obtain launch insurance at rates
we deem commercially reasonable, and a significant launch failure were to occur,
it could have a material adverse effect on our ability to generate revenues and
fund future satellite procurement and launch opportunities. In
addition, the occurrence of launch failures whether on our satellites or those
of others may significantly reduce the availability of launch insurance on our
satellites or make launch insurance premiums uneconomical.
Our
fixed satellite services business is subject to risks of adverse government
regulation.
Our
satellite services business is subject to varying degrees of regulation in the
United States by the FCC, and other entities, and in foreign countries by
similar entities. These regulations are subject to the political
process and have been in constant flux over the past
decade. Moreover, a substantial number of foreign countries in which
we have, or may in the future make, an investment, regulate, in varying degrees,
the ownership of satellites and the distribution and ownership of programming
services and foreign investment in programming companies. Further
material changes in law and regulatory requirements must be anticipated, and
there can be no assurance that our business and the business of our affiliates
will not be adversely affected by future legislation, new regulation or
deregulation.
Our
business depends substantially on FCC licenses that can expire or be revoked or
modified and applications that may not be granted.
If the
FCC were to cancel, revoke, suspend or fail to renew any of our licenses or
authorizations, it could have a material adverse effect on our business,
financial condition and results of operations. Specifically, loss of
a frequency authorization would reduce the amount of spectrum available to us,
potentially reducing the amount of services available to our
customers. The materiality of such a loss of authorizations would
vary based upon, among other things, the location of the frequency used or the
availability of replacement spectrum. In addition, Congress often
considers and enacts legislation that could affect us, and FCC proceedings to
implement the Communications Act and enforce its regulations are
ongoing. We cannot predict the outcomes of these legislative or
regulatory proceedings or their effect on our business.
We
may not be aware of certain foreign government regulations.
Because
regulatory schemes vary by country, we may be subject to regulations in foreign
countries of which we are not presently aware. If that were to be the
case, we could be subject to sanctions by a foreign government that could
materially and adversely affect our ability to operate in that
country. We cannot assure you that any current regulatory approvals
held by us are, or will remain, sufficient in the view of foreign regulatory
authorities, or that any additional necessary approvals will be granted on a
timely basis or at all, in all jurisdictions in which we wish to operate new
satellites, or that applicable restrictions in those jurisdictions will not be
unduly burdensome. The failure to obtain the authorizations necessary
to operate satellites internationally could have a material adverse effect on
our ability to generate revenue and our overall competitive
position.
We, our
customers and companies with which we do business may be required to have
authority from each country in which we or they provide services or provide our
customers use of our satellites. Because regulations in each country
are different, we may not be aware if some of our customers and/or companies
with which we do business do not hold the requisite licenses and
approvals.
Our
dependence on outside contractors could result in delays related to the design,
manufacture and launch of our new satellites, which could in turn adversely
affect our operating results.
There are
a limited number of manufacturers that are able to design and build satellites
according to the technical specifications and standards of quality we require,
including Astrium Satellites, Boeing Satellite Systems, Lockheed Martin, Loral
and Thales Alenia Space. There are also a limited number of agencies
able to launch such satellites, including International Launch Services,
Arianespace, United Launch Alliance and Sea Launch Company. The loss
of any of our manufacturers or launch agencies could result in the delay of the
design, building or launch of our satellites. Even if alternate
suppliers for such services are available, we may have difficulty identifying
them in a timely manner, we may incur significant additional expense in changing
suppliers, and this could result in difficulties or delays in the design,
manufacturing or launch of our satellites. Any delays in the design,
building or launch of our satellites could have a material adverse effect on our
business, financial condition and results of operations.
We
currently have no commercial insurance coverage on the satellites we
own.
We do not
insure our owned satellites against in-orbit or other failures. The
loss of a satellite or other satellite malfunctions or anomalies could have a
material adverse effect on our financial performance which we may not be able to
mitigate by using available capacity on other satellites. In
addition, the loss of a satellite or other satellite malfunctions or anomalies
could affect our ability to comply with FCC regulatory obligations and our
ability to fund the construction or acquisition of replacement satellites for
our in-orbit fleet in a timely fashion, or at all.
Risks
Relating to the Spin-Off
Our
agreements with DISH Network may not reflect what two unaffiliated parties might
have agreed to.
The
allocation of assets, liabilities, rights, indemnifications and other
obligations between DISH Network and us under the separation and ancillary
agreements we entered into with DISH Network do not necessarily reflect what two
unaffiliated parties might have agreed to. Had these agreements been
negotiated with unaffiliated third parties, their terms may have been more
favorable, or less favorable, to us.
We
will have potential conflicts of interest with DISH Network.
Questions
relating to conflicts of interest may arise between DISH Network and us in a
number of areas relating to our past and ongoing relationships. Areas in which
conflicts of interest between DISH Network and us could arise include, but are
not limited to, the following:
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Cross
officerships, directorships and stock ownership. We will continue to
have significant overlap in directors and executive officers with DISH
Network, which may lead to conflicting interests. Certain of
our executive officers, including Charles W. Ergen, our Chairman and Chief
Executive Officer, also serve as executive officers of DISH
Network. Three of these individuals provide us services
pursuant to a management services agreement we will enter into with DISH
Network. Our board of directors will include persons who are
members of the board of directors of DISH Network, including Mr. Ergen,
who will serve as the Chairman of DISH Network and us. The
executive officers and the members of our board of directors who overlap
with DISH Network have fiduciary duties to DISH Network’s
shareholders. Pursuant to the management services agreement,
three of these officers will be paid by DISH Network even if their duties
include work for EchoStar. Therefore, these individuals may
have actual or apparent conflicts of interest with respect to matters
involving or affecting each company. For example, there will be
the potential for a conflict of interest when we or DISH Network look at
acquisitions and other corporate opportunities that may be suitable for
both companies. In addition, many of our directors and officers
own DISH Network stock and options to purchase DISH Network stock, which
they acquired or were granted prior to the Spin-off, including Mr. Ergen,
who beneficially owns approximately 50.0% of the total equity and control
approximately 80.0% of the voting power of DISH Network and
us. These ownership interests could create actual, apparent or
potential conflicts of interest when these individuals are faced with
decisions that could have different implications for our company and DISH
Network.
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Intercompany
agreements related to the Spin-off. We have
entered into agreements with DISH Network pursuant to which it will
provide us certain management, administrative, accounting, tax, legal and
other services, for which we will pay DISH Network an amount equal to DISH
Network’s cost plus an additional amount that is equal to a fixed
percentage of DISH Network’s cost. In addition, we will enter
into a number of intercompany agreements covering matters such as tax
sharing and our responsibility for certain liabilities previously
undertaken by DISH Network for certain of our businesses. We
will also enter into certain commercial agreements with DISH Network
pursuant to which we will, among other things, be obligated to sell at
specified prices, set-top boxes and related equipment to DISH
Network. The terms of these agreements were established while
we were a wholly-owned subsidiary of DISH Network and were not the result
of arm’s length negotiations. In addition, conflicts could
arise in the interpretation or any extension or renegotiation of these
existing agreements.
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Future
intercompany transactions. In the
future, DISH Network or its affiliates may enter into transactions with us
or our subsidiaries or other affiliates. Although the terms of
any such transactions will be established based upon negotiations between
DISH Network and us and, when appropriate, subject to the approval of the
independent directors on our board or a committee of disinterested
directors, there can be no assurance that the terms of any such
transactions will be as favorable to us or our subsidiaries or affiliates
as may otherwise be obtained in arm’s length
negotiations.
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Business
Opportunities. DISH
Network will retain its interests in various U.S. and international
companies that have subsidiaries or controlled affiliates that own or
operate domestic or foreign services that may compete with services
offered by our businesses. We may also compete with DISH
Network when we participate in auctions for spectrum or orbital slots for
our satellites.
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We may
not be able to resolve any potential conflicts, and, even if we do so, the
resolution may be less favorable to us than if we were dealing with an
unaffiliated party.
We do not
have any agreements with DISH Network that restrict us from selling our products
to competitors of DISH Network. We also do not have any agreements
with DISH Network that would prevent us from competing with each
other.
In
addition, the corporate opportunity policy set forth in our articles of
incorporation addresses potential conflicts of interest for officers and
directors of DISH Network who are also officers or directors of
us. This policy could restrict our ability to take advantage of
certain corporate opportunities.
We
may incur material costs and expenses as a result of our separation from DISH
Network.
We may
incur costs and expenses greater than those we currently incur as a result of
our separation from DISH Network. These increased costs and expenses
may arise from various factors, including financial reporting, costs associated
with complying with federal securities laws (including compliance with the
Sarbanes-Oxley Act of 2002), tax administration and human resources related
functions. Although DISH Network will continue to provide many of
these services to us under the services agreement, such services are for a
limited period of time. We cannot assure you that these costs will
not be material to our business.
Risks
Relating to our Common Stock and the Securities Market
If,
we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, or our internal control over financial reporting is not effective,
the reliability of our financial statements may be questioned and our stock
price may suffer.
Section
404 of the Sarbanes-Oxley Act of 2002 requires any company subject to the
reporting requirements of the U.S. securities laws to do a comprehensive
evaluation of its and its consolidated subsidiaries’ internal control over
financial reporting. To comply with this statute, we will eventually
be required to document and test our internal control procedures, our management
will be required to assess and issue a report concerning our internal control
over financial reporting, and our independent auditors will be required to issue
an opinion on management’s assessment of those matters. The rules
governing the standards that must be met for management to assess our internal
control over financial reporting are complex and require significant
documentation, testing and possible remediation to meet the detailed standards
under the rules. During the course of its testing, our management may
identify material weaknesses or deficiencies which may not be remedied in time
to meet the deadline imposed by the Sarbanes-Oxley Act. If our
management cannot favorably assess the effectiveness of our internal control
over financial reporting or our auditors identify material weaknesses in our
internal controls, investor confidence in our financial results may weaken, and
our stock price may suffer.
It
may be difficult for a third party to acquire us, even if doing so may be
beneficial to our shareholders.
Certain
provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a change in control of our company that a shareholder may consider
favorable. These provisions include the following:
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a
capital structure with multiple classes of common stock: a
Class A that entitles the holders to one vote per share, a Class B that
entitles the holders to ten votes per share, a Class C that entitles the
holders to one vote per share, except upon a change in control of our
company in which case the holders of Class C are entitled to ten votes per
share and a non-voting Class D;
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a
provision that authorizes the issuance of “blank check” preferred stock,
which could be issued by our board of directors to increase the number of
outstanding shares and thwart a takeover
attempt;
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a
provision limiting who may call special meetings of shareholders;
and
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a
provision establishing advance notice requirements for nominations of
candidates for election to our board of directors or for proposing matters
that can be acted upon by shareholders at shareholder
meetings.
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In
addition, pursuant to our certificate of incorporation we have a significant
amount of authorized and unissued stock which would allow our board of directors
to issue shares to persons friendly to current management, thereby protecting
the continuity of its management, or which could be used to dilute the stock
ownership of persons seeking to obtain control of us.
We
are controlled by one principal shareholder.
Charles
W. Ergen, our Chairman and Chief Executive Officer, beneficially owns
approximately 50.0% of our total equity securities and possess approximately
80.0% of the total voting power. Thus, Mr. Ergen has the ability to
elect a majority of our directors and to control all other matters requiring the
approval of our shareholders. As a result of Mr. Ergen’s voting
power, we are a “controlled company” as defined in the Nasdaq listing rules and,
therefore, are not subject to Nasdaq requirements that would otherwise require
us to have (i) a majority of independent directors; (ii) a nominating committee
composed solely of independent directors; (iii) compensation of our executive
officers determined by a majority of the independent directors or a compensation
committee composed solely of independent directors; and (iv) director nominees
selected, or recommended for the Board’s selection, either by a majority of the
independent directors or a nominating committee composed solely of independent
directors. Mr. Ergen also beneficially owns approximately 50.0% of
the total equity and 80.0% of the total voting power of DISH Network and
continues to be the Chairman and Chief Executive Officer of DISH Network, which
directly and through its subsidiaries continues to be our largest customer,
accounting for a substantial majority of our revenues.
Holders
of any single class of our common stock may not have any remedies if any action
by our directors or officers has an adverse effect on only that series of our
common stock.
Principles
of Nevada law and the provisions of our certificate of incorporation may protect
decisions of our board of directors that have a disparate impact upon holders of
any single class of our common stock. Under Nevada law, the board of
directors has a duty to act with due care and in the best interests of all of
our shareholders, including the holders of all classes of our common
stock. Principles of Nevada law established in cases involving
differing treatment of multiple classes or series of stock provide that a board
of directors owes an equal duty to all common shareholders regardless of class
or series and does not have separate or additional duties to any group of
shareholders. As a result, in some circumstances, our directors may
be required to make a decision that is adverse to the holders of one class of
our common stock. Under the principles of Nevada law referred to
above, you may not be able to challenge these decisions if our board of
directors is disinterested and adequately informed with respect to these
decisions and acts in good faith and in the honest belief that it is acting in
the best interests of all of our shareholders.
We
do not intend to pay dividends for the foreseeable future.
We have
never declared or paid any dividends on our common stock. We intend
to retain any earnings to finance the operation and expansion of our business,
and we do not anticipate paying any cash dividends in the future. As
a result, you may only receive a return on your investment in our common stock
if the market price of our common stock increases.
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UNRESOLVED
STAFF COMMENTS
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The
following table sets forth certain information concerning our principal
properties related to our set-top box business (“STB”), our fixed satellite
services business (“FSS”) and our other businesses related to our real estate
leases (“Other”). We operate various facilities in the United States
and abroad. We believe that our facilities are well maintained and
are sufficient to meet our current and projected needs.
Description/Use/Location
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Segment(s)
Using Property
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Approximate
Square Footage
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Owned
or Leased
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Corporate
headquarters, Englewood, Colorado
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Other
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476,000
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Owned
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EchoStar
Technologies Corporation engineering offices and service
center, Englewood, Colorado
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STB
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144,000
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Owned
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EchoStar
Technologies Corporation engineering offices, Englewood,
Colorado
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STB
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124,000
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Owned
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Digital
broadcast operations center, Cheyenne, Wyoming
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FSS
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143,000
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Owned
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Digital
broadcast operations center, Gilbert, Arizona
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FSS
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124,000
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Owned
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Regional
digital broadcast operations center, Monee, Illinois
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FSS
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45,000
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Owned
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Regional
digital broadcast operations center, New Braunsfels, Texas
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FSS
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35,000
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Owned
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Regional
digital broadcast operations center, Quicksberg, Virginia
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FSS
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35,000
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Owned
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Regional
digital broadcast operations center, Spokane, Washington
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FSS
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35,000
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Owned
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Regional
digital broadcast operations center, Orange, New Jersey
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FSS
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8,800
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Owned
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Customer
call center and data center, Littleton, Colorado
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Other
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202,000
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Owned
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Customer
call center, Thornton, Colorado
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Other
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55,000
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Owned
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Engineering
offices and warehouse, Almelo, The Netherlands
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STB
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55,000
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Owned
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Engineering
offices, Steeton, England
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STB
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43,000
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Owned
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Under the
terms of our separation from DISH Network, we will lease portions of certain of
our owned facilities to DISH Network. See “Certain Intercompany
Agreements — Agreements with DISH Network — Real Estate Lease Agreements” set
forth in our Proxy Statement for the 2008 Annual Meeting of Shareholders under
the caption “Certain Relationships and Related Transactions.”
Item
3. LEGAL
PROCEEDINGS
In
connection with the Spin-off, we have entered into a separation agreement with
DISH Network, which provides for, among other things, the division of liability
resulting from litigation. Under the terms of the separation
agreement, we have assumed liability for any acts or omissions that relate to
our business whether such acts or omissions occurred before or after the
Spin-off. Certain exceptions are provided, including for intellectual
property related claims generally, whereby we will only be liable for our acts
or omissions that occurred following the Spin-off. In accordance with
these terms of the separation agreement, we may be partially or completely
responsible for any liability resulting from the legal proceedings described
below.
Acacia
During
2004, Acacia Media Technologies, (“Acacia”) filed a lawsuit against us and DISH
Network in the United States District Court for the Northern District of
California. The suit also named DirecTV, Comcast, Charter, Cox and a
number of smaller cable companies as defendants. Acacia is an
intellectual property holding company which seeks to license the patent
portfolio that it has acquired. The suit alleges infringement of
United States Patent Nos. 5,132,992 (the ‘992 patent), 5,253,275 (the ‘275
patent), 5,550,863 (the ‘863 patent), 6,002,720 (the ‘720 patent) and 6,144,702
(the ‘702 patent). The ‘992, ‘863, ‘720 and ‘702 patents have been asserted
against us.
The
patents relate to various systems and methods related to the transmission of
digital data. The ‘992 and ‘702 patents have also been asserted
against several Internet content providers in the United States District Court
for the Central District of California. During 2004 and 2005, the
Court issued Markman rulings which found that the ‘992 and ‘702 patents were not
as broad as Acacia had contended, and that certain terms in the ‘702 patent were
indefinite. In April 2006, DISH Network and other defendants asked
the Court to rule that the claims of the ‘702 patent are invalid and not
infringed. That motion is pending. In June and September
2006, the Court held Markman hearings on the ‘992, ‘863, ‘720 and ‘275 patents,
and issued a ruling during December 2006.
Acacia’s
various patent infringement cases have been consolidated for pre-trial purposes
in the United States District Court for the Northern District of
California. We and DISH Network intend to vigorously defend this
case. In the event that a Court ultimately determines that we and
DISH Network infringe any of the patents, we may be subject to substantial
damages, which may include treble damages and/or an injunction that could
require us to materially modify certain user-friendly features that we currently
offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period
prior to the effective date of the Spin-off.
Broadcast
Innovation, L.L.C.
In 2001,
Broadcast Innovation, L.L.C. (“Broadcast Innovation”) filed a lawsuit against
DISH Network, DirecTV, Thomson Consumer Electronics and others in Federal
District Court in Denver, Colorado. The suit alleges infringement of
United States Patent Nos. 6,076,094 (the ‘094 patent) and 4,992,066 (the ‘066
patent). The ‘094 patent relates to certain methods and devices for
transmitting and receiving data along with specific formatting information for
the data. The ‘066 patent relates to certain methods and devices for
providing the scrambling circuitry for a pay television system on removable
cards. We examined these patents and believe that they are not
infringed by any of our products or services. Subsequently, DirecTV
and Thomson settled with Broadcast Innovation leaving us as the only
defendant.
During
2004, the judge issued an order finding the ‘066 patent invalid. Also
in 2004, the Court ruled the ‘094 patent invalid in a parallel case filed by
Broadcast Innovation against Charter and Comcast. In 2005, the United States
Court of Appeals for the Federal Circuit overturned the ‘094 patent finding of
invalidity and remanded the case back to the District Court. During
June 2006, Charter filed a reexamination request with the United States Patent
and Trademark Office. The Court has stayed the case pending
reexamination. Our case remains stayed pending resolution of the
Charter case.
We and
DISH Network intend to vigorously defend this case. In the event that
a Court ultimately determines that we and DISH Network infringe any of the
patents, we may be subject to an injunction that could require us to materially
modify certain user-friendly features that we currently offer to
consumers. We are being indemnified by DISH Network for any potential
liability or damages resulting from this suit relating to the period prior to
the effective date of the Spin-off.
Finisar
Corporation
Finisar
Corporation (“Finisar”) obtained a $100 million verdict in the United States
District Court for the Eastern District of Texas against DirecTV for patent
infringement. Finisar alleged that DirecTV’s electronic program guide
and other elements of its system infringe United States Patent No. 5,404,505
(the ‘505 patent).
In July
2006, DISH Network, together with NagraStar LLC, filed a Complaint for
Declaratory Judgment in the United States District Court for the District of
Delaware against Finisar that asks the Court to declare that they and we do not
infringe, and have not infringed, any valid claim of the ‘505
patent. Trial is not currently scheduled. The District
Court has stayed our action until the Federal Circuit has resolved DirecTV’s
appeal.
We and
DISH Network intend to vigorously prosecute this case. In the event
that a Court ultimately determines that we and DISH Network infringe this
patent, we may be subject to an injunction that could require us to materially
modify certain user-friendly features that we currently offer to
consumers. We are being indemnified by DISH Network for any potential
liability or damages resulting from this suit relating to the period prior to
the effective date of the Spin-off.
Global
Communications
On April
19, 2007, Global Communications, Inc., which we refer to as Global, filed a
patent infringement action against DISH Network in the United States District
Court for the Eastern District of Texas. The suit alleges
infringement of United States Patent No. 6,947,702 (the ‘702
patent). This patent, which involves satellite reception, was issued
in September 2005. On October 24, 2007, the United States Patent and
Trademark Office granted our request for reexamination of the ‘702 patent and
issued an Office Action finding that all of the claims of the ‘702 patent were
invalid. Based on the PTO’s decision, we have asked the District
Court to stay the litigation until the reexamination proceedings is
concluded.
We and
DISH Network intend to vigorously defend this case. In the event that
a Court ultimately determines that we and DISH Network infringe the ‘702
patents, we may be subject to an injunction that could require us to materially
modify certain user-friendly features that we currently offer to
consumers. We are being indemnified by DISH Network for any potential
liability or damages resulting from this suit relating to the period prior to
the effective date of the Spin-off.
Superguide
During
2000, Superguide Corp. (“Superguide”) filed suit against DISH Network, DirecTV,
Thomson and others in the United States District Court for the Western District
of North Carolina, Asheville Division, alleging infringement of United States
Patent Nos. 5,038,211 (the ‘211 patent), 5,293,357 (the ‘357 patent) and
4,751,578 (the ‘578 patent) which relate to certain electronic program guide
functions, including the use of electronic program guides to control
VCRs. Superguide sought injunctive and declaratory relief and damages
in an unspecified amount.
On
summary judgment, the District Court ruled that none of the asserted patents
were infringed by us. These rulings were appealed to the United
States Court of Appeals for the Federal Circuit. During 2004, the
Federal Circuit affirmed in part and reversed in part the District Court’s
findings and remanded the case back to the District Court for further
proceedings. In 2005, Superguide indicated that it would no longer
pursue infringement allegations with respect to the ‘211 and ‘357 patents and
those patents have now been dismissed from the suit. The District
Court subsequently entered judgment of non-infringement in favor of all
defendants as to the ‘211 and ‘357 patents and ordered briefing on Thomson’s
license defense as to the ‘578 patent. During December 2006, the
District Court found that there were disputed issues of fact regarding Thomson’s
license defense, and ordered a trial solely addressed to that
issue. That trial took place in March 2007. In July 2007,
the District Court ruled in favor of Superguide. As a result,
Superguide will be able to proceed with their infringement action against us,
DirecTV and Thomson.
We and
DISH Network intend to vigorously defend this case. In the event that
a Court ultimately determines that we infringe the ‘578 patent, we may be
subject to a portion of the final damages, which may include treble damages
and/or an injunction that could require us to materially modify certain
user-friendly electronic programming guide and related features that we
currently offer to consumers. We are being indemnified by DISH
Network for any potential liability or damages resulting from this suit relating
to the period prior to the effective date of the Spin-off. We cannot
predict with any degree of certainty the outcome of this
suit.
Tivo
Inc.
On
January 31, 2008, the U.S. Court of Appeals for the Federal Circuit affirmed in
part and reversed in part the April 2006 jury verdict concluding that certain of
our digital video recorders, or DVRs, infringed a patent held by
Tivo. In its decision, the Federal Circuit affirmed the jury’s
verdict of infringement on Tivo’s “software claims,” upheld the award of damages
from the district court, and ordered that the stay of the district court’s
injunction against us, which was issued pending appeal, will dissolve when the
appeal becomes final. The Federal Circuit, however, found that we did
not literally infringe Tivo’s “hardware claims,” and remanded such claims back
to the district court for further proceedings. We are appealing the
Federal Circuit’s ruling.
In
addition, we have developed and deployed ‘next-generation’ DVR software to our
customers’ DVRs. This improved software is fully operational and has
been automatically downloaded to current customers (the
“Design-Around”). We have formal legal opinions from outside counsel
that conclude that our Design-Around does not infringe, literally or under the
doctrine of equivalents, either the hardware or software claims of Tivo’s
patent.
If the
Federal Circuit’s decision is upheld and Tivo decides to challenge the
Design-Around, we will mount a vigorous defense. If we and DISH
Network are unsuccessful in subsequent appeals or in defending against claims
that the Design-Around infringes Tivo’s patent, we and DISH Network could also
be prohibited from distributing DVRs, or be required to modify or eliminate
certain user-friendly DVR features that we currently offer to
consumers. In that event we and DISH Network would be at a
significant disadvantage to our competitors who could offer this functionality
and, while we and DISH Network would attempt to provide that functionality
through other manufacturers, the adverse affect on our business could be
material. We could also have to pay substantial additional
damages.
Trans
Video
In August
2006, Trans Video Electronic, Ltd. (“Trans Video”) filed a patent infringement
action against us and DISH Network in the United States District Court for the
Northern District of California. The suit alleges infringement of
United States Patent Nos. 5,903,621 (the ‘621 patent) and 5,991,801 (the ‘801
patent). The patents relate to various methods related to the
transmission of digital data by satellite. On May 14, 2007, we and
DISH Network reached a settlement with Trans Video which did not have a material
impact on our results of operations.
Other
In
addition to the above actions, we are subject to various other legal proceedings
and claims which arise in the ordinary course of business. In our
opinion, the amount of ultimate liability with respect to any of these actions
is unlikely to materially affect our financial position, results of operations
or liquidity.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No items
were submitted to a vote of security holders during the fourth quarter of
2007.
PART
II
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information. Our Class A common stock is quoted on the Nasdaq Global Select Market
under the symbol “SATS.” As of February 19, 2008, there were
approximately 11,338 holders of record of our Class A common stock, not
including stockholders who beneficially own Class A common stock held in nominee
or street name. As of February 19, 2008, 41,611,830 of the
47,687,040 outstanding shares of our Class B common stock were held by Charles
W. Ergen, our Chairman and Chief Executive Officer and the remaining
6,075,210 were held in a trust for members of Mr. Ergen’s
family. There is currently no trading market for our Class B common
stock. On February 19, 2008, the closing sale price per share of our common
stock on the Nasdaq Global Select Market was $38.01.
Dividend. We
currently do not intend to declare dividends on our common
stock. Payment of any future dividends will depend upon our earnings,
capital requirements, and other factors the Board of Directors considers
appropriate. We currently intend to retain our earnings, if any, to
support future growth and expansion. See “Item 7. - Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources.”
Securities
Authorized for Issuance Under Equity Compensation Plans. See Item 12
– Security Ownership of Certain Beneficial Owners and Management.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
During
October 2007, our Board of Directors authorized the purchase of up to $1.0
billion of our Class A common stock during 2008. During the period
from October 1, 2007 through December 31, 2007, we did not repurchase any shares
as our stock was not publicly traded. Purchases under our repurchase program may
be made through open market purchases, privately negotiated transactions, or
Rule 10b5-1 trading plans, subject to market conditions and other
factors. We may elect not to purchase the maximum amount of shares
allowable under this program and we may also enter into additional share
repurchase programs authorized by our Board of Directors.
The
following tables present selected historical information relating to our
combined financial condition and results of operations for the past five
years. The financial data for the three years ended December 31, 2007
has been derived from our audited combined financial statements for the
corresponding periods. Data for the other periods presented has been
derived from unaudited information. The data should be read in
conjunction with our combined financial statements and Management’s Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein. Our historical and pro forma financial data included in this
report may not be indicative of our future performance and does not necessarily
reflect what our financial condition and results of operations would have been
had we operated as a separate, stand-alone entity during the periods presented,
particularly since changes will occur in our operations and capitalization as a
result of our Spin-off from DISH Network. Our audited combined
financial statements reflect the historical financial position and results of
operations of entities included in consolidated financial statements of DISH
Network, representing almost exclusively DISH Network’s set-top box business,
using the historical results of operations and historical bases of assets and
liabilities of this business. Our historical combined financial
statements reflect sales to DISH Network at cost and do not include certain
satellites, uplink and satellite transmission assets, real estate and other
assets and related liabilities that were contributed to us by DISH Network in
the Spin-off. These assets and liabilities, which will primarily
comprise our fixed satellite services business, have been separately audited and
are included in the Statement of Net Assets to be Contributed by DISH Network
and Unaudited Pro Forma Combined and Adjusted Financial Information included
herein. The financial condition and results of operations of our
fixed satellite services business have not been included in our historical
combined financial statements because our fixed satellite services business was
operated as an integral part of DISH Network’s subscription television business
and did not constitute a “business” in the historical financial statements of
DISH Network. DISH Network acquired Sling Media on October 19,
2007. Our historical financial data includes financial information
for Sling Media from the acquisition date through December 31,
2007. Our unaudited pro forma combined financial statements include
Sling Media’s financial information from January 1, 2007 to the acquisition
date. See “Unaudited Pro Forma Combined and Adjusted Financial
Information” under “The EchoStar Spin-off”
above.
|
|
For
the Years Ended December 31,
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations Data:
|
|
Pro
Forma
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
Revenue
|
|
$ |
2,088,256 |
|
|
$ |
1,544,065 |
|
|
$ |
1,525,320 |
|
|
$ |
1,513,691 |
|
|
$ |
1,720,091 |
|
|
$ |
976,636 |
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (exclusive of depreciation and amortization)
|
|
|
1,627,844 |
|
|
|
1,451,704 |
|
|
|
1,439,919 |
|
|
|
1,438,499 |
|
|
|
1,650,775 |
|
|
|
886,665 |
|
Research
and development
|
|
|
94,377 |
|
|
|
78,790 |
|
|
|
56,451 |
|
|
|
45,928 |
|
|
|
39,809 |
|
|
|
32,361 |
|
General
and administrative, including sales and marketing
|
|
|
130,558 |
|
|
|
90,245 |
|
|
|
60,365 |
|
|
|
56,496 |
|
|
|
65,059 |
|
|
|
50,472 |
|
Depreciation
and amortization
|
|
|
246,530 |
|
|
|
9,705 |
|
|
|
6,032 |
|
|
|
5,832 |
|
|
|
5,071 |
|
|
|
5,511 |
|
Total
costs and expenses
|
|
|
2,099,309 |
|
|
|
1,630,444 |
|
|
|
1,562,767 |
|
|
|
1,546,755 |
|
|
|
1,760,714 |
|
|
|
975,009 |
|
Operating
income (loss)
|
|
$ |
(11,053 |
) |
|
$ |
(86,379 |
) |
|
$ |
(37,447 |
) |
|
$ |
(33,064 |
) |
|
$ |
(40,623 |
) |
|
$ |
1,627 |
|
Net
income (loss)
|
|
$ |
(93,166 |
) |
|
$ |
(85,300 |
) |
|
$ |
(34,162 |
) |
|
$ |
(44,940 |
) |
|
$ |
(43,237 |
) |
|
$ |
4,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
89,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
90,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
Pro
Forma
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
Cash,
cash equivalents and marketable securities
|
|
$ |
1,532,267 |
|
|
$ |
532,267 |
|
|
$ |
323,576 |
|
|
$ |
106,109 |
|
|
$ |
143,437 |
|
|
$ |
156,814 |
|
Restricted
cash.
|
|
$ |
3,150 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,581 |
|
|
$ |
1,699 |
|
|
$ |
1,523 |
|
Total
assets
|
|
$ |
3,882,533 |
|
|
$ |
1,260,910 |
|
|
$ |
517,821 |
|
|
$ |
229,392 |
|
|
$ |
277,843 |
|
|
$ |
248,811 |
|
Long-term
debt (including current portion)
|
|
$ |
382,419 |
|
|
$ |
3,709 |
|
|
$ |
- |
|
|
$ |
495 |
|
|
$ |
647 |
|
|
$ |
2,214 |
|
Net
investment in EchoStar
|
|
$ |
3,275,856 |
|
|
$ |
1,207,518 |
|
|
$ |
502,283 |
|
|
$ |
217,132 |
|
|
$ |
258,452 |
|
|