EchoStar
Annual Report
Year Ended December 31, 2010
March 24, 2011
Dear EchoStar Corporation Shareholders:
After three full years as an independent, publicly-traded company, we continue to concentrate on developing digital
equipment and satellite service solutions for domestic and international satellite, cable TV, IPTV, terrestrial and
telecommunications operators. I am pleased to report that EchoStar had a strong year in 2010. Our revenue grew
23% to $2.35 billion. Throughout the year, we continued to focus on efficiency across our operations, which
resulted in improved operating margins.
Despite difficult economic conditions, we see opportunities for growth in emerging markets. To this end, our
Mexican joint venture, Dish Mexico, is one of the fastest growing DTH service providers in the world, approaching
two million subscribers with healthy margins. As we identify opportunities, we continue to evaluate partnerships,
joint ventures and strategic acquisitions that will leverage our digital equipment, satellite and operational expertise
around the globe.
Sling Media continues to deliver on the promise of TV Everywhere. Its placeshifting platform expanded further
onto iPad, Android, Windows Phone and other Internet-connected devices. For example, we launched our award
winning Slingbox 700U, the smallest, thinnest and easiest to install Slingbox in our history. Furthermore, our Sling
related revenues are rising due to expanded retail growth and sales to pay-TV operators. Meanwhile, the acquisition
of Move Networks and its adaptive video delivery technologies increase our IPTV capability in the U.S. and abroad.
Move provides us with the ability to deliver an Over The Top video service as well as a competitive advantage in the
video delivery marketplace.
While we maintain our focus on areas that historically have been successful for us, our pending acquisition of
Hughes Communications will expand EchoStar’s ability for video and data delivery via satellite throughout the
world. This transaction brings together two premier providers of satellite communications services, which will
enable the combined companies to provide best-in-class service to our customers.
We will also remember 2010 with sadness for the passing of Dean Olmstead, President of EchoStar Satellite
Services. His legacy at EchoStar is an outstanding team with solid leadership that continues his vision of growing
EchoStar into a market-leading provider of satellite services. The pending acquisition of Hughes exemplifies our
commitment to Dean’s vision.
Let me close by expressing my pride in the worldwide EchoStar team for bringing us to this point. Combining our
knowledge and expertise in video systems and delivery with the technology and innovation of Hughes, Sling and
Move will position us for outstanding market growth and industry leadership. As the market landscape changes,
EchoStar continues to be a predominant leader providing customers with video and data – Anytime, Anywhere.
Thank you for your continued support.
Sincerely,
Charles W. Ergen
Chairman of the Board of Directors
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:55)
(cid:133)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM _______________ TO ________________.
Commission file number: 001-33807
EchoStar Corporation
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
26-1232727
(I.R.S. Employer Identification No.)
100 Inverness Terrace East
Englewood, Colorado
(Address of principal executive offices)
80112 5308
(Zip Code)
Registrant’s telephone number, including area code: (303) 706-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock, $0.001 par value
Name of each exchange on which registered
The Nasdaq Stock Market L.L.C.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:55) No (cid:133)
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 (cid:133) No (cid:55)
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 (cid:55) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes (cid:55) No (cid:31)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. (cid:55)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer (cid:55) Accelerated filer (cid:133)
Smaller reporting company (cid:133)
Non-accelerated filer (cid:133)
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes (cid:133) No (cid:55)
As of June 30, 2010, the aggregate market value of Class A common stock held by non-affiliates of the registrant was $712 million based upon
the closing price of the Class A common stock as reported on the Nasdaq Global Select Market as of the close of business on that date.
As of February 14, 2011, the registrant’s outstanding common stock consisted of 37,583,445 shares of Class A common stock and 47,687,039
shares of Class B common stock, each $0.001 par value.
The following documents are incorporated into this Form 10-K by reference:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be filed in connection with its 2011 Annual Meeting of Shareholders are incorporated
by reference in Part III.
TABLE OF CONTENTS
PART I
Disclosure Regarding Forward-Looking Statements.............................................................................
Business.................................................................................................................................................
Risk Factors...........................................................................................................................................
Unresolved Staff Comments..................................................................................................................
Properties...............................................................................................................................................
Legal Proceedings.................................................................................................................................
(Removed and Reserved).......................................................................................................................
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14
31
32
32
None
PART II
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.............................................................................................
Selected Financial Data.........................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations..................
Quantitative and Qualitative Disclosures About Market Risk...............................................................
Financial Statements and Supplementary Data......................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................
Controls and Procedures........................................................................................................................
Other Information..................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance.....................................................................
Executive Compensation.......................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters...................................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence.......................................
Principal Accounting Fees and Services................................................................................................
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits, Financial Statement Schedules...............................................................................................
Signatures..............................................................................................................................................
Index to Consolidated Financial Statements..........................................................................................
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39
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65
65
66
66
67
67
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67
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F-1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995
throughout this report. Whenever you read a statement that is not simply a statement of historical fact (such as when
we describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or “anticipate” will occur and other similar
statements), you must remember that our expectations may not be achieved, even though we believe they are
reasonable. We do not guarantee that any future transactions or events described herein will happen as described or
that they will happen at all. You should read this report completely and with the understanding that actual future
results may be materially different from what we expect. Whether actual events or results will conform with our
expectations and predictions is subject to a number of risks and uncertainties.
For further discussion see Item 1A. Risk Factors. The risks and uncertainties include, but are not limited to, the
following:
General Risks Affecting Our Business
• We currently depend on DISH Network Corporation (“DISH Network”), Bell TV and Dish Mexico for
substantially all of our revenue. The loss of, or a significant reduction in, orders from, or a decrease in
selling prices of digital set-top boxes and/or other products or services to, DISH Network, Bell TV or Dish
Mexico would significantly reduce our revenue and adversely impact our results of operations. In addition,
the loss of, or a significant reduction in, orders from, or a decrease in selling price of transponder leasing
and/or providing digital broadcast operations to, DISH Network would also significantly reduce our
revenue and adversely impact our results of operations.
• Economic weakness, including high unemployment and reduced consumer spending, may adversely affect
our ability to grow or maintain our business.
•
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not
successful in developing and deploying potential new alternative technology and we are unable to reach a
license agreement with Tivo on reasonable terms, we would be subject to substantial liability and would be
prohibited from offering DVR functionality that would in turn place us at a significant disadvantage to our
competitors and significantly decrease sales of digital set-top boxes to DISH Network and others.
•
If we are unable to properly respond to technological changes, our business could be significantly harmed.
• We currently have unused satellite capacity, and our results of operations may be materially adversely
affected if we are not able to lease more of this capacity to third parties.
• Our sales to DISH Network could be terminated or substantially curtailed on short notice, which would
have a detrimental effect on us.
• We may need additional capital, which may not be available on acceptable terms or at all, to continue
investing in our business and to finance acquisitions and other strategic transactions.
• We may experience significant financial losses on our existing investments.
• We may pursue acquisitions and other strategic transactions to complement or expand our business, which
may not be successful and we may lose up to the entire value of our investment in these acquisitions and
transactions.
• We intend to make significant investments in new products, services, technologies and business areas that
may not be profitable.
• We may not be aware of certain foreign government laws or regulations or changes to them which could
have a significant adverse impact on our business.
• We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign
anti-bribery laws.
• Our business depends on certain intellectual property rights and on not infringing the intellectual property
rights of others. The loss of or infringement of our intellectual property rights could have a significant
adverse impact on our business.
• Any failure or inadequacy of our information technology infrastructure could harm our business.
i
• We are party to various lawsuits which, if adversely decided, could have a significant adverse impact on
our business, particularly lawsuits regarding intellectual property.
• 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.
• We rely on key personnel and the loss of their services may negatively affect our businesses.
Risks Affecting Our “Digital Set-Top Box” Business
• We depend on sales of digital set-top boxes for nearly all of our revenue and a decline in sales of our digital
set-top boxes would have a material adverse effect on our financial position and results of operations.
• Our business may suffer if our customer base does not compete successfully with existing and emerging
competition.
• Our future financial performance depends in part on our ability to penetrate new markets for digital set-top
boxes.
• Component pricing may remain stable or be negatively affected by inflation, increased demand, decreased
supply, or other factors, which could have a material adverse effect on our results of operations.
• The average selling price and gross margins of our digital set-top boxes has been decreasing and may
decrease even further, which could negatively impact our financial position and results of operations.
• Our ability to sell our digital set-top boxes to other operators depends on our ability to obtain licenses to
use the conditional access systems utilized by these other operators.
• Growth in our “Digital Set-Top Box” business likely requires expansion of our sales to international
customers, and we may be unsuccessful in expanding international sales.
•
If we are successful in growing sales of our digital set-top boxes to international customers, we may be
subject to greater risks.
• The digital set-top box business is extremely competitive.
• We expect to continue to face competition from new market entrants, principally located in Asia, that offer
low cost set-top boxes.
• Our digital set-top boxes are highly complex and may experience quality or supply problems.
•
If significant numbers of television viewers are unwilling to pay for pay-TV services that utilize digital set-
top boxes, we may not be able to sustain our current revenue level.
• Our reliance on a single supplier or a limited number of suppliers for several components used in our
digital set-top boxes could restrict production, result in higher digital set-top box costs and delay deliveries
to customers.
• Our future growth depends on growing demand for advanced technologies.
•
If the encryption and related security technology used in our digital set-top boxes is compromised, sales of
our digital set-top boxes may decline.
Risks Affecting Our “Satellite Services” Business
• We currently face competition from established competitors in the satellite service business and may face
competition from others in the future.
• Our owned and leased satellites in orbit are subject to significant operational and environmental risks that
could limit our ability to utilize these satellites.
• Our satellites have minimum design lives ranging from 12 to 15 years, but could fail or suffer reduced
capacity before then.
• Our satellites under construction are subject to risks related to construction and launch that could limit our
ability to utilize these satellites.
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• Our “Satellite Services” business is subject to risks of adverse government regulation.
• Our business depends on Federal Communications Commission (“FCC”) licenses that can expire or be
revoked or modified and applications for FCC licenses that may not be granted.
• 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.
• We generally do not have commercial insurance coverage on the satellites we use and could face
significant impairment charges if one of our satellites fails.
Risks Relating to the Spin-Off
• We have potential conflicts of interest with DISH Network due to our common ownership and
management.
Risks Relating to our Common Stock and the Securities Market
• We cannot assure you that there will not be deficiencies leading to material weaknesses in our internal
control over financial reporting.
•
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders,
because of our capital structure.
• We are controlled by one principal shareholder who is our Chairman.
Risks Relating to our Acquisition of Hughes Communications Inc. (“Hughes”)
• Governmental authorities must approve our acquisition of Hughes and could impose conditions on, delay,
or refuse to approve the merger.
• We may not be able to obtain the financing required to fulfill our obligations under our agreement to
acquire Hughes.
• The terms of the financing related to our acquisition of Hughes will significantly reduce our ability to incur
additional indebtedness.
• The incurrence of indebtedness to finance our acquisition of Hughes will substantially increase our
leverage.
• Although we expect that our acquisition of Hughes will benefit us, those expected benefits may not occur
because of the complexity of the integration and other challenges.
•
If we are able to complete our acquisition of Hughes, we will be subject to the risks related to Hughes’
business.
We may face other risks described from time to time in periodic and current reports we file with the Securities and
Exchange Commission (“SEC”).
All cautionary statements made herein should be read as being applicable to all forward-looking statements
wherever they appear. Investors should consider the risks described herein and should not place undue reliance on
any forward-looking statements. We assume no responsibility for updating forward-looking information contained
or incorporated by reference herein or in other reports we file with the SEC.
In this report, the words “EchoStar,” the “Company,” “we,” “our” and “us” refer to EchoStar Corporation and its
subsidiaries, unless the context otherwise requires. “DISH Network” refers to DISH Network Corporation and its
subsidiaries, unless the context otherwise requires.
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Item 1. BUSINESS
OVERVIEW
PART I
EchoStar Corporation is a holding company, whose subsidiaries (which together with EchoStar Corporation are
referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) operate two primary business units:
•
•
“Digital Set-Top Box” Business – which designs, develops and distributes digital set-top boxes and related
products, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers,
telecommunication and cable companies and, with respect to Slingboxes, directly to consumers via retail
outlets. Our “Digital Set-Top Box” business also provides digital broadcast operations including satellite
uplinking/downlinking, transmission services, signal processing, conditional access management and other
services primarily to DISH Network.
“Satellite Services” Business – which uses our ten owned and leased in-orbit satellites and related FCC
licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and
secondarily to Dish Mexico, U.S. government service providers, state agencies, Internet service providers,
broadcast news organizations, programmers and private enterprise customers. We also use certain of our
satellites to offer our ViP-TV service, which transports MPEG-4 IP encapsulated standard-definition and
high-definition programming on behalf of telecommunications companies and rural cable operators.
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 100 Inverness Terrace East, Englewood, Colorado 80112-5308 and our telephone number is
(303) 706-4000. Effective January 1, 2008, DISH Network completed its distribution to us (the “Spin-off”) of its
digital set-top box business and certain infrastructure and other assets, including certain of its satellites, uplink and
satellite transmission assets, real estate and other assets and related liabilities. Since the Spin-off, we and DISH
Network have operated as separate publicly-traded companies, and neither entity has any ownership interest in the
other. However, a substantial majority of the voting power of the shares of both companies is owned beneficially by
Charles W. Ergen, our Chairman, or by certain trusts established by Mr. Ergen for the benefit of his family.
BUSINESS STRATEGIES
Expand “Digital Set-Top Box” business to additional customers. We believe opportunities exist to expand our
business by selling equipment and services in both the United States and international markets. As a result of our
extensive experience with designing, developing and distributing digital set-top boxes and related products, we
believe we can leverage the broader adoption of advanced technologies within set-top boxes to create opportunities
for us. In particular, the broader adoption of advanced technologies within set-top boxes may launch a replacement
cycle, particularly among direct-to-home (“DTH”) satellite and cable providers with substantial bases of legacy
equipment.
Leverage satellite capacity and related infrastructure. Our “Satellite Services” business benefits from excess
satellite and fiber capacity. While DISH Network is our primary customer for satellite services, we believe market
opportunities exist to lease our capacity to a broader customer base, including providers of pay-TV service, satellite-
delivered broadband, corporate communications and government services.
Offer end-to-end pay-TV delivery systems. We intend to leverage our approximately 1,100 engineers to customize
infrastructure solutions for a broad base of customers. For example, as recently demonstrated by our Dish Mexico
joint venture, we are offering customers end-to-end pay-TV delivery systems incorporating our satellite and
backhaul capacity, customized digital set-top boxes and network design and management.
1
Capitalize on change in regulations. Changes in federal law and regulations applicable to the set-top box industry
may create opportunities for us to expand our business. For instance, the FCC requires cable providers to use
removable security modules to provide conditional access security for television content. The FCC intended 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 DTH satellite service is particularly well-suited for countries
without extensive telecommunications and cable infrastructure, and we intend to continue to try to secure new
investments and customer relationships with international DTH 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.
“DIGITAL SET-TOP BOX” BUSINESS
Our Products
Digital Set-Top Boxes. We offer a wide range of digital set-top boxes that allow consumers to watch and control
their television programming and contain a variety of other capabilities and functionality. Our current digital set-top
boxes include:
•
Standard-definition (“SD”) 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.
• High-definition (“HD”) digital set-top boxes: These devices allow consumers who subscribe to television
services from multi-channel video distributors to access the enhanced picture quality and sound of high-
definition content, in addition to the SD functionality of our SD digital set-top boxes.
Certain models of our SD digital set-top boxes and HD digital set-top boxes also contain certain of the following
advanced capabilities and functionalities:
•
Interactive Applications: These applications include an on-screen program guide, pay-per-view offerings,
the ability to support V-chip type parental control technology, games and shopping.
• DVR: Enables subscribers to pause, stop, reverse, fast forward, record and replay digital television content
using a built-in and/or external hard drive capable of storing content.
• Broadband Internet Connectivity: Provides IPTV functionality, which supports on-demand services that
allow consumers to download television programming, movies, music and other content.
•
Sling “placeshifting” technology: Allows consumers to watch and control their digital television content
anywhere in the world via a broadband Internet connection.
In addition to digital set-top boxes, we also design and develop related products such as satellite dishes, remote
controls, and broadband Internet connectivity devices.
Digital Broadcast Operations. We 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 maximize the use of the spot beam capabilities of our satellites and our
customers’ satellites. Programming and other data is received at these centers by fiber optic cable or satellite. It is
then processed, compressed, and encrypted and then uplinked to our satellites and our customers’ satellites for
transmission to end users. In addition, we have the capability to aggregate content at our digital broadcast centers
and offer transport services for over 200 channels of MPEG-4 IP encapsulated standard-definition and high-
definition programming from our satellite located at the 85 degree orbital location. We offer these wholesale
programming transport services to telecommunication companies, rural cable operators, local exchange carriers and
wireless broadband providers.
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Our Customers
Historically, the primary customer of our “Digital Set-Top Box” business has been DISH Network. DISH Network
accounted for 82.8%, 81.9% and 87.1% of our total “Digital Set-Top Box” revenue for the years ended December
31, 2010, 2009 and 2008, respectively. In addition, Bell TV, a DTH satellite service provider in Canada, accounted
for 9.8%, 11.7% and 9.3% of our total “Digital Set-Top Box” revenue for the years ended December 31, 2010, 2009
and 2008, respectively. Furthermore, Dish Mexico, a DTH satellite service provider in Mexico, accounted for 3.9%
and 2.1% of our total “Digital Set-Top Box” revenue for the years ended December 31, 2010 and 2009, respectively.
We also currently sell our digital set-top boxes to other international DTH satellite and cable providers, although
these customers do not account for a significant amount of our total revenue.
We expect to continue to rely on DISH Network as the primary customer of our “Digital 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 digital set-top boxes and related products to DISH Network at our cost plus a fixed
margin until January 1, 2012. However, DISH Network is under no obligation to purchase our digital set-top boxes
or related products before or after this date.
A substantial majority of our international revenue during each of the years ended December 31, 2010, 2009, and
2008, was attributable to sales of digital set-top boxes to Bell TV and Dish Mexico. In early 2009, we completed a
multi-year contract extension with Bell TV that makes us the exclusive provider of digital set-top boxes to Bell TV,
subject to certain limited exceptions. The agreement includes fixed pricing over the term of the agreement as well
as providing future engineering development for enhanced Bell TV service offerings. Additionally, during 2008, we
entered into our Dish Mexico joint venture. Sales of digital set-top boxes and related accessories to Dish Mexico are
not related to the original contribution commitment associated with our investment in Dish Mexico, which was
satisfied as of December 31, 2010.
Our Competition
As we seek to establish ourselves in the digital set-top box industry as an independent business, we face substantial
competition. Many of our primary competitors, such as Motorola, Cisco (which owns Scientific Atlanta), Pace and
Technicolor have established longstanding relationships with their customers. Although some of the competitors
own the conditional access technology deployed by their customers, the FCC’s rules regarding separate mandated
removable security in digital cable systems may allow us to compete for this type of business. In addition, we may
face competition from international developers of digital set-top box systems that 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 advanced technologies,
including delivery of 3D TV video content and Internet delivery of video content, to market to keep pace with our
competitors.
Our Manufacturers
Although we design, engineer and distribute digital set-top boxes and related products, we are not directly engaged
in the manufacturing process. Rather, we outsource the manufacturing of our digital set-top boxes and related
products to third parties 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 digital 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 digital set-top boxes.
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“SATELLITE SERVICES” BUSINESS
We operate six owned and four leased in-orbit satellites. We also have one owned satellite and one leased satellite
under construction. In addition, we have suspended construction on the CMBStar satellite.
Our transponder capacity is currently used by our customers for a variety of applications:
• DTH Services. We provide satellite transponder capacity to satellite TV providers, broadcasters and
programmers who use our satellites to deliver programming. Our satellites are also used for the
transmission of live sporting events, Internet, disaster recovery, and satellite news gathering services.
• Government Services. We provide satellite services and technical services to U.S. government service
providers and directly to some state agencies. We believe the U.S. government may increase its use of
commercial satellites for homeland security, emergency response, continuing education, distance learning,
and training.
• Network Services. We provide 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
communications.
Our Customers
We provide transponder capacity on our satellite fleet primarily to DISH Network, but also to a small number of
U.S. government service providers, state agencies, Internet service providers, broadcast news organizations,
programmers and private enterprise customers. Currently, due to our limited customer base, we have excess
capacity. For the years ended December 31, 2010, 2009 and 2008, DISH Network accounted for approximately
79.5%, 75.4% and 78.7% of our total “Satellite Services” revenue. We have entered into certain commercial
agreements with DISH Network pursuant to which we are obligated to provide DISH Network with satellite services
at fixed prices for varying lengths of time depending on the satellite. See “Related Party Transactions with DISH
Network — Satellite Capacity Agreements” in Note 19 in the Notes to Consolidated Financial Statements in Item 15
of this Annual Report on Form 10-K for further discussion. 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 construct and launch its own satellites. Any termination or reduction in the services we provide to DISH
Network may cause us to have excess capacity on our satellites and require that we aggressively pursue alternative
sources of revenue for this business. Our other 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.
Our Competition
We compete against larger, well-established satellite service companies, such as Intelsat, SES World Skies and
Telesat, in an industry that is characterized by long-term contracts and high costs for customers to change service
providers. Therefore, it will be difficult to displace customers from their current relationships with our competitors.
Intelsat and SES World Skies maintain key North American orbital slots that may further limit competition and
competitive pricing. In addition, our 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
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.
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INTERNATIONAL DIRECT-TO-HOME PLATFORMS
Our experience with digital set-top boxes and satellite delivery systems enables us to provide end-to-end pay-TV
delivery systems incorporating our satellite and backhaul capacity, customized digital set-top boxes and related
components, and network design and management.
During 2008, we entered into a joint venture for a DTH satellite service in Mexico known as Dish Mexico, S. de
R.L. de C.V. (“Dish Mexico”). Pursuant to these arrangements, we provide certain broadcast services and satellite
capacity and sell hardware such as digital set-top boxes and related equipment to Dish Mexico. Subject to a number
of conditions, we committed to provide $112 million of value over an initial ten year period in the form of cash,
equipment and services, which was satisfied as of December 31, 2010.
During December 2009, we entered into a joint venture to provide a DTH satellite service in Taiwan and certain
other targeted regions in Asia. We own 50% and have joint control of the joint venture. Pursuant to these
arrangements, we sell hardware such as digital set-top boxes and provide certain technical support services to the
joint venture. We have provided $18 million of cash to the joint venture, and an $18 million line of credit that the
joint venture may only use to purchase set-top boxes from us.
OTHER BUSINESS OPPORTUNITIES
We intend to evaluate new strategic development opportunities in North America and in other international markets.
We also plan to expand our business and support the development of new satellite-delivered services, such as
broadband Internet connectivity and mobile video services. The expertise we obtain through these strategic
opportunities may also help us to improve and expand the services that we provide to our existing customers.
Acquisition of Hughes
On February 13, 2011, we and certain of our subsidiaries, including EchoStar Satellite Services L.L.C., (“ESS”)
entered into an agreement and plan of merger (the “Hughes Agreement”) with Hughes, whereby we will acquire all
of the outstanding equity of Hughes and its subsidiaries, including its main operating subsidiary, Hughes Network
Systems, LLC (“HNS”) (the “Hughes Merger”). Pursuant to the Hughes Agreement, each issued and outstanding
share of common stock of Hughes (other than common stock with respect to which appraisal rights have been
exercised) will be converted into the right to receive $60.70 in cash. The Hughes Agreement also contemplates the
repayment of all of the outstanding debt of Hughes and HNS (including the 9½% Senior Notes due 2014 issued by
HNS), except that the $115 million loan facility guaranteed by COFACE, the French Export Credit Agency, will
continue to remain outstanding following the Merger if certain consents are obtained. As a result, the Hughes
Merger is valued at approximately $2.0 billion, including the Hughes debt expected to be refinanced. The Hughes
Merger is expected to close later this year, subject to certain closing conditions, including among others, certain
government regulatory approvals, such as approval by the FCC and the Federal Trade Commission. The Hughes
Agreement contains certain termination rights for both Hughes and us.
In order to finance the Hughes Merger, we and ESS obtained an aggregate financing commitment of $1.0 billion in
senior secured bridge financing and $800 million in senior unsecured bridge financing, in each case from Deutsche
Bank AG Cayman Islands Branch (collectively, the “Bridge Commitment”). Deutsche Bank’s obligations under the
Bridge Commitment are subject to a number of conditions, including that the conditions to closing under the Hughes
Agreement have been met (subject to certain exceptions); that we have a minimum amount of cash on hand at the
closing; that we have provided certain financial statements and other information relating to us and Hughes in specified
time periods; and that our aggregate indebtedness not exceed specified levels. There is no assurance that we will be
able to satisfy these conditions. The initial term of the Bridge Commitment is six months. We have the option to
extend the term of the Bridge Commitment to nine months so long as we have delivered certain required information,
including certain financial statements, and have complied with our obligations to issue debt securities in lieu of
borrowing under the Bridge Commitment. Subject to certain exceptions, we do not have the ability to terminate the
Hughes Agreement until nine months after the date the Hughes Agreement was executed. Accordingly, there is no
assurance that the Bridge Commitment will remain in effect for the duration of our obligations under the Hughes
Agreement. We do not have the ability to terminate the Hughes Agreement if we are unable to obtain sufficient funds
5
to satisfy our obligations under the Hughes Agreement. If the funding under the Bridge Commitment were to become
unavailable for any reason, there is no assurance that we will be able to obtain sufficient funds to satisfy our obligations
under the Hughes Agreement.
OUR SATELLITE FLEET
Our satellite fleet consists of both owned and leased satellites detailed in the table below.
Degree
Orbital
Location
Original
Useful Life/
Lease Term
(In Years)
Satellites
Owned:
EchoStar III (1).....................................
EchoStar IV (2).....................................
EchoStar VI (1)....................................
EchoStar VIII (1).................................
EchoStar IX (1).....................................
EchoStar XII (1)..................................
Launch
Date
October 1997
May 1998
July 2000
August 2002
August 2003
July 2003
61.5
77
77
77
121
61.5
Leased from DISH Network:
EchoStar I (1).......................................
December 1995
77
Leased from Other Third Parties:
AMC-15 (3).........................................
AMC-16 (3).........................................
Nimiq 5 (1) (3).....................................
December 2004
January 2005
September 2009
Under Construction:
QuetzSat-1 (leased) (1)........................
EchoStar XVI (owned) (1)...................
CMBStar (owned).................................
2011
2012
Construction
Suspended
105
85
72.7
77
61.5
12
12
12
12
12
10
12
10
10
15
10
15
(1) See Note 19 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form
10-K for further discussion of our Related Party Agreements.
(2) Fully depreciated and not currently in service.
(3) These satellites are accounted for as capital leases.
Prior to 2010, certain satellites in our fleet experienced anomalies, some of which have had a significant adverse
impact on their remaining useful life and/or commercial operation. There can be no assurance that future anomalies
will not further impact the remaining useful life and commercial operation of any of these satellites. See “Long-
Lived Satellite Assets” in Note 6 in the Notes to Consolidated Financial Statements in Item 15 of this Annual Report
on Form 10-K for further discussion of evaluation of impairment. There can be no assurance that we can recover
critical transmission capacity in the event one or more of our in-orbit satellites were to fail. We generally do not
carry insurance for any of the in-orbit satellites that we use, and therefore we will bear the risk of any in-orbit
failures.
6
Recent Developments
Recent developments with respect to certain of our satellites are discussed below.
Owned Satellites
EchoStar III. EchoStar III was originally designed to operate a maximum of 32 DBS transponders in a mode that
provides service to the entire continental United States (“CONUS”) at approximately 120 watts per channel,
switchable to 16 transponders operating at over 230 watts per channel, and was equipped with a total of 44 traveling
wave tube amplifiers (“TWTAs”) to provide redundancy. As a result of TWTA failures in previous years, during
January and May 2010, and February 2011, only 10 transponders are currently available for use. Although these
failures have impacted the commercial operation of the satellite, the satellite has been fully depreciated. It is likely
that additional TWTA failures will occur from time to time in the future and such failures could further impact
commercial operation of the satellite.
EchoStar VI. EchoStar VI was designed with 108 solar array strings, of which approximately 102 are required to
assure full power availability for the original minimum 12-year useful life of the satellite. During March and August of
2010, EchoStar VI experienced anomalies resulting in the loss of 24 solar array strings, reducing the number of
functional solar array strings to 84. While these anomalies did not reduce the estimated useful life of the satellite to less
than 12 years, commercial operation has been impacted and there can be no assurance that future anomalies will not
reduce its useful life or further impact its commercial operation. The satellite was designed to operate 32 DBS
transponders in CONUS at approximately 125 watts per channel, switchable to 16 DBS transponders operating at
approximately 250 watts per channel. The power reduction resulting from the solar array failures currently limits us to
operating 24 DBS transponders in CONUS at approximately 125 watts per channel, switchable to 12 DBS transponders
operating at approximately 250 watts per channel. The number of transponders to which power can be provided is
expected to decline in the future at the rate of approximately one transponder every three years.
EchoStar VIII. EchoStar VIII was designed to operate 32 DBS transponders in CONUS at approximately 120 watts
per channel, switchable to 16 DBS transponders operating at approximately 240 watts per channel. EchoStar VIII
was also designed with spot-beam technology. This satellite has experienced several anomalies prior to 2011, but
none have reduced its useful life or impacted its commercial operation. During January 2011, the satellite
experienced an anomaly, which temporarily disrupted electrical power to some components causing an interruption
of broadcast service. Testing is being performed to determine if this anomaly will reduce the satellite’s useful life or
impact its commercial operations. There can be no assurance that this anomaly or any future anomalies will not
reduce its useful life or impact its commercial operation.
Leased Satellites
AMC-16. AMC-16 commenced commercial operation during February 2005 and currently operates at the 85 degree
orbital location. This SES World Skies satellite is equipped with 24 Ku-band fixed satellite services (“FSS”)
transponders that operate at approximately 120 watts per channel and a Ka-band payload consisting of 12 spot
beams. During the first quarter 2010, SES World Skies notified us that AMC-16 had experienced a solar-array
anomaly that further reduced its available transponder capacity. As a result, our monthly recurring payment was
reduced accordingly and our capital lease obligation and the corresponding asset value were lowered by
approximately $39 million.
Satellites Under Construction
QuetzSat-1. During 2008, we entered into a ten-year satellite service agreement with SES Latin America S.A.
(“SES”) to lease all of the capacity on QuetzSat-1. QuetzSat-1 is expected to be launched during the second half of
2011 and will operate at the 77 degree orbital location. Upon expiration of the initial term, we have the option to
renew the transponder service agreement on a year-to-year basis through the end-of-life of the QuetzSat-1 satellite.
DISH Network has agreed to lease 24 of the 32 DBS transponders on this satellite from us. See Note 19 in the
Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
7
EchoStar XVI. During November 2009, we entered into a contract for the construction of EchoStar XVI, a DBS
satellite, which is expected to be completed during the second half of 2012 and will operate at the 61.5 degree
orbital location. DISH Network has agreed to lease all of the capacity on this satellite from us for a portion of its
useful life. See Note 19 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on
Form 10-K.
CMBStar. During 2008, we suspended construction of the CMBStar satellite and recorded an $85 million
impairment. We continue to explore alternative uses for this satellite, including potentially reconfiguring the
satellite and changing its proposed orbital location in a manner that would be more cost-effective than designing and
constructing a new satellite.
GOVERNMENT REGULATIONS
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, the International Telecommunication Union (“ITU”) and certain foreign
governments. 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 digital 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 our satellite operations. 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, the licensing of satellites and 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, licenses, authorizations and
approvals including required timetables for construction and operation of satellites;
avoiding interference with other radio frequency emitters; and
ensuring compliance with other applicable provisions of the Communications Act and FCC rules and
regulations.
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 certain technical and 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, may not be granted in a timely manner, or may be granted subject to
conditions which may be cumbersome.
8
Overview of Our Satellite Licenses, Authorizations and Contractual Rights for Satellite Capacity.
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. Certain of our satellites also include spot-
beam technology that enables us to provide services on a local or regional basis, but reduces the number of
frequency channels that could otherwise be utilized 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 method for assigning these two channels will be decided in a pending FCC rulemaking
proceeding, and these two channels are currently 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. There is a pending petition for reconsideration of that decision, which will be
determined as part of the FCC rulemaking.
We also have FCC authority to provide service from a Mexican DBS orbital slot at the 77 degree orbital location
using 24 frequencies and at a Canadian DBS orbital slot at the 72.7 degree orbital location using 32 frequencies. In
addition, we hold licenses or have entered into agreements to lease capacity on satellites at FSS 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 900 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 at least 720 MHz of Ka spectrum capable of
providing service into select spot beams; and
500 MHz of Ku spectrum divided into 24 frequencies at the 85 degree orbital location, currently capable of
providing service to CONUS, plus at least 720 MHz of Ka spectrum capable of providing service into
select spot beams.
We have FCC authority to build and operate a “tweener” DBS satellite at the 86.5 degree orbital location. Among
other conditions, we had to complete construction of a satellite for that slot by November 30, 2010. We have
requested modification of that authority to move an existing satellite, EchoStar VIII, to that location and operate that
satellite instead of completing construction of a new one. There can be no assurance that the FCC will grant this
request or that it will not find that we have failed to meet the November 30, 2010 “milestone” deadline.
We were also granted authority to launch and operate five satellites in the 17/24 GHz Broadcasting-Satellite Service
(“BSS”) frequency band at the 62.15, 75, 79, 107 and 110.4 degree orbital locations. These authorizations are
conditioned on meeting certain construction milestones, and on the results of a pending rulemaking addressing
potential interference between DBS and 17/24 GHz BSS operations. The FCC has also authorized DirecTV to
operate a satellite in the 17/24 GHz BSS frequency band at 110.9 degrees, and therefore the available spectrum at
the nominal 110 degrees orbital location is split equally between DirecTV and us. There can be no assurance that
we will develop acceptable plans to meet these milestones, or that we will be able to utilize these orbital slots.
Each of our FSS and 17/24 GHz BSS satellite licenses is subject to a bond requirement of $3 million, all or part of
which may be forfeited if we do not meet the milestones for a particular satellite. We have requested that the bond
funds for certain satellite licenses we have surrendered be released to us rather than be paid to the FCC. We cannot
be sure that the FCC will approve these requests.
Before we may launch and operate a satellite, the FCC must grant us a license. Under current FCC rules, if a
licensee does not meet construction or launch milestones under three satellite licenses within any three-year period,
a rebuttable presumption is established that the licensee obtained one or more of those licenses for speculative
purposes. As a result, the FCC will not grant any further satellite license applications from that licensee beyond two
9
pending applications and/or licensed-but-unbuilt satellites, unless the applicant is able to rebut that presumption, the
applicant demonstrates that it is likely to build and launch its satellites, or the FCC grants a waiver. The FCC has
also stated that the voluntary surrender of a satellite license counts as a missed milestone. On May 27, 2009, the
FCC dismissed our application for a C-band satellite at the 85 degree orbital location (without prejudice to re-filing)
on the grounds that we had surrendered three satellite licenses within a three-year period. We re-filed our
application for a C-band satellite at the 85 degree orbital location on May 28, 2009. On July 29, 2010, the FCC
dismissed our re-filed application (again without prejudice to re-filling) on the grounds that we had not rebutted the
presumption that we had obtained one or more of those licenses for speculative purposes. On August 30, 2010, we
filed a petition for reconsideration of this latest dismissal. In our petition for reconsideration, we asked the FCC to
reconsider its decision, sought to rebut the presumption, attempted to make the required demonstration, and
requested a waiver of the rule. Unless we can convince the FCC to reconsider its decision, make the required
demonstration or the FCC grants a waiver, we will need to wait until we have fewer than two pending applications
and/or licensed-but-unbuilt satellites before the FCC will grant us additional satellite licenses.
We currently have several pending applications and/or licensed-but-unbuilt satellites, none of which are affected by
the FCC’s dismissal of this application. There can be no assurance that the FCC will grant our petition for
reconsideration or that it will not dismiss any future satellite applications we may file on the same grounds. In
addition, we have a number of modification, special temporary authority, and license applications pending with the
FCC. We cannot be sure that the FCC will grant any of our 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.
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, and our FSS and 17/24 GHz BSS licenses
generally have 15 year terms. Our licenses are currently set to expire at various times. In addition, our special
temporary authorizations are granted for periods of only 180 days or less, subject to possible renewal by the FCC.
Generally, our FCC licenses and special temporary authorizations have been renewed by the FCC on a routine basis
but, there can be no assurance that the FCC will continue to do so.
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,
filing and other 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.
Reverse Band (17/24 GHz BSS) Spectrum. Recently authorized 17/24 GHz BSS operations may interfere with the
uplink operations of DBS satellites. At this time, no applications (other than our own application at 62.15 degrees)
have been filed to operate a 17/24 GHz BSS satellite near our DBS satellites at 61.5 degrees. We cannot be certain
that such an application will not be filed in the future. Furthermore, the FCC has a pending rulemaking to decide
how to protect DBS satellites from 17/24 GHz BSS operations, and we cannot predict if and how the final rules will
affect either our DBS operations at 61.5 degrees or our 17/24 GHz BSS authorizations.
Interference from Other Services Sharing Satellite Spectrum. The FCC has adopted rules that allow non-
geostationary orbit 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 multichannel video and data distribution
service (“MVDDS”) in the DBS band. MVDDS licenses were auctioned in 2004. While, to our knowledge, no
MVDDS systems have been commercially deployed, several systems are now being tested, and may soon be
deployed. Despite regulatory provisions to protect DBS operations from harmful interference, there can be no
assurance that operations by other satellites 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 to the U.S. from a Mexican orbital slot at 77 degrees, and a Canadian orbital slot at 72.7 degrees. DirecTV,
Spectrum Five and DISH Network L.L.C. have received similar authorizations to provide service to the U.S. from
foreign orbital slots. The possibility that the FCC will allow service to the U.S. from additional foreign slots may
10
permit additional competition against us from other satellite providers. 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.
The International Telecommunication Union. Our satellites also must conform to ITU requirements and
regulations. We have cooperated, and continue to cooperate, with the FCC in the preparation of ITU filings and
responses. We have “requests for modification” that have been filed by the United States government relating to
certain of our satellites. In the event such a “request for modification” is not granted by the ITU, we will have to
enter into coordination agreements with adjacent operators or operate the applicable satellite(s) on a non-
interference basis. If we cannot enter into coordination agreements with adjacent operators or operate on a non-
interference basis, we may have to cease operating such satellite(s) at the affected orbital location. We cannot
predict when the ITU will act upon these “requests for modifications.”
Regulations Applicable to Our “Digital Set-Top Box” Business
FCC Jurisdiction over Set-Top Box Operations. Our digital 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.
Separate Security Plug and Play. U.S. cable companies are required by law to separate the security from the other
functionality of their set-top boxes. Set-top boxes used by DBS providers are not currently subject to this separate
security requirement. However, the FCC is currently considering a possible expansion of the requirement to set-top
boxes. The development of a retail market for cable set-top boxes could provide us with an opportunity to expand
sales of set-top boxes and related equipment for use in non-DBS households. The cable industry and consumer
electronics companies have reached a “tru2way” commercial arrangement to resolve many of the outstanding issues
related to this requirement. We have licensed tru2way technology for use with cable set-top boxes. We cannot
predict whether the FCC will impose rules on DBS providers that are based on cable “plug and play” rules or the
concepts from the private tru2way commercial arrangement. If the FCC were to extend or expand its separate
security rules or the tru2way commercial arrangement 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 removable security modules, there is a risk that we would have reduced sales if competitors produce DBS
set-top boxes.
Other Applicable Regulations
LMDS Licenses. In 2010, we purchased an additional equity interest in Alta Wireless, Inc. which holds certain
authorizations for Local Multipoint Distribution Service (“LMDS”) licenses in each of Kansas City, Phoenix,
Cheyenne, and San Diego.
Export Control Regulation
We are required to obtain import and export licenses from the United States government to receive and deliver
certain components of DTH satellite television systems. In addition, the delivery of satellites and the supply of
certain related ground control equipment, technical services and data, and satellite communication/control services
to destinations outside the United States are subject to 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).
11
PATENTS AND TRADEMARKS
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 valid intellectual property rights 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 infringement. If those intellectual
property rights are held by a competitor, we may be unable to obtain a license to such 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 either publishes the
application or issues a patent (whichever arises first) 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
patent claim is valid and whether a particular product infringes a valid patent claim 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 be trebled 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 these rights are not
valid or that our products do not infringe on these rights. We also cannot be certain that we will 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 “Item 3 – 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, waste management,
hazardous chemicals and product disposal. We attempt to maintain compliance with all such requirements. We do
not expect capital or other expenditures for environmental compliance to be material in 2011 or 2012.
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 2010, 2009 and 2008, see Note 16 in
the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
EMPLOYEES
We have approximately 2,300 employees and generally consider relations with them to be good. In addition, DISH
Network provides us with certain management and administrative services, which include the services of certain
employees of DISH Network. See “Certain Intercompany Agreements — Management Services Agreement and
Professional Services Agreement” set forth in our Proxy Statement for the 2011 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-
12
0330 for further information on the operation of 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 http://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 and information below sets forth the name, age and position with 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
R. Stanton Dodge.............
Michael T. Dugan ............
Charles W. Ergen.............
Mark W. Jackson .............
Roger J. Lynch .................
David J. Rayner ...............
Steven B. Schaver...........
Age
43
62
57
50
48
53
56
Position
Executive Vice President, General Counsel, Secretary and Director
President, Chief Executive Officer and Director
Chairman
President, EchoStar Technologies L.L.C.
Executive Vice President, Advanced Technologies
Chief Financial Officer
President, EchoStar International Corporation
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 and government affairs of DISH Network, EchoStar and their
subsidiaries. Mr. Dodge also serves as a member of our Board of Directors. 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 of increasing responsibility in DISH
Network’s legal department. He assumed responsibility for human resources at DISH Network in January 2010, and
assumed responsibility for corporate communications at DISH Network in December 2010.
Michael T. Dugan. Mr. Dugan has served as President and Chief Executive Officer of EchoStar since November
2009. Mr. Dugan also serves as a member of our Board of Directors. Mr. Dugan served as a senior advisor to
EchoStar since the Spin-off of EchoStar from DISH Network on January 1, 2008. From May 2004 to December
2007, he was a Director of DISH Network, and served DISH Network alternately as Chief Technical Officer and
senior advisor from time to time.
Charles W. Ergen. Mr. Ergen serves as our Chairman. Mr. Ergen served as our Chief Executive Officer from our
formation in 2007 until November 2009. Mr. Ergen is also the Chairman, President and Chief Executive Officer of
DISH Network Corporation, a position that he has held since DISH Network’s formation in 1980. During the past
ten years, he has also held various executive officer and director positions with DISH Network’s subsidiaries.
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Mark W. Jackson. Mr. Jackson is currently the President of EchoStar Technologies L.L.C. and oversees all day to
day operations of our “Digital Set-Top Box” business. Mr. Jackson served as the President of EchoStar
Technologies Corporation from June 2004 through December 2007.
Roger J. Lynch. Mr. Lynch has served as our Executive Vice President, Advanced Technologies since November
2009. Mr. Lynch also serves as Executive Vice President, Advanced Technologies at DISH Network. Prior to
joining EchoStar, Mr. Lynch served as Chairman and CEO of Video Networks International, Ltd., an IPTV
technology company in the United Kingdom from 2002 through 2009.
David J. Rayner. Mr. Rayner has served as Chief Financial Officer of EchoStar since June 2010 and is responsible
for all accounting, finance, human resources, and information technology functions of EchoStar. Mr. Rayner served
as our Chief Administrative Officer from January 2008 to June 2010. Prior to that, Mr. Rayner served as Executive
Vice President of Installation and Service Networks of DISH Network and had previously held the position of Chief
Financial Officer of DISH Network from December 2004 to September 2006.
Steven B. Schaver. Mr. Schaver has served as President of EchoStar International Corporation since April 2000.
Mr. Schaver served as DISH Network’s Chief Financial Officer and Chief Operating Officer from 1996 to 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.
Item 1A. RISK FACTORS
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 may also 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 Corporation (“DISH Network”), Bell TV and Dish Mexico for
substantially all of our revenue. The loss of, or a significant reduction in, orders from, or a decrease in selling
prices of digital set-top boxes and/or other products or services to, DISH Network, Bell TV or Dish Mexico would
significantly reduce our revenue and adversely impact our results of operations. In addition, the loss of, or a
significant reduction in, orders from, or a decrease in selling price of transponder leasing and/or providing
digital broadcast operations to, DISH Network would also significantly reduce our revenue and adversely impact
our results of operations.
DISH Network accounted for 82.5%, 81.3% and 86.5% of our total revenue for the years ended December 31, 2010,
2009 and 2008, respectively. In addition, Bell TV accounted for 8.6%, 10.5% and 8.4% of our total revenue for the
years ended December 31, 2010, 2009 and 2008, respectively. Furthermore, Dish Mexico accounted for 3.8% and
2.3% of our total revenue for the years ended December 31, 2010 and 2009, respectively. Any reduction in sales to
DISH Network, Bell TV or Dish Mexico or in the prices they pay for the products and services they purchase from
us could have a significant negative impact on our business. In addition, because substantially all of our revenue is
derived from DISH Network, Bell TV and Dish Mexico, our success also depends to a significant degree on the
continued success of DISH Network, Bell TV and Dish Mexico in attracting new subscribers and in marketing
programming packages and other services and features to subscribers that will require the purchase of new digital
set-top boxes, and in particular, new digital set-top boxes at the high-end of our product range that incorporate high-
definition, multiple tuners and other advanced technology. If DISH Network’s gross subscriber additions are
adversely affected by the sustained economic weakness in the U.S. or for any other reason, we may experience a
decline in our sales of digital set-top boxes to DISH Network. As disclosed by DISH Network in its Annual Report
on Form 10-K for the year ended December 31, 2010, DISH Network had higher than normal inventory levels of
digital set-top boxes and related components at December 31, 2010 and also experienced fewer gross subscriber
additions during 2010. As a result of such higher than normal inventory levels, it is possible that DISH Network
will purchase fewer digital set-top boxes and related components from us than it has purchased during the year
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ended December 31, 2010. This decrease could have a material adverse effect on our results of operations. In
addition, to the extent that DISH Network subscriber growth decreases, sales of our digital set-top boxes and related
components to DISH Network may further decline, which in turn could have a further material adverse effect on our
financial position and results of operations.
In addition, the timing of orders for digital set-top boxes from these three customers could vary significantly
depending on equipment promotions these customers offer to their subscribers, changes in technology, and their use
of remanufactured digital 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 digital set-top boxes is being deployed and inventory of
older generation digital 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 maturing and competitive nature of the digital set-top
box business, the limited number of potential new customers and the short-term nature of our purchase orders with
DISH Network, Bell TV and Dish Mexico, we could in the future experience downward pricing pressure on our
digital set-top boxes to DISH Network, Bell TV or Dish Mexico, which in turn would adversely affect our gross
margins and profitability.
DISH Network is currently our primary customer of digital set-top boxes and digital broadcast operation services.
These products and services are provided pursuant to contracts that generally expire on January 1, 2012. Thereafter,
if we are unable to extend those contracts on similar terms with DISH Network, or if we are otherwise unable to
obtain acceptable contracts from third parties following a termination by DISH Network, there could be a significant
adverse effect on our business, results of operations and financial position.
There are a relatively small number of potential new customers for our digital set-top boxes, satellite services and
digital broadcast operations, 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.
Historically, many of our potential customers have perceived us as a competitor due to our affiliation with DISH
Network. There can be no assurance that we will be successful in entering into any commercial relationships with
potential customers who are competitors of DISH Network (particularly if we continue to be perceived as affiliated
with DISH Network as a result of common ownership and management).
Economic weakness, including high unemployment and reduced consumer spending, may adversely affect our
ability to grow or maintain our business.
A substantial majority of our revenue comes from providers of pay-TV services that derive a substantial majority of
their revenue from residential customers whose spending patterns may be affected by sustained economic weakness
and uncertainty. Economic weakness and uncertainty persisted during 2010. Our ability to grow or maintain our
business may be adversely affected by sustained economic weakness, including the effect of wavering consumer
confidence, high unemployment and other factors that may adversely affect our “Digital Set-Top Box” business and
providers of pay-TV services. In particular, the weak economic conditions may result in the following:
• Decreased Demand. Subscribers to pay-TV services may delay purchasing decisions or reduce or
reallocate their discretionary spending, which may in turn decrease demand for programming packages
from pay-TV providers that include set-top box equipment manufactured by us.
•
Increased Pricing Pressure. Increased pricing pressures, which may result in reduced margins for pay-TV
providers, including DISH Network, Bell TV and Dish Mexico, our primary customers, may reduce
demand for high-end digital set top boxes on which we earn higher gross margins. Furthermore, pay-TV
providers may increasingly look to make purchases from foreign set-top box suppliers primarily located in
Asia with lower-priced products as their customers become more cost-sensitive in making purchase
decisions as a result of weak economic conditions.
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• Excess Inventories and Satellite Capacity. There is an increased risk of excess and obsolete inventories as
a result of possible lower demand for pay-TV services and the resultant lower demand for digital set-top
boxes from pay-TV providers. We may also have excess satellite capacity resulting from possible
decreased demand for pay-TV services and other services utilizing satellite transmission.
•
Increased Impairment Charges. Sustained economic weakness could result in substantial future
impairment charges relating to, among other things, satellites, FCC authorizations, and our debt and equity
investments.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not
successful in developing and deploying potential new alternative technology and we are unable to reach a license
agreement with Tivo on reasonable terms, we would be subject to substantial liability and would be prohibited
from offering DVR functionality that would in turn place us at a significant disadvantage to our competitors and
significantly decrease sales of digital set-top boxes to DISH Network and others.
In June 2009, the United States District Court granted Tivo’s motion for contempt finding that our next-generation
DVRs continue to infringe Tivo’s intellectual property and awarded Tivo an additional $103 million in supplemental
damages and interest for the period from September 2006 through April 2008. In September 2009, the District
Court partially granted Tivo’s motion for contempt sanctions and awarded $2.25 per DVR subscriber per month for
the period from April 2008 to July 2009 (as compared to the award for supplemental damages for the prior period
from September 2006 to April 2008, which was based on an assumed $1.25 per DVR subscriber per month). By the
District Court’s estimation, the total award for the period from April 2008 to July 2009 is approximately $200
million (the enforcement of the award has been stayed by the District Court pending our appeal of the underlying
June 2009 contempt order).
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful
in developing and deploying potential new alternative technology and we are unable to reach a license agreement with
Tivo on reasonable terms, we may be required to cease distribution of digital set-top boxes with DVR functionality. In
that event, our sales of digital set-top boxes to DISH Network and others would likely significantly decrease and could
even potentially cease for a period of time. Furthermore, the inability to offer DVR functionality would place us at a
significant disadvantage to our competitors and make it even more difficult for us to penetrate new markets for digital
set-top boxes. The adverse effect on our financial position and results of operations if the District Court’s contempt
order is upheld would be significant.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in
defending against any subsequent claim in a new action that our original alternative technology or any potential new
alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs. In that event, we would
be at a significant disadvantage to our competitors who could continue offering DVR functionality and the adverse
effect on our business would be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District Court. DISH Network
has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for
substantially all liability arising from this lawsuit. We contributed an amount equal to our $5 million intellectual
property liability limit under the Receiver Agreement, and during 2009, we recorded a charge included in “General and
administrative expenses – DISH Network” on our Consolidated Statements of Operations and Comprehensive Income
(Loss) for this amount to reflect this contribution. We and DISH Network have further agreed that our $5 million
contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise
under the Receiver Agreement. We and DISH Network also agreed that we would each be entitled to joint ownership
of, and a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is unable
to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these damages
and sanctions not paid by DISH Network. Any amounts that DISH Network may be required to pay could impair its
ability to pay us and also negatively impact our future liquidity.
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If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at a
time and in circumstances in which we would normally not raise capital and there can be no assurance that such
capital would be available on terms that would be attractive to us or at all. Therefore, any capital we raise may be
on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and
might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and
initiatives.
If we are unable to properly respond to technological changes, our business could be significantly harmed.
Our business and the market in which we operate are characterized by rapid technological changes, evolving
industry standards and frequent product enhancements. If we are unable to properly respond to technological
developments, our existing products may become obsolete and demand for our products may decline. For instance,
we face increasing demand for the delivery of digital video services via the Internet. If this increasing demand,
along with other changes in technology allows pay-TV subscribers to use devices such as personal computers,
Internet ready televisions, blu-ray players or gaming consoles, instead of set-top boxes, to receive their pay-TV
services, our customers may not need to purchase our digital set-top boxes to provide their subscribers with their
pay-TV services. Our competitors may also introduce technologies that compete favorably with our digital set-top
boxes or that cause our digital set-top boxes to no longer be of significant benefit to our customers.
We and our suppliers may not be able to keep pace with technological developments. If we fail to timely obtain
such technologies from our suppliers or introduce products and services with superior technologies, if the new
technologies developed by us or our partners fail to achieve sustained acceptance in the marketplace or become
obsolete, or if our competitors obtain or develop proprietary technologies that are perceived by the market as being
superior to ours, we could suffer a material adverse effect on our future competitive position that could in turn
decrease our revenues and earnings. Furthermore, 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.
Our response to technological developments depends, to a significant degree, on the work of technically skilled
employees. Competition for the services of such employees is intense. Although we strive to attract and retain these
employees, we may not succeed in this respect. If we are unable to attract and retain technically skilled employees,
we may not be able to respond to changes in technologies and, as a result, our competitive position could be
materially and adversely affected.
We currently have unused satellite capacity, and our results of operations may be materially adversely affected if
we are not able to lease more of this capacity to third parties.
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, especially in light of the potential continued lack of demand for satellite
services as a result of sustained economic weakness, there can be no assurance that we can successfully develop the
business opportunities we currently plan to pursue with this capacity. If we are unable to lease our excess satellite
capacity, our margins would be negatively impacted and we may be required to record impairments related to our
satellites.
Our sales to DISH Network could be terminated or substantially curtailed on short notice, which would have a
detrimental effect on us.
DISH Network has no obligations to continue to purchase our products and only certain obligations to continue to
purchase certain of our services. Therefore, 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 replace our historical revenues from DISH Network.
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We may need additional capital, which may not be available on acceptable terms or at all, to continue investing in
our business and to finance acquisitions and other strategic transactions.
We may need to raise additional capital in the future to among other things, continue investing in our business,
construct and launch new satellites, and pursue acquisitions and other strategic transactions.
Weakness in the financial markets could make it difficult for certain borrowers to access capital markets at
acceptable terms or at all. Instability in the equity markets could make it difficult for us to raise equity financing
without incurring substantial dilution to our existing shareholders. In particular, it may be difficult for us to raise
debt financing on acceptable terms. In addition, sustained economic weakness may limit our ability to generate
sufficient internal cash to fund investments, capital expenditures, acquisitions and other strategic transactions. We
cannot predict with any certainty whether or not we will be impacted by sustained economic weakness. As a result,
these conditions make it difficult for us to accurately forecast and plan future business activities because we may not
have access to funding sources necessary for us to pursue organic and strategic business development opportunities.
We may experience significant financial losses on our existing investments.
We have entered into certain strategic transactions and investments in North America, Asia and elsewhere,
including, among others, our investments in TerreStar Corporation and TerreStar Networks. These investments
involve a high degree of risk and could diminish our ability to fund our stock buyback program, invest capital in our
business or return capital to our shareholders. The overall sustained economic uncertainty, as well as financial,
operational and other difficulties encountered by certain companies in which we have invested, such as the
bankruptcies of TerreStar Networks and TerreStar Corporation, increases the risk that the actual amounts realized in
the future on our debt and equity investments will differ significantly from the fair values currently assigned to
them. 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. In particular, the laws, regulations and practices
of certain countries may make it harder for our international investments to be successful. If our investments suffer
losses, our financial condition could be materially adversely affected. 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 acquisitions and other strategic transactions to complement or expand our business, which may
not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.
Our future success may depend on the existence of, and our ability to capitalize on, opportunities to buy other
businesses or technologies or partner with other companies that could complement, enhance or expand our current
business or products or that might may otherwise offer us growth opportunities. We may pursue acquisitions, joint
ventures or other business combination activities to complement or expand our business. In addition, we have
entered, and may continue to enter, into strategic transactions and investments in North America, Asia and
elsewhere. Any such acquisitions, transactions or investments that we are able to identify and complete may involve
a number of risks, including, but not limited to, the following:
•
•
•
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;
possible adverse effects on our operating results during the integration process;
these transactions, which could become substantial over time, involve a high degree of risk and could
expose us to significant financial losses if the underlying ventures are not successful; and/or we are
unable to achieve the intended objectives of the transaction.
New acquisitions, joint ventures and other transactions may require the commitment of significant capital that would
otherwise be directed to investments in our existing businesses or be distributed to shareholders. Commitment of this
capital may cause us to defer or suspend any share repurchases or capital expenditures that we otherwise may have
made.
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We intend to make significant investments in new products, services, technologies and business areas 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 related technologies, including new digital set-top box designs, as well as entry into new
business areas. Investments in new technologies and business areas are inherently speculative and commercial
success thereof depends on numerous factors including innovativeness, quality of service and support, and
effectiveness of sales and marketing. We may not achieve revenue or profitability from such investments for a
number of years, if at all. Moreover, even if such products, services, technologies and business area become
profitable, their operating margins may be minimal.
We may not be aware of certain foreign government laws or regulations or changes to them which could have a
significant adverse impact on our business.
Because regulatory schemes vary by country, we may be subject to laws or 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 whom 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 laws and 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.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-
bribery laws.
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in other jurisdictions generally
prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of
obtaining or retaining business. Our policies mandate compliance with these laws. However, we operate in many
parts of the world that have experienced governmental corruption to some degree. If we are found to be liable for
violating these laws, we could suffer from civil and criminal penalties or other sanctions, which could have a
material adverse impact on our business, financial condition, and results of operations.
Our business depends on certain intellectual property rights and on not infringing the intellectual property rights
of others. The loss of or infringement of our intellectual property rights could have a significant adverse impact
on our business.
We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our
vendors and other parties, to use our technologies, conduct our operations and sell our products and services. Legal
challenges to our intellectual property rights and claims by third parties of intellectual property infringement could
require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability
or be enjoined preliminarily or permanently from further use of the intellectual property in question or from the
continuation of our businesses as currently conducted, which could require us to change our business practices or
limit our ability to compete effectively or could otherwise have an adverse effect on our results of operations. Even
if we believe any such challenges or claims are without merit, they can be time-consuming and costly to defend and
may divert management’s attention and resources away from our business. Moreover, due to the rapid pace of
technological change, we rely in part on technologies developed or licensed by third parties, and if we are unable to
obtain or continue to obtain licenses or other required intellectual property rights from these third parties on
reasonable terms, our business, financial position and results of operations could be adversely affected.
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Any failure or inadequacy of our information technology infrastructure could harm our business.
The capacity, reliability and security of our information technology hardware and software infrastructure are
important to the operation of our current business, which would suffer in the event of system failures. Likewise, our
ability to expand and update our information technology infrastructure in response to our growth and changing
needs is important to the continued implementation of our new service offering initiatives. Our inability to expand
or upgrade our technology infrastructure could have adverse consequences, which could include the delayed
implementation of new offerings, product or service interruptions, and the diversion of development resources.
We are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our
business, particularly lawsuits regarding intellectual property.
We are subject to various legal proceedings and claims, which arise in the ordinary course of business. 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 or services infringes valid intellectual property rights held by others, we may be
required to cease developing or marketing those products or services, to obtain licenses from the holders of the
intellectual property at a material cost, or to redesign those products or services in such a way as to avoid
infringement. If those intellectual property rights are held by a competitor, we may be unable to license the
necessary intellectual property rights at any price, which could adversely affect our competitive position. Please see
further discussion under Item 1. Business — Patents and Trademarks of this Annual Report on Form 10-K.
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:
•
•
•
•
•
•
human resources related functions;
accounting;
tax administration;
legal and external reporting;
treasury administration, investor relations, internal audit and insurance functions; and
information technology and telecommunications services.
DISH Network and its affiliates are currently obligated to provide certain of these functions to us pursuant to the
management services agreement and the professional services agreement between us and DISH Network. See
“Related Party Transactions with DISH Network — Professional Services Agreement” and “Related Party
Transactions with DISH Network – Management Services Agreement” set forth in our Proxy Statement for the 2011
Annual Meeting of Shareholders under the caption “Certain Relationships and Related Transactions.” If DISH
Network does not continue to perform effectively the services that are called for under the management services
agreement and the professional services agreement, we may not be able to operate our business effectively. In addition
if, once the management services agreement and the professional services agreement terminate, 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.
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We rely on key personnel and the loss of their services may negatively affect our businesses.
We believe that our future success will depend to a significant extent upon the performance of Mr. Charles W.
Ergen, our Chairman, and certain other key executives. Certain of these key 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
the ability of these certain other key executives 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 have certain 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 “Digital Set-Top Box” Business
We depend on sales of digital set-top boxes for nearly all of our revenue and a decline in sales of our digital set-
top boxes would have a material adverse effect on our financial position and results of operations.
Our historical revenues consist primarily of sales of our digital 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 digital set-top boxes to
DISH Network, Bell TV and Dish Mexico. If the sustained economic weakness persists, demand for digital set-top
boxes from our three significant customers could decrease and, consequently, our revenue and profitability could be
adversely affected. As disclosed by DISH Network in its Annual Report on Form 10-K for the year ended
December 31, 2010, DISH Network had higher than normal inventory levels of digital set-top boxes and related
components at December 31, 2010 and also experienced fewer gross subscriber additions during 2010. While we
expect that DISH Network will continue to purchase digital set-top boxes and related components from us, DISH
Network’s higher than normal inventory levels, could result in fewer purchases of digital set-top boxes and related
components from us than it has purchased during the year ended December 31, 2010.
Our business may suffer if our customer base does not compete successfully with existing and emerging
competition.
Our existing customers face competition from providers of digital media, including those companies that offer
online services distributing movies, television shows and other video programming. As technologies develop, other
means of delivering information and entertainment to television viewers are evolving. For example, online
platforms that provide for the distribution and viewing of video programming compete with our customers’ pay-TV
services. To the extent that these technologies compete successfully against our customers 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 digital set-top boxes could decline and we may not be able to sustain our current revenue levels.
Our future financial performance depends in part on our ability to penetrate new markets for digital set-top
boxes.
Our products were initially designed for, and have been deployed mostly by, providers of satellite-delivered digital
television. Our sales of digital set-top boxes to providers of digital television other than providers of satellite-
delivered digital television have not been significant. 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, and our perception by many potential customers as a competitor due to our affiliation with DISH
Network, may make it more difficult for us to sell cable set-top boxes, and may result in pricing pressure, low profit
margins, high sales and marketing expenses and limited market share, any of which could, to a certain extent,
adversely affect our business, operating results and financial condition.
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Component pricing may remain stable or be negatively affected by inflation, increased demand, decreased supply,
or other factors, which could have a material adverse effect on our results of operations.
The substantial majority of our revenues are derived from the sale of digital set-top boxes. A significant portion of
the production costs of digital set-top boxes relate to the purchase of electronic components, the costs of which have
historically fallen over time. To the extent that component pricing does not decline or increases, whether due to
inflation, increased demand, decreased supply or other factors, we may not be able to pass on the impact of
increasing raw materials prices or labor and other costs, to our customers, and we may not be able to operate
profitably. For example, we entered into a digital set-top box contract extension with Bell TV under which we
supply digital set-top boxes to Bell TV at fixed prices over the duration of the contract. Under this fixed-price
arrangement, we bear any risk of increased costs because we are not able to pass any increase in our component
pricing on to Bell TV.
The average selling price and gross margins of our digital set-top boxes has been decreasing and may decrease
even further, which could negatively impact our financial position and results of operations.
The average selling price and gross margins of our digital set-top boxes has been decreasing and may decrease even
further due to, among other things, an increase in the sales of lower-priced digital set-top boxes to DISH Network
and increased competitive pricing pressure Furthermore, our ability to increase the average selling prices of our
digital set-top boxes is limited and our average selling price may decrease even further in response to competitive
pricing pressures, new product introductions by us or our competitors, lack of demand for our new product
introductions or other factors. If we are unable to increase or at least maintain the average selling prices of our
digital set-top boxes, or if such selling prices further decline, and we are unable to respond in a timely manner by
developing and introducing new products and continually reducing our product costs, our revenues and gross margin
may be negatively affected, which will harm our financial position and results of operations.
Our ability to sell our digital set-top boxes to other operators depends on our ability to obtain licenses to use the
conditional access systems utilized by these other operators.
Our commercial success in selling our digital set-top boxes to cable television and other operators depends
significantly on our ability to obtain licenses to use the conditional access systems deployed by these operators in
our digital 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 system operator with its set-top boxes. We
cannot assure you that we will able to obtain required licenses on commercially favorable terms, or 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 or other television operators. Our failure to obtain a license to use the conditional access
systems that we may require to develop or commercialize our digital set-top boxes with cable television or other
operators, in turn, would harm our ability to grow our customer base and revenue.
Growth in our “Digital Set-Top Box” business likely requires expansion of our sales to international customers,
and we may be unsuccessful in expanding international sales.
We believe that to grow our digital set-top box revenue and business and to build a large customer base, we must
increase sales of our digital set-top boxes in international markets. We have had limited success in selling our
digital set-top boxes internationally. To succeed in these sales efforts, we believe we must 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 and deal with these challenges in our
international operations, the size of our total addressable market may be limited. This, in turn, would harm our
ability to grow our customer base and revenue.
22
If we are successful in growing sales of our digital set-top boxes to international customers, we may be subject to
greater risks.
We may be subject to greater risks than our competitors as a result of international expansion. We could be harmed
financially and operationally by tariffs, taxes and other trade barriers that may be imposed on our products or
services, or by political and economic instability in the countries in which we sell our digital set-top boxes. If we
ever need to pursue legal remedies against our customers or our business partners located outside of the United
States, it may be difficult for us to enforce our rights against them. Furthermore, we may be subject to currency
risks with respect to payments from our international customers and our international customers may have difficulty
obtaining U.S. currency and/or remitting payment due to currency exchange controls.
The digital 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 Motorola, Cisco (which owns Scientific Atlanta), Pace and Technicolor. 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 that 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.
We expect to continue to face competition from new market entrants, principally located in Asia, that offer low
cost set-top boxes.
The set-top box market is intensely competitive, and market leadership changes frequently as a result of new
products, designs and pricing. We expect to face additional competition from companies, principally located in
Asia, which offer low cost set-top boxes, including set-top boxes that are modeled after our products or products of
our principal competitors. The entry of these new competitors may result in increased pricing pressure in the
market. If market prices are substantially reduced by such new entrants, our business, financial condition or results
of operations could be materially adversely affected. In particular, it may be difficult for us to make profitable sales
in international markets where these new competitors are present and in which we have not previously made sales of
set-top boxes.
If we do not distinguish our products, particularly our retail products, through distinctive, technologically advanced
features and design, as well as build and strengthen our brand recognition, our business could be harmed as we may
not be able to effectively compete on price alone against new low cost market entrants that are principally located in
Asia. If we do not otherwise compete effectively, demand for our products could decline, our gross margins could
decrease, we could lose market share, and our revenues and earnings could decline.
Our digital set-top boxes are highly complex and may experience quality or supply problems.
Our digital set-top boxes are highly 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 digital 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.
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If significant numbers of television viewers are unwilling to pay for pay-TV services that utilize digital set-top
boxes, we may not be able to sustain our current revenue level.
We are substantially dependent upon the ability of our customers to promote the delivery of pay-TV services,
including, among others, premium programming packages and services that utilize technology incorporated into our
digital set-top boxes, such as HD technology and IPTV, to generate future revenues.
However, our customers 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 digital set-top
box offerings. If our customers are unable to develop and effectively market compelling reasons for their
subscribers to continue to purchase their pay-TV services that utilize our more advanced digital set-top boxes, it will
be difficult for us to sustain our historical revenues. This risk is exacerbated by the sustained economic weakness
under which consumers become more cost-sensitive in their discretionary spending and by increasing consumer
demand for online platforms that provide for the distribution and viewing of video programming that competes with
our customers’ pay-TV services.
Our reliance on a single supplier or a limited number of suppliers for several components used in our digital set-
top boxes could restrict production, result in higher digital set-top box costs and delay deliveries to customers.
We obtain many components for our digital 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 digital 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.
The sustained economic weakness may cause certain suppliers that we rely on to cease operations which, in turn,
may cause us to suffer disruptions to our supply chain or incur higher production costs.
Our future growth depends on growing demand for advanced technologies.
Future demand for our digital set-top boxes will depend significantly on the growing demand for advanced
technologies, such as HDTV, 3D TV and broadband Internet connectivity. The effective delivery of advanced
technologies, such as HDTV and 3D TV, will depend on digital television operators developing and building
infrastructure to provide widespread HDTV and 3D TV programming. If the deployment of, or demand for,
advanced technologies, such as HDTV, 3D TV and broadband Internet connectivity, is not as widespread or as rapid
as we or our customers expect, our revenue growth will be limited.
If the encryption and related security technology used in our digital set-top boxes is compromised, sales of our
digital set-top boxes may decline.
Our customers use encryption and related security technology obtained from us or our suppliers in the digital set-top
boxes that they purchase from us to control access to their programming content. Such encryption and related
security technology has been compromised in the past and may be compromised in the future even though we
continue to respond with significant investment in security measures, such as updates in security software, that are
intended to make signal theft more difficult. It has been our prior experience that security measures may only be
effective for short periods of time or not at all. We cannot ensure that we will be successful in reducing or
controlling theft of our customers’ programming content. As a result, sales of our digital set-top boxes may decline
and we may incur additional costs in the future if security of our customers’ system is compromised.
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Risks Affecting Our “Satellite Services” Business
We currently face competition from established competitors in the satellite service business and may face
competition from others in the future.
In our “Satellite Services” business, we compete against larger, well-established satellite service companies, such as
Intelsat, SES World Skies and Telesat. 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 costs for
customers to change service providers, 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
makes 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 could have an adverse effect on our financial performance. Our “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 owned and leased satellites in orbit are subject to significant operational and environmental risks that could
limit our ability to utilize these satellites.
Satellites are subject to significant operational risks while in orbit. These risks include malfunctions, commonly
referred to as anomalies, which have occurred in our satellites and the satellites of other operators as a result of
various factors, such as satellite design and manufacturing defects, 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 ranging from 12 to 15 years, but could fail or suffer reduced capacity
before then.
Our ability to earn revenue depends on the usefulness of our satellites, each of which has a limited useful life. A
number of factors affect the useful lives of the satellites, including, among other things, the quality of their design
and 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 ranges from 12 to 15 years. We can
provide no assurance, however, as to the actual useful lives of the satellites.
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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 under construction are subject to risks related to construction and launch that could limit our
ability to utilize these satellites.
Satellite construction and launch are subject to significant risks, including delays, launch failure and incorrect orbital
placement. 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 three years, and
to obtain other launch opportunities. Construction and launch delays could materially and adversely affect our
ability to generate revenues. If we decide not to procure launch insurance, or we decide to procure launch insurance
but we are unable to do so or are unable to 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 “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 and internationally by the ITU. These regulations are
subject to the political process and have changed from time to time. 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 on FCC licenses that can expire or be revoked or modified and applications for FCC
licenses that may not be granted.
If the FCC were to cancel, revoke, suspend, or fail to renew any of our licenses or authorizations, or fail to grant our
applications for FCC licenses, 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 orbital location, the frequency band and the
availability of replacement spectrum. In addition, Congress often considers legislation that could affect us and
enacts legislation that does 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.
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, Space Systems/Loral and Thales Alenia Space. There are also a limited number of launch service providers
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 service providers could increase the cost and
26
result in the delay of the design, construction 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, construction or launch of
our satellites. Any delays in the design, construction or launch of our satellites could have a material adverse effect
on our business, financial condition and results of operations.
We generally do not have commercial insurance coverage on the satellites we use and could face significant
impairment charges if one of our satellites fails.
Generally, we do not carry launch or in-orbit insurance on the satellites we use. We currently do not carry in-orbit
insurance on any of our satellites and generally do not use commercial insurance to mitigate the potential financial
impact of launch or in-orbit failures because we believe that the cost of insurance premiums is uneconomical relative
to the risk of such failures. If one or more of our in-orbit satellites fail, we could be required to record significant
impairment charges.
Risks Relating to the Spin-Off
We have potential conflicts of interest with DISH Network due to our common ownership and management.
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:
• Cross officerships, directorships and stock ownership. We continue to have significant overlap in
directors and executive officers with DISH Network, which may lead to conflicting interests. Certain of
our executive officers and directors, including Charles W. Ergen, our Chairman, also serve as executive
officers of DISH Network. Our General Counsel and Corporate Controller provide us services pursuant to
a management services agreement we entered into with DISH Network and provide the same services to
DISH Network. Our Board of Directors includes persons who are members of the Board of Directors of
DISH Network, including Mr. Ergen, who serves 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. Therefore, these individuals may have actual or apparent conflicts of
interest with respect to matters involving or affecting each company. For example, there is 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, certain of which they acquired or were granted prior to
the Spin-off, including Mr. Ergen, who beneficially owns approximately 53.6% of the total equity
(assuming conversion of only the Class B Common Stock held by Mr. Ergen into Class A Common Stock)
and controls approximately 90.5% of the voting power of DISH Network. Mr. Ergen’s beneficial
ownership of DISH Network excludes 4,245,151 shares of DISH Network Class A Common Stock issuable
upon conversion of shares of DISH Network Class B Common Stock currently held by certain trusts
established by Mr. Ergen for the benefit of his family. These trusts beneficially own approximately 2.0%
of the total equity securities (assuming conversion of only the Class B Common Stock held by such trusts
into Class A Common Stock) and possess approximately 1.6% of the total voting power of DISH Network.
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.
•
Intercompany agreements related to the Spin-off. We entered into agreements with DISH Network
pursuant to which it provides us certain management, administrative, accounting, tax, legal and other
services, for which we pay DISH Network an amount equal to DISH Network’s cost plus a fixed margin.
In addition, we entered 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 also entered into certain commercial agreements with DISH Network pursuant to which we
are, among other things, obligated to sell digital set-top boxes and related equipment to DISH Network at
specified prices. The terms of certain of these agreements were established while we were a wholly-owned
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subsidiary of DISH Network and were not the result of arm’s length negotiations. 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 did 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. In addition, conflicts could
arise in the interpretation or any extension or renegotiation of these existing agreements.
• 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 committee of the non-interlocking directors or in certain instances non-interlocking
management, 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 negotiations between unaffiliated third parties.
• Business opportunities. DISH Network retains its interests in various 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.
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, nor do we have any agreement that prevents DISH Network from purchasing products from our
competitors. 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.
Risks Relating to our Common Stock and the Securities Market
We cannot assure you that there will not be deficiencies leading to material weaknesses in our internal control
over financial reporting.
We periodically evaluate and test our internal control over financial reporting to satisfy the requirements of Section
404 of the Sarbanes-Oxley Act. Our management has concluded that our internal control over financial reporting
was effective as of December 31, 2010. If in the future we are unable to report that our internal control over
financial reporting is effective (or if our auditors do not agree with our assessment of the effectiveness of, or are
unable to express an opinion on, our internal control over financial reporting), investors, customers and business
partners could lose confidence in the accuracy of our financial reports, which could in turn have a material adverse
effect on our business, 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,
because of our capital structure.
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:
•
•
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;
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;
28
•
•
a provision limiting who may call special meetings of shareholders; and
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.
In addition, pursuant to our certificate of incorporation we have a significant amount of authorized and unissued
stock that would allow our Board of Directors to issue shares to persons friendly to current management, thereby
protecting the continuity of 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 who is our Chairman.
Charles W. Ergen, our Chairman, beneficially owns approximately 43.8% of our total equity securities (assuming
conversion of only the Class B Common Stock held by Mr. Ergen into Class A Common Stock) and possesses
approximately 56.0% of the total voting power. Mr. Ergen’s beneficial ownership of us excludes 18,900,405 shares
of our Class A Common Stock issuable upon conversion of shares of our Class B Common Stock currently held by
certain trusts established by Mr. Ergen for the benefit of his family. These trusts beneficially own approximately
33.5% of our total equity securities (assuming conversion of only the Class B Common Stock held by such trusts
into Class A Common Stock) and possess approximately 36.7% of our 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 53.6% of the total equity (assuming
conversion of only the Class B Common Stock held by Mr. Ergen into Class A Common Stock) and controls
approximately 90.5% of the total voting power of DISH Network and continues to be the Chairman, President 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. Mr. Ergen’s beneficial ownership of DISH
Network excludes 4,245,151 shares of DISH Network Class A Common Stock issuable upon conversion of shares
of DISH Network Class B Common Stock currently held by certain trusts established by Mr. Ergen for the benefit of
his family. These trusts beneficially own approximately 2.0% of the total equity securities (assuming conversion of
only the Class B Common Stock held by such trusts into Class A Common Stock) and possess approximately 1.6%
of the total voting power of DISH Network.
Risks Relating to our Acquisition of Hughes
Governmental authorities must approve our acquisition of Hughes and could impose conditions on, delay, or
refuse to approve the merger.
We are subject to certain antitrust, competition, and communications laws of the United States and of other
jurisdictions in which the Hughes Merger is subject to review and approval. We may be unable to obtain in the
anticipated timeframe, or at all, the regulatory approvals required to complete the Hughes Merger. Governmental
authorities such as the Federal Trade Commission or the FCC may seek concessions from us, which may include
compliance with material restrictions or conditions on our business or the divestiture of portions of our or Hughes’
business, as conditions to the approval of the Hughes Merger. These actions may have a material adverse effect on
us, the combined businesses, or the value of the expected benefits arising from the Hughes Merger. Furthermore,
the requirements for obtaining the necessary approvals could delay the completion of the Hughes Merger for a
significant period of time or prevent it from occurring. Any delay in completing the Hughes Merger could also
prevent us from realizing some or all of the benefits that we expect to achieve if the Hughes Merger is successfully
completed within its expected timeframe.
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We may not be able to obtain the financing required to fulfill our obligations under our agreement to acquire
Hughes.
We currently estimate that we will need to borrow approximately $1.8 billion to finance in part the cash consideration
to Hughes stockholders and to refinance certain existing Hughes debt. We and ESS obtained an aggregate financing
commitment of $1.0 billion in senior secured bridge financing and $800 million in senior unsecured bridge financing,
in each case from Deutsche Bank AG Cayman Islands Branch (collectively, the “Bridge Commitment”). Deutsche
Bank’s obligations under the Bridge Commitment are subject to a number of conditions, including that the conditions
to closing under the Hughes Agreement have been met (subject to certain exceptions); that we have a minimum amount
of cash on hand at the closing; that we have provided certain financial statements and other information relating to us
and Hughes in specified time periods; and that our aggregate indebtedness not exceed specified levels. There is no
assurance that we will be able to satisfy these conditions. The initial term of the Bridge Commitment is six months.
We have the option to extend the term of the Bridge Commitment to nine months so long as we have delivered certain
required information, including certain financial statements, and have complied with our obligations to issue debt
securities in lieu of borrowing under the Bridge Commitment. Subject to certain exceptions, we do not have the ability
to terminate the Hughes Agreement until nine months after the date the Hughes Agreement was executed.
Accordingly, there is no assurance that the Bridge Commitment will remain in effect for the duration of our obligations
under the Hughes Agreement. We do not have the ability to terminate the Hughes Agreement if we are unable to
obtain sufficient funds to satisfy our obligations under the Hughes Agreement. If the funding under the Bridge
Commitment were to become unavailable for any reason, there is no assurance that we will be able to obtain sufficient
funds to satisfy our obligations under the Hughes Agreement.
The terms of the financing related to our acquisition of Hughes will significantly reduce our ability to incur
additional indebtedness.
Under the terms of the Bridge Commitment, we will be precluded from incurring additional indebtedness, subject to
certain limited exceptions, until we have obtained permanent debt financing to replace the Bridge Commitment.
These restrictions will significantly reduce our flexibility to pursue strategic or other transactions that would
otherwise be financed in whole or in part through the issuance of indebtedness and will also significantly limit our
ability to issue indebtedness for working capital or other purposes.
The incurrence of indebtedness to finance our acquisition of Hughes will substantially increase our leverage.
As of December 31, 2010, we had $413 million in total indebtedness and capital lease obligations. The incurrence
of an additional $1.8 billion of indebtedness to finance the Hughes merger may have important consequences to us,
including without limitation:
• making it more difficult for us to satisfy our debt service obligations;
•
•
increasing our vulnerability to general adverse economic and industry conditions;
impairing our ability to obtain additional debt or equity financing in the future for working capital,
capital expenditures, satellite construction, acquisitions or general corporate purposes;
requiring us to dedicate a material portion of our cash flows from operations to debt service
requirements, thereby reducing the availability of our cash flows to fund working capital needs, capital
expenditures, research and development, satellite construction, acquisitions and other general corporate
purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and operating
environment; and
limiting our ability to adjust to changing market conditions.
•
•
•
Any of these risks could materially impair our ability to fund our operations or to expand our business and could
place us at a disadvantage compared to our competitors that have less indebtedness than we will have, all of which
could have a material adverse effect on our business, financial position and results of operations.
30
Although we expect that our acquisition of Hughes will benefit us, those expected benefits may not occur because
of the complexity of the integration and other challenges.
We and Hughes have operated and, until the merger is completed, will continue to operate, independently.
Achieving the expected benefits of the merger will depend in part on our ability to integrate Hughes’ operations,
technology and personnel in a timely and efficient manner. We will incur substantial direct transaction costs
associated with the Hughes Merger, and additional costs associated with consolidation and integration of operations.
The integration of Hughes will be complex, time-consuming, and expensive, and may disrupt our business or result
in the loss of our or Hughes’ customers or key employees or the diversion of the attention of management. In
addition, the integration process may strain the combined company’s financial and managerial controls and reporting
systems and procedures. This may result in the diversion of management and financial resources from the combined
company’s core business objectives. We cannot assure you, however, that the integration will be completed as
quickly as expected or that the Hughes Merger will achieve its expected benefits. The challenges involved in this
integration include but are not limited to:
•
•
•
•
•
•
•
•
integrating Hughes’ broadband technology and services with our satellite services and technology;
coordinating research and development activities to enhance introduction of new satellite and
broadband technologies and services;
inability to migrate EchoStar and Hughes to a common enterprise resource planning information
system to integrate all operations, sales, and administrative activities for the combined company in a
timely and cost effective way;
coordinating the efforts of Hughes’ sales organization with our sales organization, including
integrating Hughes’ consumer sales organization with our business sales focus;
convincing Hughes customers that the merger will not impair client service standards or product
support;
integrating Hughes’ information technology systems and resources;
persuading employees in various locations that our respective business cultures are compatible,
maintaining employee morale, and retaining key employees; and
any unforeseen expenses or delays associated with the transaction.
If the total costs of the Hughes Merger exceed estimates or if the expected benefits of the Hughes Merger do not
exceed its total cost, our business, financial position, and results of operation results could be materially adversely
affected.
If we are able to complete our acquisition of Hughes, we will be subject to the risks related to Hughes’ business.
If we are able to complete the Hughes Merger, then we will be subject to the risks related to the Hughes’ business,
some of which are different than the risks we currently face. See Hughes’ periodic filings with the SEC prior to the
date hereof for a discussion of certain of the risks that Hughes’ business faces.
We may face other risks described from time to time in periodic and current reports we file with the SEC.
Item 1B. UNRESOLVED STAFF COMMENTS
None
31
Item 2.
PROPERTIES
The following table sets forth certain information concerning our principal properties related to our “Digital Set-
Top Box” business (“STB”) and our “Satellite Services” business (“SS”). 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. We own or lease capacity on ten satellites which are used in our Satellite Services business.
Description/Use/Location
Segment(s)
Using
Property
Owned
Leased
Corporate headquarters and administrative offices, Englewood, Colorado.............................
Engineering offices and service center, Englewood, Colorado...............................................
Engineering offices, Englewood, Colorado.............................................................................
Engineering offices, Atlanta, Georgia.....................................................................................
Engineering office, American Fork, Utah................................................................................
Engineering offices and warehouse, Almelo, The Netherlands...............................................
Engineering offices, Steeton, England.....................................................................................
Engineering and data center, San Francisco, California..........................................................
Engineering and sales office, New York, New York...............................................................
Engineering office, India.........................................................................................................
Engineering office, Ukraine....................................................................................................
Digital broadcast operations center, Cheyenne, Wyoming......................................................
Digital broadcast operations center, Gilbert, Arizona.............................................................
Regional digital broadcast operations center, Monee, Illinois.................................................
Regional digital broadcast operations center, New Braunfels, Texas......................................
Regional digital broadcast operations center, Quicksburg, Virginia.......................................
Regional digital broadcast operations center, Spokane, Washington......................................
Regional digital broadcast operations center, Orange, New Jersey.........................................
Micro digital broadcast operations center, Atlanta, Georgia...................................................
Micro digital broadcast operations center, St. Louis, Missouri...............................................
Micro digital broadcast operations center, Jackson, Mississippi.............................................
Spacecraft autotrack operations center, Baker, Montana........................................................
Spacecraft autotrack operations center, Black Hawk, South Dakota.......................................
STB/SS
STB
STB
STB
STB
STB
STB
STB
STB
STB
STB
STB/SS
STB/SS
STB/SS
STB/SS
STB/SS
STB/SS
STB/SS
STB
STB
STB
SS
SS
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
We lease portions of certain of our owned facilities to DISH Network. See “Related Party Transactions with DISH
Network – Real Estate Lease Agreements” set forth in our Proxy Statement for the 2011 Annual Meeting of
Shareholders under the caption “Certain Relationships and Related Transactions.” Also, see Note 19 in the Notes to
the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further discussion.
Item 3. LEGAL PROCEEDINGS
In connection with the Spin-off, we entered into a separation agreement with DISH Network, which provides,
among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the
terms of the separation agreement, we have assumed certain liabilities that relate to our business including certain
designated liabilities for acts or omissions prior to the Spin-off. Certain specific provisions govern intellectual
property related claims under which, generally, we will only be liable for our acts or omissions following the Spin-
off and DISH Network will indemnify us for any liabilities or damages resulting from intellectual property claims
relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off.
32
Acacia
During 2004, Acacia Media Technologies (“Acacia”) filed a lawsuit against us and DISH Network in the United
States District Court for the Northern District of California. The suit also named DirecTV, Comcast, Charter, Cox
and a number of smaller cable companies as defendants. Acacia is an entity that seeks to license an acquired patent
portfolio without itself practicing any of the claims recited therein. The suit alleges infringement of United States
Patent Nos. 5,132,992; 5,253,275; 5,550,863; 6,002,720; and 6,144,702, which relate to certain systems and
methods for transmission of digital data. On September 25, 2009, the District Court granted summary judgment to
the defendants on invalidity grounds, and dismissed the action with prejudice. On October 8, 2010, the Federal
Circuit Court of Appeals affirmed the dismissal. Acacia may no longer appeal this dismissal since their time to seek
en banc review with the Federal Circuit Court of Appeal or petition the United States Supreme Court for certiorari
have now expired.
Broadcast Innovation, L.L.C.
During 2001, Broadcast Innovation, L.L.C. (“Broadcast Innovation”) filed a lawsuit against DISH Network,
DirecTV, Thomson Consumer Electronics and others in United States District Court in Denver, Colorado.
Broadcast Innovation is an entity that seeks to license an acquired patent portfolio without itself practicing any of
the claims recited therein. The suit alleges infringement of United States Patent Nos. 6,076,094 (the ‘094 patent)
and 4,992,066 (the ‘066 patent). The ‘094 patent relates to certain methods and devices for transmitting and
receiving data along with specific formatting information for the data. The ‘066 patent relates to certain methods
and devices for providing the scrambling circuitry for a pay television system on removable cards. Subsequently,
DirecTV and Thomson settled with Broadcast Innovation leaving DISH Network as the only defendant.
During 2004, the District Court issued an order finding the ‘066 patent invalid. Also in 2004, the District Court
found the ‘094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and Comcast. In 2005,
the United States Court of Appeals for the Federal Circuit overturned that finding of invalidity with respect to the
‘094 patent and remanded the Charter case back to the District Court. During June 2006, Charter filed a
reexamination request with the United States Patent and Trademark Office. The District Court has stayed the
Charter case pending reexamination, and our case has been stayed pending resolution of the Charter case.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe any of the
asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain user-friendly features that we currently offer to consumers. We
are being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the
period prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
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, an entity that seeks to license an acquired patent
portfolio without itself practicing any of the claims recited therein, alleged that DirecTV’s electronic program guide
and other elements of its system infringe United States Patent No. 5,404,505 (the ‘505 patent).
During 2006, we and DISH Network, together with NagraStar L.L.C., filed a Complaint for Declaratory Judgment
in the United States District Court for the District of Delaware against Finisar that asks the Court to declare that we
do not infringe, and have not infringed, any valid claim of the ‘505 patent. Finisar brought counterclaims against us,
DISH Network and NagraStar alleging that we infringed the ‘505 patent. During April 2008, the Federal Circuit
reversed the judgment against DirecTV and ordered a new trial. On remand, the District Court granted summary
judgment in favor of DirecTV and during January 2010, the Federal Circuit affirmed the District Court’s grant of
summary judgment, and dismissed the action with prejudice. Finisar then agreed to dismiss its counterclaims
against us, DISH Network and NagraStar without prejudice. We also agreed to dismiss our Declaratory Judgment
action without prejudice.
33
Joao Control
During December 2010, Joao Control & Monitoring Systems (“Joao”) filed suit against Sling Media Inc., our
indirect wholly owned subsidiary, ACTI Corporation, ADT Security, Alarmclub.Com, American Honda Motor
Company. BMW, Byremote, Drivecam, Honeywell, Iveda Corporation, Magtec Products, Mercedes-Benz, On-Net
Surveillance, OnStar, SafeFreight Technology, Skyway Security, SmartVue Corporation, Toyota Motor Sales, Tyco,
UTC Fire and Xanboo in the United States District Court for the Central District of California alleging infringement
of United States Patent Nos. 6,549,130 and 6,587,046. The abstracts of the patents state that the claims are directed
to the remote control of devices and appliances. Joao is an entity that seeks to license an acquired patent portfolio
without itself practicing any of the claims recited therein.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the
asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain features that we currently offer to consumers. We cannot predict
with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Nazomi Communications
On February 10, 2010, Nazomi Communications, Inc. (“Nazomi”) filed suit against Sling Media, Inc., a subsidiary
of ours, Nokia Corp, Nokia Inc., Microsoft Corp., Amazon.com Inc., Western Digital Corp., Western Digital
Technologies, Inc., Garmin Ltd., Garmin Corp., Garmin International, Inc., Garmin USA, Inc., Vizio Inc. and
iOmega Corp in the United States District Court for the Central District of California alleging infringement of
United States Patent No. 7,080,362 (“the ‘362 patent”) and United States Patent No. 7,225,436 (“the ‘436 patent”).
The ‘362 patent and the ‘436 patent relate to Java hardware acceleration. The suit alleges that the Slingbox-Pro-HD
product infringes the ‘362 patent and the ‘436 patent because the Slingbox-PRO HD allegedly incorporates an
ARM926EJ-S processor core capable of Java hardware acceleration.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the
asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain features that we currently offer to consumers. We cannot predict
with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
NorthPoint Technology
On July 2, 2009, NorthPoint Technology, Ltd filed suit against us, DISH Network, and DirecTV in the United States
District Court for the Western District of Texas alleging infringement of United States Patent No. 6,208,636 (the
‘636 patent). The ‘636 patent relates to the use of multiple low-noise block converter feedhorns, or LNBFs, which
are antennas used for satellite reception.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted
patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could
require us to materially modify certain features that we currently offer to consumers. We are being indemnified by
DISH Network for any potential liability or damages resulting from this suit relating to the period prior to the effective
date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of
any potential liability or damages.
Personalized Media Communications
During 2008, Personalized Media Communications, Inc. (“PMC”) filed suit against us, DISH Network and Motorola,
Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent
Nos. 4,694,490; 5,109,414; 4,965,825; 5,233,654; 5,335,277; and 5,887,243, which relate to satellite signal
processing. PMC is an entity that seeks to license an acquired patent portfolio without itself practicing any of the
claims recited therein.
34
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe any of the
asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain user-friendly features that we currently offer to consumers. We are
being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period
prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
Suomen Colorize Oy
During October 2010, Suomen Colorize Oy (“Suomen”) filed suit against us and DISH Network L.L.C., an indirect
wholly owned subsidiary of DISH Network, in the United States District Court for the Middle District of Florida
alleging infringement of United States Patent No. 7,277,398. Suomen is an entity that seeks to license an acquired
patent portfolio without itself practicing any of the claims recited therein. The abstract of the patent states that the
claims are directed to a method and terminal for providing services in a telecommunication network.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the
asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain features that we currently offer to consumers. We are being
indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior
to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
Technology Development Licensing
On January 22, 2009, Technology Development and Licensing L.L.C. (“TDL”) filed suit against us and DISH Network
in the United States District Court for the Northern District of Illinois alleging infringement of United States Patent No.
Re. 35,952, which relates to certain favorite channel features. TDL is an entity that seeks to license an acquired patent
portfolio without itself practicing any of the claims recited therein. In July 2009, the Court granted our motion to stay
the case pending two re-examination petitions before the Patent and Trademark Office.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted
patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could
require us to materially modify certain user-friendly features that we currently offer to consumers. We are being
indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior
to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
Tivo Inc.
During January 2008, the United States Court of Appeals for the Federal Circuit affirmed in part and reversed in part
the April 2006 jury verdict concluding that certain of our digital video recorders, or DVRs, infringed a patent held by
Tivo. In its January 2008 decision, the Federal Circuit affirmed the jury’s verdict of infringement on Tivo’s “software
claims,” and upheld the award of damages from the District Court. 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. On October 6, 2008, the Supreme Court denied our petition for certiorari. As a result, DISH Network
paid approximately $105 million to Tivo.
We also developed and deployed “next-generation” DVR software. This improved software was automatically
downloaded to our current customers’ DVRs, and is fully operational (our “original alternative technology”). The
download was completed as of April 2007. We received written legal opinions from outside counsel that concluded
our original alternative technology does not infringe, literally or under the doctrine of equivalents, either the hardware
or software claims of Tivo’s patent. Tivo filed a motion for contempt alleging that we are in violation of the Court’s
injunction. We opposed this motion on the grounds that the injunction did not apply to DVRs that have received our
original alternative technology, that our original alternative technology does not infringe Tivo’s patent, and that we
were in compliance with the injunction.
35
In June 2009, the United States District Court granted Tivo’s motion for contempt, finding that our original alternative
technology was not more than colorably different than the products found by the jury to infringe Tivo’s patent, that the
original alternative technology still infringed the software claims, and that even if the original alternative technology
was “non-infringing,” the original injunction by its terms required that DISH Network disable DVR functionality in all
but approximately 192,000 digital set-top boxes in the field. The District Court also amended its original injunction to
require that we inform the court of any further attempts to design around Tivo’s patent and seek approval from the
court before any such design-around is implemented. The District Court awarded Tivo $103 million in supplemental
damages and interest for the period from September 2006 through April 2008, based on an assumed $1.25 per
subscriber per month royalty rate. DISH Network posted a bond to secure that award pending appeal of the contempt
order. On July 1, 2009, the Federal Circuit Court of Appeals granted a permanent stay of the District Court’s contempt
order pending resolution of our appeal.
The District Court held a hearing on July 28, 2009 on Tivo’s claims for contempt sanctions. Tivo sought up to $975
million in contempt sanctions for the period from April 2008 to June 2009 based on, among other things, profits Tivo
alleges DISH Network made from subscribers using DVRs. We opposed Tivo’s request arguing, among other things,
that sanctions are inappropriate because we made good faith efforts to comply with the Court’s injunction. We also
challenged Tivo’s calculation of profits. On September 4, 2009, the District Court partially granted Tivo’s motion for
contempt sanctions and awarded $2.25 per DVR subscriber per month for the period from April 2008 to July 2009 (as
compared to the award for supplemental damages for the prior period from September 2006 to April 2008, which was
based on an assumed $1.25 per DVR subscriber per month). By the District Court’s estimation, the total award for the
period from April 2008 to July 2009 is approximately $200 million. The District Court also awarded Tivo its
attorneys’ fees and costs incurred during the contempt proceedings. Enforcement of these awards has been stayed by
the District Court pending resolution of our appeal of the underlying June 2009 contempt order. On February 8,
2010, we and Tivo submitted a stipulation to the District Court that the attorneys’ fees and costs, including expert
witness fees and costs, that Tivo incurred during the contempt proceedings amounted to $6 million.
In light of the District Court’s finding of contempt, and its description of the manner in which it believes our original
alternative technology infringed the ‘389 patent, we are also developing and testing potential new alternative
technology in an engineering environment. As part of our development process, we downloaded several of our design-
around options to less than 1,000 subscribers for “beta” testing. On March 11, 2010, we requested that the District
Court approve the implementation of one of our design-around options on an expedited basis. There can be no
assurance that the District Court will approve this request.
Oral argument on our appeal of the contempt ruling took place on November 2, 2009, before a three-judge panel of
the Federal Circuit Court of Appeals. On March 4, 2010, the Federal Circuit affirmed the District Court’s contempt
order in a 2-1 decision. On May 14, 2010, our petition for en banc review of that decision by the full Federal Circuit
was granted and the opinion of the three-judge panel was vacated. Oral argument occurred on November 9, 2010.
There can be no assurance that the full Federal Circuit will reverse the decision of the three-judge panel. Tivo has
stated that it will seek additional damages for the period from June 2009 to the present.
On October 6, 2010, the Patent and Trademark Office (the “PTO”) issued an office action confirming the validity of
certain of the software claims of United States Patent No. 6,233,389 (the ‘389 patent). However, the PTO only
confirmed the validity of the ‘389 patent after Tivo made statements that we believe narrow the scope of its claims.
The claims that were confirmed thus should not have the same scope as the claims that we were found to have
infringed and which underlie the contempt ruling that we are now appealing. Therefore, we believe that the PTO’s
conclusions are relevant to the issues on appeal. The PTO’s conclusions support our position that our original
alternative technology does not infringe and that we acted in good faith to design around Tivo’s patent.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful
in developing and deploying potential new alternative technology and we are unable to reach a license agreement with
Tivo on reasonable terms, we may be required to cease distribution of digital set-top boxes with DVR functionality. In
that event, our sales of digital set-top boxes to DISH Network and others would likely significantly decrease and could
even potentially cease for a period of time. Furthermore, the inability to offer DVR functionality would place us at a
significant disadvantage to our competitors and make it even more difficult for us to penetrate new markets for digital
36
set-top boxes. The adverse effect on our financial position and results of operations if the District Court’s contempt
order is upheld would be significant.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in
defending against any subsequent claim in a new action that our original alternative technology or any potential new
alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs. In that event, we would
be at a significant disadvantage to our competitors who could continue offering DVR functionality and the adverse
effect on our business would be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District Court. DISH Network
has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for
substantially all liability arising from this lawsuit. We contributed an amount equal to our $5 million intellectual
property liability limit under the Receiver Agreement, and during 2009, we recorded a charge included in “General and
administrative expenses – DISH Network” on our Consolidated Statements of Operations and Comprehensive Income
(Loss) for this amount to reflect this contribution. We and DISH Network have further agreed that our $5 million
contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise
under the Receiver Agreement. We and DISH Network also agreed that we would each be entitled to joint ownership
of, and a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is unable
to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these damages
and sanctions not paid by DISH Network. Any amounts that DISH Network may be required to pay could impair its
ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at a
time and in circumstances in which we would normally not raise capital and there can be no assurance that such
capital would be available on terms that would be attractive to us or at all. Therefore, any capital we raise may be
on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and
might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and
initiatives.
Vigilos, LLC
On February 23, 2011, Vigilos, LLC filed a complaint against us, Sling Media, Inc., and EchoStar Technologies
L.L.C., two of our subsidiaries, and Monsoon Multimedia, Inc. in the United States District Court for the Eastern
District of Texas alleging infringement of United States Patent No. 6,839,731, which is entitled “System and
Method for Providing Data Communication in a Device Network.” As of the date of the filing of this Form 10-K,
we have not yet been served with this complaint.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the
asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain features that we currently offer to consumers. We cannot predict
with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
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.
37
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters
Market Information. Our Class A common stock is quoted on the Nasdaq Global Select Market under the symbol
“SATS.” The high and low closing sale prices of our Class A common stock during 2010 and 2009 on the Nasdaq
Global Select Market (as reported by Nasdaq) are set forth below.
2010
First Quarter....................................
Second Quarter...............................
Third Quarter..................................
Fourth Quarter................................
High
Low
$
20.71
21.53
20.33
24.97
$
18.68
18.05
18.44
18.77
2009
First Quarter....................................
Second Quarter...............................
Third Quarter..................................
Fourth Quarter................................
High
Low
$
16.64
17.46
19.77
20.94
$
13.13
14.54
14.66
17.85
As of February 14, 2011, there were approximately 11,011 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 14, 2011, 28,786,634 of the 47,687,039 outstanding shares of our Class B common stock were held by
Charles W. Ergen, our Chairman, and the remaining 18,900,405 were held in a trust for members of Mr. Ergen’s
family. There is currently no trading market for our Class B common stock.
Dividends. 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 although we expect to
repurchase shares of our common stock from time to time. See further discussion under “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in
this Annual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans. See “Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” in this Annual Report on Form 10-K.
38
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information regarding repurchases of our Class A common stock from October 1, 2010
through December 31, 2010.
Period
Total
Number of
Shares
Purchased
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
(In thousands, except per share data)
Maximum Approximate
Dollar Value of Shares
that May Yet be
Purchased Under the
Plans or Programs (1)
Average
Price Paid
per Share
October 1 - October 31, 2010............................
November 1 - November 2, 2010......................
November 3, 2010 - November 30, 2010..........
December 1 - December 31, 2010.....................
Total..................................................................
-
-
-
-
-
-
$
$
-
-
$
$
-
$
-
-
-
-
-
-
$
$
$
$
$
499,395
499,395
500,000
500,000
500,000
(1) Our Board of Directors previously authorized stock repurchases of up to $500 million of our Class A
common stock. On November 3, 2010, our Board of Directors extended the plan and authorized an increase
in the maximum dollar value of shares that may be repurchased under the plan, such that we are currently
authorized to repurchase up to $500 million of our outstanding shares of Class A common stock through and
including December 31, 2011. 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.
Item 6.
SELECTED FINANCIAL DATA
The accompanying consolidated financial statements for 2010 have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”). Certain prior period amounts have been reclassified to
conform to the current period presentation.
Within this report, we have included both “combined” financial statements prior to the Spin-off and “consolidated”
financial statements following the Spin-off, as discussed below. Throughout the remainder of this report, we refer to
both as “consolidated.”
After Spin-off - Principles of Consolidation. The financial statements in this Annual Report on Form 10-K for the
periods presented after the Spin-off are presented on a consolidated basis and represent the “Digital Set-Top Box”
business, satellites, digital broadcast operations assets, certain real estate and other net assets contributed to us as
part of the Spin-off. We consolidate all majority owned subsidiaries, investments in entities in which we have
controlling influence and variable interest entities where we have been determined to be the primary beneficiary.
Non-majority owned investments are accounted for using the equity method when we have the ability to
significantly influence the operating decisions of the investee. When we do not have the ability to significantly
influence the operating decisions of an investee, the cost method is used. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to
the current year presentation.
Prior to Spin-off - Principles of Combination. The selected financial data in this Annual Report on Form 10-K for
the periods presented prior to the Spin-off are presented on a combined basis and principally represent the “Digital
Set-Top Box” business and certain other net assets. The assets and liabilities presented have been reflected on a
historical basis, as prior to the Spin-off such assets and liabilities were 100% owned by DISH Network. Our
historical selected financial data does not include the satellites, digital broadcast operations assets, certain real estate
and other assets and related liabilities that were contributed to us by DISH Network in the Spin-off. Also, the
selected financial data for the periods presented prior to the Spin-off does not include all of the actual expenses that
would have been incurred had we been a stand-alone entity during the periods presented and do not reflect our
39
combined results of operations, financial position and cash flows had we been a stand-alone company during the
periods presented. All significant intercompany transactions and accounts have been eliminated.
This data should be read in conjunction with our Consolidated Financial Statements and related Notes thereto for the
three years ended December 31, 2010, and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included elsewhere in this report.
The following tables present selected information relating to our consolidated financial condition and results of
operations for the past five years.
For the Years Ended December 31,
Statements of Operations Data:
2010
Revenue................................................................................
Total costs and expenses .....................................................
Operating income (loss) .......................................................
$
2,350,369
2,208,044
142,325
$
$
2007
2008
2009
(In thousands, except per share amounts)
1,544,065
2,150,520
1,903,559
1,630,444
2,791,114
1,898,667
(86,379)
(640,594)
4,892
$
$
$
$
$
2006
$
1,525,320
1,562,767
(37,447)
$
Net income (loss) ................................................................
$
204,358
$
364,704
$
(958,188)
$
(85,300)
$
(34,162)
Basic and diluted net income (loss) .....................................
Basic weighted-average common shares outstanding...........
Diluted weighted-average common shares outstanding........
Basic net income (loss) per share .........................................
Diluted net income (loss) per share .....................................
$
204,358
85,084
85,203
2.40
2.40
$
$
$
364,704
85,765
86,059
4.25
4.24
$
$
$
(958,188)
89,324
89,324
(10.73)
(10.73)
$
$
$
(85,300)
89,712
89,712
(0.95)
(0.95)
$
$
(1)
(1)
(1) For all periods prior to the completion of the Spin-off on January 1, 2008, basic and diluted earnings per share are computed
using our shares outstanding as of January 1, 2008.
$
(34,162)
89,712
89,712
(0.38)
(0.38)
$
$
(1)
(1)
As of December 31,
2008
(In thousands)
$
828,661
$
2,889,799
Balance Sheet Data:
2010
2009
2007
2006
Cash, cash equivalents and current marketable securities........
Total assets..............................................................................
Capital lease obligations, mortgages and
other notes payable, including current portion....................
Total stockholders' equity (deficit)..........................................
Cash Flow Data:
$
$
1,130,900
3,842,020
$
$
829,162
3,468,068
$
$
532,267
1,260,910
$
$
323,576
517,821
$
$
412,885
3,013,190
$
$
446,369
2,664,850
$
$
346,439
2,211,586
$
$
3,709
1,207,518
$
-
$
502,283
For the Years Ended December 31,
2010
2009
2008
(In thousands)
2007
2006
Net cash flows from:
Operating activities ...........................................................
Investing activities ............................................................
Financing activities ...........................................................
$
$
$
404,015
(238,558)
(46,973)
$
$
$
196,276
(114,278)
(83,135)
$
$
$
118,048
(569,742)
435,079
$
$
$
(88,109)
(500,767)
600,337
$
$
$
(36,374)
(54,781)
104,534
40
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together
with the audited consolidated financial statements and notes to the financial statements included elsewhere in this
annual report. This management’s discussion and analysis is intended to help provide an understanding of our
financial condition, changes in financial condition and results of our operations and contains forward-looking
statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather
are based on current expectations, estimates, assumptions and projections about our industry, business and future
financial results. Our actual results could differ materially from the results contemplated by these forward-looking
statements due to a number of factors, including those discussed in this report, including under the caption “Item
1A. Risk Factors” in this Annual Report on Form 10-K.
EXECUTIVE SUMMARY
EchoStar Corporation is a holding company, whose subsidiaries operate two primary business units: the “Digital
Set-Top Box” business and the “Satellite Services” business.
“Digital Set-Top Box” Business
Our “Digital Set-Top Box” business designs, develops and distributes digital set-top boxes and related products and
technology, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers,
telecommunication and cable companies and, with respect to Slingboxes, directly to consumers via retail outlets.
Slingbox “placeshifting” technology allows consumers to watch and control their home digital video and audio
content anywhere in the world via a broadband Internet connection. Most of our digital set-top boxes are sold to
DISH Network, but we also sell a significant number of digital set-top boxes to Bell TV in Canada, Dish Mexico
and other international customers.
Our “Digital Set-Top Box” business also provides digital broadcast operations including satellite
uplinking/downlinking, transmission services, signal processing, conditional access management and other services
provided primarily to DISH Network.
We believe opportunities exist to expand our business by selling equipment and services in both the United States
and international markets. As a result of our extensive experience with digital set-top boxes and digital broadcast
operations, we are able to provide end-to-end pay-TV delivery systems incorporating our satellite and backhaul
capacity, customized digital set-top boxes and related components, and network design and management.
Dependence on DISH Network. We depend on DISH Network for a substantial portion of the revenue for our
“Digital Set-Top Box” business and we expect that for the foreseeable future DISH Network will continue to be the
primary source of revenue for each of our businesses. Therefore, our results of operations are, and will for the
foreseeable future be, closely linked to the performance of DISH Network’s satellite pay-TV business. In addition,
while we expect to sell equipment to other customers, the number of potential new customers for our “Digital Set-
Top Box” business is small and may be limited by our common ownership and related management with DISH
Network, and our current customer concentration is likely to continue for the foreseeable future.
As disclosed by DISH Network in its Annual Report on Form 10-K for the year ended December 31, 2010, DISH
Network had higher than normal inventory levels of digital set-top boxes and related components at December 31,
2010 and also experienced fewer gross subscriber additions during 2010. As a result of such higher than normal
inventory levels, it is possible that DISH Network will purchase fewer digital set-top boxes and related components
from us than it has purchased during the year ended December 31, 2010. This decrease could have a material
adverse effect on our results of operations. In addition, to the extent that DISH Network subscriber growth
decreases, sales of our digital set-top boxes and related components to DISH Network may further decline, which in
turn could have a further material adverse effect on our financial position and results of operations.
The impact to us of any decreases in DISH Network subscriber growth may be offset in the near term by an increase
in sales to DISH Network resulting from the upgrade of DISH Network subscribers to advanced products such as
high definition (“HD”) receivers and HD digital video recorders (“DVRs”), as well as by the upgrade of DISH
Network digital set-top boxes to new technologies such as MPEG-4 digital compression technology or Slingbox
placeshifting technology. However, there can be no assurance that any of these factors will mitigate any decreases
41
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
in subscriber growth at DISH Network. In addition, although we expect DISH Network to continue to purchase
products and services from us, there can be no assurance that these purchases will continue in the future.
We may experience significant pressure on margins we earn on the sale of digital set-top boxes and other equipment,
including on sales to DISH Network. This pressure may be due to economic conditions, advancements in the
technology and functionality of digital set-top boxes and other equipment. The margins we earn on sales are
determined largely through periodic negotiations that could result in pricing reflecting, among other things, the
digital set-top boxes and other equipment that best meet our customers’ current sales and marketing priorities, the
product and service alternatives available from other equipment suppliers, and our ability to respond to customer
requirements and to differentiate ourselves from other equipment suppliers on bases other than pricing.
Our future success may also depend on the extent to which prospective customers that have been competitors of
DISH Network are willing to purchase products and services from us. Many of these customers may continue to
view us as a competitor as a result of common ownership and related management with DISH Network. If we do
not develop relationships with new customers, we may not be able to expand our customer base and our ability to
increase or maintain our revenue will be impacted.
Additional Challenges for our “Digital Set-Top Box” Business. We believe that our best opportunities for
developing potential new customers for our “Digital Set-Top Box” business over the near term lie in international
markets, and we therefore expect our performance in international markets to be a significant factor in determining
whether we will be able to generate revenue and income growth in future periods. However, there can be no
assurance that we will be able to sustain or grow our international business. In particular, we have noticed an
increase in new market entrants, primarily located in Asia, that offer low cost set-top boxes, including set-top boxes
that are modeled after our products or products of our principal competitors. The entry of these new competitors
may result in pricing pressure in international markets that we hope to enter. If market prices in international
markets are substantially reduced by such new entrants, it may be difficult for us to make profitable sales in
international markets.
Furthermore, if we do not continue to distinguish our products through distinctive, technologically advanced
features and design, as well as continue to build and strengthen our brand recognition, our business could be harmed
as we may not be able to effectively compete on price alone in both domestic and international markets against low
cost competitors that are principally located in Asia. Our ability to compete in the digital set-top box industry will
also depend heavily on our ability to successfully bring advanced technologies, including delivery of 3D TV video
content and Internet delivery of video content, to market to keep pace with our competitors. If we do not otherwise
compete effectively, demand for our products could decline, our gross margins could decrease, we could lose market
share, our revenues and earnings may decline and our growth prospects would be diminished.
Sustained economic weakness and volatile credit markets may cause certain suppliers that we rely on to cease
operations, which, in turn, may cause us to suffer disruptions to our supply chain or incur higher production costs.
Our ability to sustain or increase profitability will also depend in large part on our ability to control or reduce our
costs of producing digital set-top boxes. The market for our digital set-top boxes, like other electronic products, has
been characterized by regular reductions in selling prices and production costs. Therefore, we will likely be required
to reduce production costs to maintain the margins we earn on digital set-top boxes and the profitability of our
“Digital Set-Top Box” business. However, our ability to reduce production costs may be limited by, among other
things, economic conditions and a shortage of available parts and may lead to inflated pricing.
“Satellite Services” Business
Our satellite services segment uses our ten owned and leased in-orbit satellites and related FCC licenses to lease
capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, U.S.
government service providers, state agencies, Internet service providers, broadcast news organizations, programmers
and private enterprise customers. We also use certain of our satellites to offer our ViP-TV service, which transports
MPEG-4 IP encapsulated standard-definition and high-definition programming on behalf of telecommunications
companies and rural cable operators. Furthermore, we continue to pursue expanding our business offerings by
providing value added services such as telemetry, tracking and control services to third parties. However, there can
42
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
be no assurance that we will be able to effectively compete against our competitors due to their significant resources
and operating history.
Dependence on DISH Network. We depend on DISH Network for a substantial portion of the revenue for our
“Satellite Services” business. Therefore, our results of operations are and will for the foreseeable future be closely
linked to the performance of DISH Network’s satellite pay-TV business.
While we expect to continue to provide satellite services to DISH Network for the foreseeable future, its satellite
capacity requirements may change for a variety of reasons, including the launch of its own additional satellites. Any
termination or reduction in the services we provide to DISH Network would increase excess capacity on our
satellites and require that we aggressively pursue alternative sources of revenue for this business. Possible adverse
effects on the “Digital Set-Top Box” business from DISH Network’s higher than normal inventory balance of digital
set-top boxes and related components and fewer gross subscriber additions, as disclosed in its Annual Report on
Form 10-K for the year ended December 31, 2010, are not expected to materially impact the revenue generated
within the “Satellite Services” segment in the near term.
During September 2009, we entered into a ten-year satellite service agreement with DISH Network for capacity on
the Nimiq 5 satellite. Pursuant to this agreement, DISH Network will receive service from us on all 32 of the DBS
transponders covered by our satellite service agreement with Telesat. DISH Network is currently receiving service
on 23 of these DBS transponders and will receive service on the remaining nine DBS transponders over a phase-in
period that will be completed in 2012.
During 2008, we entered into a ten-year satellite service agreement with DISH Network for capacity on the
QuetzSat-1 satellite. QuetzSat-1 is expected to be launched in the second half of 2011 and will operate at the 77
degree orbital location. Pursuant to this agreement, DISH Network will receive service from us on 24 of the 32
DBS transponders covered by our satellite service agreement with SES Latin America S.A. (“SES”).
In addition, because the number of potential new customers for our “Satellite Services” business is small and may be
limited by our relationship with DISH Network, our current customer concentration is likely to continue for the
foreseeable future. Our future success may also depend on the extent to which prospective customers that have been
competitors of DISH Network are willing to purchase services from us. Many of these customers may continue to
view us as a competitor given the common ownership and management team we continue to share with DISH
Network.
Additional Challenges for our “Satellite Services” Business. Our ability to expand revenues in the “Satellite
Services” business will likely require that we displace incumbent suppliers that generally have well established
business models and often benefit from long-term contracts with their customers. As a result, to grow our “Satellite
Services” business we may need to develop or otherwise acquire access to new satellite-delivered services so that we
may offer differentiated services to prospective customers. However, there can be no assurance that we would be
able to develop or otherwise acquire access to such differentiated services or develop the sales and marketing
expertise necessary to sell such services profitably.
In addition, as our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring,
leasing or constructing additional satellites, with or without customer commitments for capacity, which may require
us to seek additional financing. However, there can be no assurance that such financing will be available to fund
any such replacement alternatives on terms that would be attractive to us or at all.
International DTH Platforms
During 2008, we entered into a joint venture for a DTH satellite service in Mexico known as Dish Mexico, S. de
R.L. de C.V. (“Dish Mexico”). Pursuant to these arrangements, we provide certain broadcast services and satellite
capacity and sell hardware such as digital set-top boxes and related equipment to Dish Mexico. Subject to a number
of conditions, we committed to provide $112 million of value over an initial ten year period in the form of cash,
equipment and services, which was satisfied as of December 31, 2010. Additionally, we sold $81 million of digital
set-top boxes and related accessories and $9 million of satellite services to Dish Mexico during the year ended
43
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
December 31, 2010, respectively, which were not related to the original contribution commitment associated with
our investment in Dish Mexico.
During December 2009, we entered into a joint venture to provide a DTH satellite service in Taiwan and certain
other targeted regions in Asia. We own 50% and have joint control of the joint venture. Pursuant to these
arrangements, we sell hardware such as digital set-top boxes and provide certain technical support services to the
joint venture. We have provided $18 million of cash to the joint venture, and an $18 million line of credit that the
joint venture may only use to purchase set-top boxes from us. This investment is subject to an evaluation for other-
than-temporary impairment on a quarterly basis. This quarterly evaluation consists of reviewing, among other things,
company business plans and current financial statements, if available, for factors that may indicate an impairment of
our investment. During the year ended December 31, 2010, we recorded a $14 million charge to fully impair this
investment, which is included in “Unrealized and realized gains (losses) on marketable investment securities and
other investments” on our Consolidated Statements of Operations and Comprehensive Income (Loss). As of
December 31, 2010, the remaining amount available under the line of credit is $10 million and if advanced would be
subject to our evaluation for other-than-temporary impairment.
New Business Opportunities
We are exploring opportunities 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. On
December 31, 2010, we acquired certain assets of Move Networks, Inc. (“Move Networks”) for $45 million.
On February 13, 2011, we and certain of our subsidiaries, including EchoStar Satellite Services L.L.C., (“ESS”)
entered into an agreement and plan of merger (the “Hughes Agreement”) with Hughes, whereby we will acquire all
of the outstanding equity of Hughes and its subsidiaries, including its main operating subsidiary, Hughes Network
Systems, LLC (“HNS”) (the “Hughes Merger”). Pursuant to the Hughes Agreement, each issued and outstanding
share of common stock of Hughes (other than common stock with respect to which appraisal rights have been
exercised) will be converted into the right to receive $60.70 in cash. The Hughes Agreement also contemplates the
repayment of all of the outstanding debt of Hughes and HNS (including the 9½% Senior Notes due 2014 issued by
HNS), except that the $115 million loan facility guaranteed by COFACE, the French Export Credit Agency, will
continue to remain outstanding following the Merger if certain consents are obtained. As a result, the Hughes
Merger is valued at approximately $2.0 billion, including the Hughes debt expected to be refinanced. The Hughes
Merger is expected to close later this year, subject to certain closing conditions, including among others, certain
government regulatory approvals, such as approval by the FCC and the Federal Trade Commission. The Hughes
Agreement contains certain termination rights for both Hughes and us.
In order to finance the Hughes Merger, we and ESS obtained an aggregate financing commitment of $1.0 billion in
senior secured bridge financing and $800 million in senior unsecured bridge financing, in each case from Deutsche
Bank AG Cayman Islands Branch (collectively, the “Bridge Commitment”). Deutsche Bank’s obligations under the
Bridge Commitment are subject to a number of conditions, including that the conditions to closing under the Hughes
Agreement have been met (subject to certain exceptions); that we have a minimum amount of cash on hand at the
closing; that we have provided certain financial statements and other information relating to us and Hughes in specified
time periods; and that our aggregate indebtedness not exceed specified levels. There is no assurance that we will be
able to satisfy these conditions. The initial term of the Bridge Commitment is six months. We have the option to
extend the term of the Bridge Commitment to nine months so long as we have delivered certain required information,
including certain financial statements, and have complied with our obligations to issue debt securities in lieu of
borrowing under the Bridge Commitment. Subject to certain exceptions, we do not have the ability to terminate the
Hughes Agreement until nine months after the date the Hughes Agreement was executed. Accordingly, there is no
assurance that the Bridge Commitment will remain in effect for the duration of our obligations under the Hughes
Agreement. We do not have the ability to terminate the Hughes Agreement if we are unable to obtain sufficient funds
to satisfy our obligations under the Hughes Agreement. If the funding under the Bridge Commitment were to become
unavailable for any reason, there is no assurance that we will be able to obtain sufficient funds to satisfy our obligations
under the Hughes Agreement.
44
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Adverse Economic Conditions
Our ability to grow or maintain our business may be adversely affected by weak global and domestic economic
conditions, including wavering consumer confidence and constraints on discretionary purchasing, unemployment,
tight credit markets, declines in global and domestic stock markets, falling home prices and other factors that may
adversely affect the markets in which we operate. Our ability to increase our income or to generate additional
revenues will depend in part on our ability to organically grow our business, identify and successfully exploit
opportunities to acquire other businesses or technologies, and enter into strategic partnerships. These activities may
require significant additional capital that may not be available on terms that would be attractive to us or at all. In
particular, volatile credit markets, which have significantly impacted the availability and cost of financing,
specifically in the leveraged finance markets, may significantly constrain our ability to obtain financing to support
our growth initiatives. These developments in the credit markets may increase our cost of financing and impair our
liquidity position. In addition, these developments may cause us to defer or abandon business strategies and
transactions that we would otherwise pursue if financing were available on acceptable terms.
Furthermore, unfavorable events in the economy, including deterioration in the credit and equity markets could
cause consumer demand for pay-TV services and consequently sales of our digital set-top boxes to DISH Network,
Bell TV, Dish Mexico and other international customers to decline materially because consumers may delay
purchasing decisions or reduce or reallocate their discretionary spending.
Future Capital Sources
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated
through operations, to fund our investment needs. Since we depend on DISH Network for a substantial portion of our
revenue, our cash flow from operations depends heavily on their needs for equipment and services. As disclosed by
DISH Network in its Annual Report on Form 10-K for the year ended December 31, 2010, DISH Network had
higher than normal inventory levels of digital set-top boxes and related components at December 31, 2010 and also
experienced fewer gross subscriber additions during 2010. While we expect that DISH Network will continue to
purchase digital set-top boxes and related components from us, DISH Network’s higher than normal inventory
levels, could result in fewer purchases of digital set-top boxes and related components from us than it has purchased
during the year ended December 31, 2010. A significant decline in DISH Network’s purchases from us could have a
material adverse effect on our results of operations. To the extent that DISH Network experiences a net loss of
subscribers, sales of our digital set-top boxes and related components to DISH Network may further decline, which
in turn could have a further material adverse effect on our financial position and results of operations. As a result,
there can be no assurances that we will always have positive cash flows from operations and should our cash flows turn
negative, our existing cash and marketable investment securities balances may be reduced.
In addition, if we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are
not successful in developing and deploying potential new alternative technology and we are unable to reach a license
agreement with Tivo on reasonable terms, we may be required to cease distribution of digital set-top boxes with
DVR functionality. In that event, our sales of digital set-top boxes to DISH Network and others would likely
significantly decrease and could even potentially cease for a period of time. Furthermore, the inability to offer DVR
functionality would place us at a significant disadvantage to our competitors and make it even more difficult for us
to penetrate new markets for digital set-top boxes. The adverse effect on our financial position and results of
operations if the District Court’s contempt order is upheld would be significant.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in
defending against any subsequent claim in a new action that our original alternative technology or any potential new
alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs. In that event, we
would be at a significant disadvantage to our competitors who could continue offering DVR functionality and the
adverse effect on our business would be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District Court. DISH Network
has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for
substantially all liability arising from this lawsuit. We contributed an amount equal to our $5 million intellectual
45
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
property liability limit under the Receiver Agreement, and during 2009, we recorded a charge included in “General and
administrative expenses – DISH Network” on our Consolidated Statements of Operations and Comprehensive Income
(Loss) for this amount to reflect this contribution. We and DISH Network have further agreed that our $5 million
contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise
under the Receiver Agreement. We and DISH Network also agreed that we would each be entitled to joint ownership
of, and a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is
unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these
damages and sanctions not paid by DISH Network. Any amounts that DISH Network may be required to pay could
impair its ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at a
time and in circumstances in which we would normally not raise capital and there can be no assurance that such
capital would be available on terms that would be attractive to us or at all. Therefore, any capital we raise may be
on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and
might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and
initiatives.
Other Risks
Our profitability is affected by our noncurrent marketable investment securities portfolio as of December 31, 2010
of $726 million, of which $613 million was accounted for at fair value and represented our investments in TerreStar
Corporation and TerreStar Networks. The fluctuations in fair value of these investments are recorded in “Unrealized
gains (losses) on investments accounted for at fair value, net” on our Consolidated Statements of Operations and
Comprehensive Income (Loss) and directly impact our profitability. For the years ended December 31, 2010, 2009
and 2008, we recorded a $144 million gain, a $313 million gain and a $318 million loss on these investments,
respectively. Our investments in TerreStar Corporation and TerreStar Networks are highly speculative and have
experienced and continue to experience significant volatility. The investments in TerreStar Networks are
determined using Level 3 inputs under the fair value hierarchy. In estimating those fair values, we consider quotes
from brokers and other pricing services, if available, and obtain both observable and unobservable inputs in our
valuation models, which include the use of option pricing and discounted cash flow techniques. The fair value of
these investments can be significantly impacted by adverse changes in securities markets generally, as well as risks
related to the performance of TerreStar Corporation and TerreStar Networks, their ability to obtain sufficient capital
to execute their business plans, risks associated with their specific industries, bankruptcy and other factors. See
Note 4 under “Investments in TerreStar” in the Notes to the Consolidated Financial Statements for further
discussion.
Our profitability is also affected by costs associated with our efforts to expand our sales, marketing, product
development and general and administrative capabilities in all of our businesses. As we expand internationally, we
may also incur additional costs to conform our digital set-top boxes to comply with local laws or local specifications
and to ship our digital set-top boxes to our international customers.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Equipment revenue – DISH Network. “Equipment revenue – DISH Network” primarily includes sales of digital
set-top boxes and related components to DISH Network, including Slingboxes and related hardware products.
Equipment revenue – other. “Equipment revenue – other” primarily includes sales of digital set-top boxes and
related components to Bell TV, Dish Mexico and other international and domestic customers, including sales of
Slingboxes and related hardware products.
46
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Services and other revenue – DISH Network. “Services and other revenue – DISH Network” primarily includes
revenue associated with satellite and transponder leasing, satellite uplinking/downlinking, signal processing,
conditional access management, telemetry, tracking and control, professional services, facilities rental revenue and
other services provided to DISH Network.
Services and other revenue – other. “Services and other revenue – other” primarily includes revenue associated
with satellite and transponder leasing, satellite uplinking/downlinking and other services provided to customers
other than DISH Network.
Cost of sales – equipment. “Cost of sales – equipment” principally includes costs associated with digital set-top
boxes and related components sold to DISH Network, Bell TV, Dish Mexico and other international and domestic
customers, including costs associated with Slingboxes and related hardware products.
Cost of sales - services and other. “Cost of sales - services and other” principally includes costs associated with
satellite and transponder leasing, satellite uplinking/downlinking, signal processing, conditional access management,
telemetry, tracking and control, professional services, facilities rental revenue, and other services.
Research and development expenses. “Research and development expenses” consist primarily of costs associated
with the design and development of our digital set-top boxes, Slingboxes and related components, including among
other things, salaries and consulting fees.
Selling, general and administrative expenses. “Selling, general and administrative expenses” consists primarily of
selling and marketing costs and employee-related costs associated with administrative services (i.e., information
systems, human resources and other services), including non-cash, stock-based compensation expense. It also
includes professional fees (i.e., legal, information systems and accounting services) and other items associated with
facilities and administrative services provided by DISH Network and other third parties.
Impairments of goodwill, indefinite-lived and long-lived assets. “Impairments of goodwill, indefinite-lived and
long-lived assets” consists primarily of impairments of goodwill, FCC authorizations and satellites.
Interest income. “Interest income” consists primarily of interest earned on our cash, cash equivalents and
marketable investment securities, including accretion on debt securities.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” primarily includes
interest expense associated with our capital lease obligations.
Unrealized and realized gains (losses) on marketable investment securities and other investments. “Unrealized
and realized gains (losses) on marketable investment securities and other investments” consists primarily of gains
and losses realized on the sale or exchange of investments and “other-than-temporary” impairments of marketable
and other investment securities.
Unrealized gains (losses) on investments accounted for at fair value, net. “Unrealized gains (losses) on
investments accounted for at fair value, net” consists of unrealized gains and losses from changes in fair value of
marketable and other strategic investments accounted for at fair value.
Other, net. The primary component of “Other, net” is equity in earnings and losses of our affiliates.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as “Net income
(loss)” plus “Interest expense, net of amounts capitalized” net of “Interest income,” “Income taxes” and
“Depreciation and amortization.” This “non-GAAP measure” is reconciled to “Net income (loss)” in our discussion
of “Results of Operations” below.
47
25.1
14.9
25.5
21.3
23.5
22.6
16.4
4.7
2.4
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
RESULTS OF OPERATIONS
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009.
Statements of Operations Data
For the Years Ended
December 31,
2010
2009
(In thousands)
Variance
Amount
%
Revenue:
Equipment revenue - DISH Network..................................................
Equipment revenue - other..................................................................
Services and other revenue - DISH Network......................................
Services and other revenue - other......................................................
Total revenue...............................................................................
$
1,470,173
347,765
468,399
64,032
2,350,369
$
1,174,763
302,787
373,226
52,783
1,903,559
$
295,410
44,978
95,173
11,249
446,810
Costs and Expenses:
Cost of sales - equipment....................................................................
% of Total equipment revenue................................................
Cost of sales - services and other........................................................
% of Total services and other revenue...................................
Research and development expenses..................................................
% of Total revenue...................................................................
Selling, general and administrative expenses.....................................
% of Total revenue...................................................................
Depreciation and amortization............................................................
Total costs and expenses.............................................................
1,553,129
85.4%
236,356
44.4%
46,093
2.0%
143,555
6.1%
228,911
2,208,044
1,267,172
85.8%
203,123
47.7%
44,009
2.3%
140,234
7.4%
244,129
1,898,667
285,957
33,233
2,084
3,321
(15,218)
309,377
(6.2)
16.3
Operating income (loss)......................................................................
142,325
4,892
137,433
NM
Other Income (Expense):
Interest income...................................................................................
Interest expense, net of amounts capitalized.......................................
Unrealized and realized gains (losses) on marketable
investment securities and other investments..................................
Unrealized gains (losses) on investments
accounted for at fair value, net......................................................
Other, net............................................................................................
Total other income (expense)......................................................
Income (loss) before income taxes.....................................................
Income tax (provision) benefit, net.....................................................
Effective tax rate........................................................................
Net income (loss)................................................................................
$
14,472
(14,560)
26,441
(32,315)
(11,969)
17,755
(45.3)
54.9
2,923
119,461
(116,538)
(97.6)
144,473
(860)
146,448
288,773
(84,415)
29.2%
204,358
313,000
(6,120)
420,467
425,359
(60,655)
14.3%
364,704
$
(168,527)
5,260
(274,019)
(136,586)
(23,760)
(53.8)
85.9
(65.2)
(32.1)
(39.2)
$
(160,346)
(44.0)
Other Data:
EBITDA.............................................................................................
$
517,772
$
675,362
$
(157,590)
(23.3)
48
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Equipment revenue – DISH Network. “Equipment revenue – DISH Network” totaled $1.470 billion during the
year ended December 31, 2010, an increase of $295 million or 25.1% compared to the same period in 2009. This
change related primarily to an increase in unit sales of set-top boxes, partially offset by a decline in average revenue
per unit. The decline in average revenue per unit was driven by continued manufacturing efficiencies and a change
to one of our component vendor contracts, which reduced our set-top box costs. Pursuant to the receiver agreement,
set-top boxes are sold to DISH Network at cost plus a fixed margin resulting in a decline in revenue per unit when
lower set-top box costs are incurred.
Currently, we expect DISH Network to remain the primary customer of our “Digital Set-Top Box” business and the
primary source of our total revenue. Pursuant to the commercial agreements we entered into with DISH Network,
we are obligated to sell digital set-top boxes to DISH Network until January 1, 2012, although DISH Network has
no obligation to purchase digital set-top boxes from us during or after this period. As disclosed by DISH Network in
its Annual Report on Form 10-K for the year ended December 31, 2010, DISH Network had higher than normal
inventory levels of digital set-top boxes and related components at December 31, 2010 and also experienced fewer
gross subscriber additions during 2010. While we expect that DISH Network will continue to purchase digital set-
top boxes and related components from us, DISH Network’s higher than normal inventory levels, could result in
fewer purchases of digital set-top boxes and related components from us than it has purchased during the year ended
December 31, 2010. A significant decline in DISH Network’s purchases from us could have a material adverse
effect on our results of operations. To the extent that DISH Network experiences a net loss of subscribers, sales of
our digital set-top boxes and related components to DISH Network may further decline, which in turn could have a
further material adverse effect on our financial position and results of operations.
Equipment revenue – other. “Equipment revenue – other” totaled $348 million during the year ended December
31, 2010, an increase of $45 million or 14.9% compared to the same period in 2009. This change resulted primarily
from an increase in sales to Dish Mexico, which was in addition to the original contribution commitment associated
with our investment in Dish Mexico.
Services and other revenue – DISH Network. “Services and other revenue – DISH Network” totaled $468 million
during the year ended December 31, 2010, an increase of $95 million or 25.5% compared to the same period in
2009. The change was driven by an increase in transponder leasing primarily related to the Nimiq 5 satellite, which
was placed into service in October 2009, the increase in monthly lease rates per transponder on certain satellites based
on the terms of our amended lease agreements and an increase in uplink services. This increase in uplink services was
primarily attributable to the launch of additional local channels and additional satellites being placed into service. See
Note 19 in the Notes to the Consolidated Financial Statements for further discussion.
Cost of sales – equipment. “Cost of sales – equipment” totaled $1.553 billion during the year ended December 31,
2010, an increase of $286 million or 22.6% compared to the same period in 2009. This change primarily resulted
from an increase in sales of digital set-top boxes and related components to DISH Network and Dish Mexico. “Cost
of sales – equipment” represented 85.4% and 85.8% of total equipment sales during the year ended December 31,
2010 and 2009, respectively.
Cost of sales – services and other. “Cost of sales – services and other” totaled $236 million during the year ended
December 31, 2010, an increase of $33 million or 16.4% compared to the same period in 2009. This change
primarily resulted from an increase in costs related to the EchoStar I satellite, which we began leasing from DISH
Network during the first quarter 2010, and costs related to the Nimiq 5 satellite, which was placed into service in
October 2009. “Cost of sales - services and other” represented 44.4% and 47.7% of total “Services and other
revenue” during the year ended December 31, 2010 and 2009, respectively. The improvement in this expense to
revenue ratio was primarily driven by an increase in transponder leasing revenue, discussed above. The majority of
our costs associated with transponder leasing are related to satellites which are included in “Depreciation and
amortization” expense.
49
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Depreciation and amortization. “Depreciation and amortization” expense totaled $229 million during the year ended
December 31, 2010, a $15 million or 6.2% decrease compared to the same period in 2009. The change in
“Depreciation and amortization” expense was primarily related to declines in depreciation expense related to satellites
that became fully depreciated in 2010, partially offset by depreciation expense associated with Nimiq 5, which was
placed into service in October 2009.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $15 million
during the year ended December 31, 2010, a decrease of $18 million or 54.9% compared to the same period in 2009.
This change primarily resulted from $26 million of interest which was capitalized into construction in progress
during 2010, including $7 million that related to interest expense that should have been capitalized in 2009. This
decrease was partially offset by an increase in interest expense related to our capital leases obligations.
Unrealized and realized gains (losses) on marketable investment securities and other investments. “Unrealized
and realized gains (losses) on marketable investment securities and other investments” totaled a net gain of $3
million during the year ended December 31, 2010, a $117 million decrease compared to the same period in 2009.
This change primarily resulted from an $87 million decrease in net gains on the sale of marketable investment
securities during 2010 compared to 2009 and an increase in impairment charges on our marketable and other
investment securities during 2010 compared to the same period in 2009.
Unrealized gains (losses) on investments accounted for at fair value, net. “Unrealized gains (losses) on
investments accounted for at fair value, net” totaled a net gain of $144 million during the year ended December 31,
2010, a $169 million decrease compared to the same period in 2009. This change is attributable to a decline in gains
related to investments accounted for under the fair value method. See Note 4 under “Investments in TerreStar” in
the Notes to the Consolidated Financial Statements for further discussion.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $518 million during the year ended
December 31, 2010, a decrease of $158 million compared to the same period in 2009. EBITDA for the year ended
December 31, 2010 was negatively impacted by a decrease in “Unrealized and realized gains (losses) on marketable
investment securities and other investments” and “Unrealized gains (losses) on investments accounted for at fair
value, net,” partially offset by an increase in “Operating income (loss).” The following table reconciles EBITDA to
the accompanying financial statements.
For the Years Ended
December 31,
2010
2009
(In thousands)
EBITDA..............................................
Interest expense, net .........................
Income tax (provision) benefit, net...
Depreciation and amortization..........
Net income (loss)................................
$
517,772
(88)
(84,415)
(228,911)
$
204,358
$
675,362
(5,874)
(60,655)
(244,129)
$
364,704
EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United
States, or GAAP, and should not be considered a substitute for operating income, net income or any other measure
determined in accordance with GAAP. Conceptually, EBITDA measures the amount of income generated each
period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. EBITDA
is used by our management as a measure of operating efficiency and overall financial performance for
benchmarking against our peers and competitors. Management believes EBITDA provides meaningful
supplemental information regarding liquidity and the underlying operating performance of our business.
Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts,
investors and other interested parties to evaluate companies in the digital set-top box industry.
50
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Income tax (provision) benefit, net. The income tax provision totaled $84 million during the year ended December
31, 2010, an increase of $24 million compared to the same period in 2009. This increase resulted primarily from an
increase in the effective tax rate, offset by the decrease in “Income (loss) before income taxes.” The effective tax
rate for 2009 was positively impacted by the change in our valuation allowances against certain deferred tax assets
that are capital in nature.
Net income (loss). Our net income was $204 million during the year ended December 31, 2010, a decrease of $160
million compared to the same period in 2009. This decrease was primarily attributable to the changes in revenue
and expenses discussed above.
51
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008.
Statements of Operations Data
For the Years Ended
December 31,
2009
2008
(In thousands)
Variance
Amount
%
Revenue:
Equipment revenue - DISH Network..................................................
Equipment revenue - other..................................................................
Services and other revenue - DISH Network......................................
Services and other revenue - other......................................................
Total revenue...............................................................................
$
1,174,763
302,787
373,226
52,783
1,903,559
$
1,491,556
246,655
367,890
44,419
2,150,520
$
(316,793)
56,132
5,336
8,364
(246,961)
(21.2)
22.8
1.5
18.8
(11.5)
Costs and Expenses:
Cost of sales - equipment....................................................................
% of Total equipment revenue.................................................
Cost of sales - services and other........................................................
% of Total services and other revenue....................................
Research and development expenses...................................................
% of Total revenue....................................................................
Selling, general and administrative expenses......................................
% of Total revenue....................................................................
Depreciation and amortization............................................................
Impairments of goodwill, indefinite-lived and long-lived assets.........
Total costs and expenses..............................................................
1,267,172
85.8%
203,123
47.7%
44,009
2.3%
140,234
7.4%
244,129
-
1,898,667
1,494,641
86.0%
220,817
53.6%
34,901
1.6%
163,813
7.6%
264,197
612,745
2,791,114
(227,469)
(15.2)
(17,694)
(8.0)
9,108
26.1
(23,579)
(14.4)
(20,068)
(612,745)
(892,447)
(7.6)
(100.0)
(32.0)
Operating income (loss)......................................................................
4,892
(640,594)
645,486
NM
Other Income (Expense):
Interest income....................................................................................
Interest expense, net of amounts capitalized.......................................
Unrealized and realized gains (losses) on marketable
investment securities and other investments...................................
Unrealized gains (losses) on investments
accounted for at fair value, net.......................................................
Other, net.............................................................................................
Total other income (expense).......................................................
26,441
(32,315)
34,694
(31,909)
(8,253)
(406)
(23.8)
(1.3)
119,461
(89,795)
209,256
313,000
(6,120)
420,467
(317,994)
(9,270)
(414,274)
630,994
3,150
834,741
Income (loss) before income taxes......................................................
Income tax (provision) benefit, net.....................................................
Effective tax rate........................................................................
Net income (loss)................................................................................
425,359
(60,655)
14.3%
364,704
(1,054,868)
96,680
9.2%
(958,188)
$
$
1,480,227
(157,335)
$
1,322,892
NM
NM
34.0
NM
NM
NM
NM
Other Data:
EBITDA..............................................................................................
$
675,362
$
(793,456)
$
1,468,818
NM
52
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Equipment revenue – DISH Network. “Equipment revenue – DISH Network” totaled $1.175 billion during the
year ended December 31, 2009, a decrease of $317 million or 21.2% compared to the same period in 2008. This
change related primarily to a decrease in unit sales of set-top boxes, a decline in average revenue per unit and, to a
lesser extent, a decrease in accessory sales. The decline in average revenue per unit was driven by continued
manufacturing efficiencies and a change to one of our component vendor contracts. This contract change reduced
our set-top box costs for 2009 and 2008, which resulted in a corresponding reduction in revenue of $40 million.
Pursuant to the receiver agreement, discussed below, set-top boxes are sold to DISH Network at cost plus a fixed
margin resulting in a decline in revenue per unit when lower set-top box costs are incurred.
Equipment revenue – other. “Equipment revenue – other” totaled $303 million during the year ended December
31, 2009, an increase of $56 million or 22.8% compared to the same period in 2008. This change resulted primarily
from sales of $36 million to Dish Mexico, and a $20 million increase in sales to Bell TV. Although the number of
units sold to Bell TV increased, the average revenue per unit to Bell TV decreased compared to the same period in
2008 due to a change in sales mix and as a result of the early 2009 amendment to our agreement with Bell TV,
discussed below. The sales to Dish Mexico were in addition to the original contribution commitment associated
with our investment in Dish Mexico.
Services and other revenue – DISH Network. “Services and other revenue – DISH Network” totaled $373 million
during the year ended December 31, 2009, an increase of $5 million or 1.5% compared to the same period in 2008.
The change was driven primarily by an increase in uplink services provided to DISH Network related to support for
new satellites and new services like HD programming, partially offset by a decrease in transponder leasing and other
services provided to DISH Network.
Services and other revenue – other. “Services and other revenue – other” totaled $53 million during the year ended
December 31, 2009, an increase of $8 million or 18.8% compared to the same period in 2008. The change was
driven primarily by an increase in transponder leasing provided to customers other than DISH Network.
Cost of sales – equipment. “Cost of sales – equipment” totaled $1.267 billion during the year ended December 31,
2009, a decrease of $227 million or 15.2% compared to the same period in 2008. This change primarily resulted
from a decrease in sales to DISH Network, partially offset by sales to Dish Mexico and an increase in sales to Bell
TV. “Cost of sales – equipment” represented 85.8% and 86.0% of total equipment sales during the year ended
December 31, 2009 and 2008, respectively.
Cost of sales – services and other. “Cost of sales – services and other” totaled $203 million during the year ended
December 31, 2009, a decrease of $18 million or 8.0% compared to the same period in 2008. This change primarily
resulted from a decrease in costs associated with fiber backhaul and a decline in other services provided to DISH
Network. “Cost of sales – services and other” represented 47.7% and 53.6% of total “Services and other revenue”
during the year ended December 31, 2009 and 2008, respectively. The improvement in this expense to revenue ratio
was primarily driven by an increase in transponder leasing and uplink services revenue with relatively low variable
costs.
Research and development expenses. “Research and development expenses” totaled $44 million during the year
ended December 31, 2009, an increase of $9 million or 26.1% compared to the same period in 2008. This increase
was related to the development of set-top box products for domestic and international cable, DTH and IPTV
customers, including the development and integration of Slingbox placeshifting technology into existing and future
products.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $140 million
during the year ended December 31, 2009, a decrease of $24 million or 14.4% compared to the same period in 2008.
This decrease was primarily attributable to a reduction of our marketing and advertising expenses for Slingboxes
and related hardware products and the collection of previously reserved receivables. “Selling, general and
administrative expenses” represented 7.4% and 7.6% of “Total revenue” during the year ended December 31, 2009
and 2008, respectively. The decrease in the ratio of the expenses to “Total revenue” was primarily attributable to the
decrease in “Total revenue” relative to the decrease in expense, previously discussed.
53
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Depreciation and amortization. “Depreciation and amortization” expense totaled $244 million during the year ended
December 31, 2009, a $20 million or 7.6% decrease compared to the same period in 2008. The decrease in
“Depreciation and amortization” expense was primarily due to less depreciation expense on AMC-15 and AMC-16,
which we impaired in 2008 by a combined amount of $218 million. This decrease was partially offset by an increase in
depreciation expense mainly associated with uplink equipment placed in service during 2009.
Impairments of goodwill, indefinite-lived and long-lived assets. “Impairments of goodwill, indefinite-lived and
long-lived assets” totaled $613 million during the year ended December 31, 2008 and resulted from impairments of
goodwill, satellites, and FCC authorizations.
Unrealized and realized gains (losses) on marketable investment securities and other investments. “Unrealized
and realized gains (losses) on marketable investment securities and other investments” totaled a net gain of $119
million during the year ended December 31, 2009, a $209 million increase compared to the same period in 2008.
This change was attributable to an increase in net gains of $42 million on the sale and exchange of marketable and
non-marketable investment securities and a decline of $167 million in impairments on our marketable and other
investment securities during the year ended December 31, 2009 compared to the same period in 2008.
Unrealized gains (losses) on investments accounted for at fair value, net. “Unrealized gains (losses) on
investments accounted for at fair value, net” totaled a net gain of $313 million during the year ended December 31,
2009, a $631 million increase compared to the same period in 2008. This change is attributable to increases in fair
value related to investments accounted for under the fair value method.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $675 million during the year ended
December 31, 2009, an increase of $1.469 billion compared to the same period in 2008. EBITDA for the year ended
December 31, 2009 was positively impacted by changes in “Unrealized and realized gains (losses) on marketable
investment securities and other investments” of $209 million and “Unrealized gains (losses) on investments
accounted for at fair value, net” of $631 million and “Impairments of goodwill, indefinite-lived and long-lived
assets” of $613 million. The following table reconciles EBITDA to the accompanying financial statements.
For the Years Ended
December 31,
2009
2008
(In thousands)
EBITDA..............................................
Interest expense, net .........................
Income tax (provision) benefit, net...
Depreciation and amortization..........
Net income (loss)................................
$
675,362
(5,874)
(60,655)
(244,129)
364,704
$
$
(793,456)
2,785
96,680
(264,197)
(958,188)
$
EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United
States, or GAAP, and should not be considered a substitute for operating income, net income or any other measure
determined in accordance with GAAP. Conceptually, EBITDA measures the amount of income generated each
period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. EBITDA
is used by our management as a measure of operating efficiency and overall financial performance for
benchmarking against our peers and competitors. Management believes EBITDA provides meaningful
supplemental information regarding liquidity and the underlying operating performance of our business.
Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts,
investors and other interested parties to evaluate companies in the digital set-top box industry.
Income tax (provision) benefit, net. During the year ended December 31, 2009, we recorded an income tax
provision totaling $61 million, an increase of $157 million compared to the same period in 2008. This change
resulted primarily from the increase in “Income (loss) before income taxes,” and by the increase in our effective tax
rate. During the year ended December 31, 2009, our effective tax rate was positively impacted by the release of
$105 million of certain previously recognized valuation allowances established against certain deferred tax assets
that are capital in nature. During the year ended December 31, 2008 our effective tax rate was negatively impacted
54
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
by the establishment of a $178 million valuation allowance on the deferred tax assets related to unrealized losses on
marketable investment securities accounted for at fair value and the impairment of certain marketable and non-
marketable investment securities.
Net income (loss). Our net income was $365 million during the year ended December 31, 2009, an increase of
$1.323 billion compared to the same period in 2008. This increase was primarily attributable to the changes in
revenue and expenses discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased within 90 days of their maturity to be cash equivalents. See “Item 7A.
– Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K for further
discussion regarding our marketable investment securities. As of December 31, 2010 and 2009, our cash, cash
equivalents and current marketable investment securities totaled $1.131 billion compared to $829 million as of
December 31, 2009, an increase of $302 million. This increase in cash, cash equivalents and current marketable
investment securities was primarily related to cash generated from operations of $404 million, a cash payment
received from DISH Network of $103 million for the assignment of certain rights under a launch contract and an
increase of $111 million in the value of certain marketable investment securities, partially offset by capital
expenditures of $197 million and purchases of strategic investments of $114 million.
We have investments in various debt and equity instruments including corporate bonds, corporate equity securities,
government bonds, and variable rate demand notes (“VRDNs”). VRDNs are long-term floating rate municipal
bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of
the put options are secured by a pledged liquidity source. Our VRDN portfolio is comprised of investments in many
municipalities, which are backed by financial institutions or other highly rated companies that serve as the pledged
liquidity source. While they are classified as marketable investment securities, the put option allows VRDNs to be
liquidated generally on a same day or on a five business day settlement basis. As of December 31, 2010 and 2009,
we held VRDNs, within our current marketable investment securities portfolio, with fair values of $396 million and
$399 million, respectively.
The following discussion highlights our cash flow activities during the years ended December 31, 2010, 2009, and
2008.
Cash flows from operating activities. We typically reinvest the cash flow from operating activities in our business.
For the year ended December 31, 2010, 2009 and 2008 we reported net cash inflows from operating activities of
$404 million, $196 million and $118 million, respectively.
The $208 million improvement in net cash inflows from operating activities during the year ended December 31, 2010
compared to the same period in 2009 was primarily attributable to an increase of $183 million in net income adjusted to
exclude non-cash changes in: (i) “Unrealized gains (losses) on investments accounted for at fair value, net,” (ii)
“Unrealized and realized gains (losses) on marketable investment securities and other investments” and (iii) “Deferred
tax expense (benefit).”
The $78 million improvement in net cash inflows from operating activities during the year ended December 31, 2009
compared to the same period in 2008 was primarily attributable to an increase in cash resulting from changes in
operating assets and liabilities of $19 million and an increase in net income of $57 million adjusted to exclude non-cash
changes in: (i) “Impairments of goodwill, indefinite-lived and long-lived assets” (ii) “Unrealized gains (losses) on
investments accounted for at fair value, net,” (iii) “Unrealized and realized gains (losses) on marketable investment
securities and other investments” (iv) “Depreciation and amortization” expense, and (v) “Deferred tax expense
(benefit).”
55
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Cash flows from investing activities. Our investing activities generally include purchases and sales of marketable
investment securities, capital expenditures and strategic investments. For the years ended December 31, 2010, 2009
and 2008, we reported net cash outflows from investing activities of $239 million, $114 million and $570 million,
respectively.
The increase in net cash outflows from investing activities from 2009 to 2010 of $125 million primarily resulted from
net purchases of marketable investment securities of $47 million in 2010 and net sales of marketable investment
securities of $223 million in 2009 for a net change of $270 million, partially offset by cash inflows of $103 million
related to the assignment of rights under a launch contract to DISH Network, cash inflows related to a decline in the
capital expenditures of $17 million compared to 2009 and proceeds from the sale of strategic investments of $16
million.
The decrease in net cash outflows from investing activities from 2008 to 2009 of $455 million primarily resulted from
net sales of marketable investment securities of $223 million in 2009 and net purchases of marketable investment
securities of $227 million in 2008 for a net change of $450 million.
Cash flows from financing activities. Our financing activities generally include cash used for payment of capital lease
obligations, mortgages or other notes payable, and repurchases of our Class A common stock. For the years ended
December 31, 2010 and 2009 we reported net cash outflows from financing activities of $47 million and $83 million,
respectively. For the year ended December 31, 2008 we reported net cash inflows from financing activities of $435
million.
The decline in net cash outflows from financing activities from 2009 to 2010 of $36 million principally resulted from a
decrease in repurchases of Class A common stock during 2010 compared to 2009.
The decline in net cash flow from financing activities from 2008 to 2009 of $518 million principally resulted from the
2008 contribution from DISH Network in connection with the Spin-off of $544 million, partially offset by a decrease in
repurchases of Class A common stock during 2009 compared to 2008.
Satellites
As our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or
constructing additional satellites, with or without customer commitments for capacity.
Stock Repurchases
During the years ended December 31, 2010, 2009 and 2008, we repurchased 34,000, 1.9 million, and 3.6 million
shares of our common stock for $605,000, $30 million and $68 million, respectively. On November 3, 2010, our
Board of Directors extended the plan and authorized an increase in the maximum dollar value of shares that may be
repurchased under the plan, such that we are currently authorized to repurchase up to $500 million of our
outstanding shares of Class A common stock through and including December 31, 2011. As of December 31, 2010,
we may repurchase up to $500 million under this plan.
56
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Obligations and Future Capital Requirements
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2010 future maturities of our contractual obligations are summarized as follows:
Total
2011
2012
2013
2014
2015
Thereafter
Payments due by period
Long-term debt obligations....................
Capital lease obligations.........................
Interest expense on long-term
debt and capital lease obligations........
Satellite-related obligations....................
Operating lease obligations....................
Purchase and other obligations ..............
Total.......................................................
$
6,535
406,350
$
749
52,311
$
808
56,928
(In thousands)
871
$
62,651
$
940
64,850
$
1,005
11,088
$
2,162
158,522
222,057
1,020,744
17,554
287,513
1,960,753
$
37,256
160,930
6,977
287,513
545,736
32,504
160,058
4,609
-
254,907
$
27,267
79,583
2,566
-
172,938
$
21,489
76,451
1,635
-
165,365
$
17,852
65,289
1,014
-
96,248
$
85,689
478,433
753
-
725,559
$
$
In certain circumstances the dates on which we are obligated to make these payments could be delayed. These
amounts will increase to the extent we procure insurance for our satellites or contract for the construction, launch or
lease of additional satellites.
The table above does not include $30 million of liabilities associated with unrecognized tax benefits which were
accrued, discussed in Note 10 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual
Report on Form 10-K, and are included on our Consolidated Balance Sheets as of December 31, 2010. We do not
expect any portion of this amount to be paid or settled within the next twelve months.
In connection with TerreStar Networks’ bankruptcy, we entered into agreements to provide a $75 million credit
facility to TerreStar Networks and certain of its affiliates, of which $25 million has been funded as of December 31,
2010. The table above does not include any unfunded amounts. See Note 4 under “Investments in TerreStar” in the
Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further
discussion.
During December 2009, we entered into a joint venture to provide a DTH satellite service in Taiwan and certain
other targeted regions in Asia. We own 50% and have joint control of the joint venture. Pursuant to these
arrangements, we sell hardware such as digital set-top boxes and provide certain technical support services to the
joint venture. We have provided $18 million of cash to the joint venture, and an $18 million line of credit that the
joint venture may only use to purchase set-top boxes from us. This investment is subject to an evaluation for other-
than-temporary impairment on a quarterly basis. This quarterly evaluation consists of reviewing, among other things,
company business plans and current financial statements, if available, for factors that may indicate an impairment of
our investment. During the year ended December 31, 2010, we recorded a $14 million charge to fully impair this
investment, which is included in “Unrealized and realized gains (losses) on marketable investment securities and
other investments” on our Consolidated Statements of Operations and Comprehensive Income (Loss). As of
December 31, 2010, the remaining amount available under the line of credit is $10 million and if advanced would be
subject to our evaluation for other-than-temporary impairment. The table above includes this $10 million under
“Purchase and other obligations.”
In general, we do not engage in off-balance sheet financing activities.
57
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Satellite-Related Obligations
Satellites Under Construction. As of December 31, 2010, we had entered into the following contracts to construct
new satellites which are contractually scheduled to be completed within the next two years. Future commitments
related to these satellites are included in the table above under “Satellite-related obligations.”
QuetzSat-1. During 2008, we entered into a ten-year satellite service agreement with SES to lease all of the capacity
on QuetzSat-1. QuetzSat-1 is expected to be launched during the second half of 2011 and will operate at the 77
degree orbital location. Upon expiration of the initial term, we have the option to renew the transponder service
agreement on a year-to-year basis through the end-of-life of the QuetzSat-1 satellite. DISH Network has agreed to
lease 24 of the 32 DBS transponders on this satellite from us. The expected future payments related to QuetzSat-1
included in the table above are $301 million.
EchoStar XVI. During November 2009, we entered into a contract for the construction of EchoStar XVI, a DBS
satellite, which is expected to be completed during the second half of 2012 and will operate at the 61.5 degree
orbital location. DISH Network has agreed to lease all of the capacity on this satellite from us for a portion of its
useful life. The expected future payments related to EchoStar XVI included in the table above are $85 million.
Purchase Obligations
Our purchase obligations primarily consist of binding purchase orders for digital set-top boxes and related
components, digital broadcast operations and transitional service agreements. Our purchase obligations can
fluctuate significantly from period to period due to, among other things, management’s control of inventory levels,
and can materially impact our future operating asset and liability balances, and our future working capital
requirements.
Satellite Insurance
We generally do not carry insurance for any of the in-orbit satellites that we use because we believe that the
premium costs are uneconomical relative to the risk of satellite failure. 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. 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. 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.
Future Capital Requirements
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated
through operations to fund our investment needs. Since we currently depend on DISH Network for a substantial
portion of our revenue, our cash flow from operations depends heavily on their needs for equipment and services. As
disclosed by DISH Network in its Annual Report on Form 10-K for the year ended December 31, 2010, DISH
Network had higher than normal inventory levels of digital set-top boxes and related components at December 31,
2010 and also experienced fewer gross subscriber additions during 2010. While we expect that DISH Network will
continue to purchase digital set-top boxes and related components from us, DISH Network’s higher than normal
inventory levels, could result in fewer purchases of digital set-top boxes and related components from us than it has
purchased during the year ended December 31, 2010. A significant decline in DISH Network’s purchases from us
could have a material adverse effect on our results of operations. To the extent that DISH Network experiences a
net loss of subscribers, sales of our digital set-top boxes and related components to DISH Network may further
decline, which in turn could have a further material adverse effect on our financial position and results of operations.
As a result, there can be no assurances that we will always have positive cash flows from operations and should our
cash flows turn negative, our existing cash and marketable investment securities balances may be reduced.
58
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Our future capital expenditures are likely to increase if we make additional investments in infrastructure necessary
to support and expand our “Satellite Services” business, or if we decide to purchase one or more additional satellites.
Other aspects of our business operations may also require additional capital. We 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 our stock buyback program of up to $500 million of our Class
A common stock, all of which remained available as of December 31, 2010.
However, there can be no assurance that we could raise all required capital or that required capital would be
available on acceptable terms or at all. Any renewed weakness in the financial markets could make it difficult for
certain borrowers to access capital markets at acceptable terms or at all, which may significantly constrain our ability
to obtain financing to support our business operations. This 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 particular, it may be difficult for us to raise debt
financing on acceptable terms in light of the fact that we have never previously raised debt financing. In addition,
sustained economic weakness may limit our ability to generate sufficient internal cash to fund investments, capital
expenditures, acquisitions and other strategic transactions. Any renewed instability in the equity markets could
make it difficult for us to raise equity financing without incurring substantial dilution to our existing shareholders,
and debt-financing arrangements may require us to pledge certain assets and enter into covenants that could restrict
certain business activities or our ability to incur further indebtedness and may contain other terms that are not
favorable to our shareholders or us. If we are unable to obtain adequate funds on reasonable terms, we may be
required to curtail operations significantly or obtain funds by entering into financing, supply or joint venture
agreements on unattractive terms.
On February 13, 2011, we and certain of our subsidiaries, including EchoStar Satellite Services L.L.C., (“ESS”)
entered into an agreement and plan of merger (the “Hughes Agreement”) with Hughes, whereby we will acquire all
of the outstanding equity of Hughes and its subsidiaries, including its main operating subsidiary, Hughes Network
Systems, LLC (“HNS”) (the “Hughes Merger”). Pursuant to the Hughes Agreement, each issued and outstanding
share of common stock of Hughes (other than common stock with respect to which appraisal rights have been
exercised) will be converted into the right to receive $60.70 in cash. The Hughes Agreement also contemplates the
repayment of all of the outstanding debt of Hughes and HNS (including the 9½% Senior Notes due 2014 issued by
HNS), except that the $115 million loan facility guaranteed by COFACE, the French Export Credit Agency, will
continue to remain outstanding following the Merger if certain consents are obtained. As a result, the Hughes
Merger is valued at approximately $2.0 billion, including the Hughes debt expected to be refinanced. The Hughes
Merger is expected to close later this year, subject to certain closing conditions, including among others, certain
government regulatory approvals, such as approval by the FCC and the Federal Trade Commission. The Hughes
Agreement contains certain termination rights for both Hughes and us.
In order to finance the Hughes Merger, we and ESS obtained an aggregate financing commitment of $1.0 billion in
senior secured bridge financing and $800 million in senior unsecured bridge financing, in each case from Deutsche
Bank AG Cayman Islands Branch (collectively, the “Bridge Commitment”). Deutsche Bank’s obligations under the
Bridge Commitment are subject to a number of conditions, including that the conditions to closing under the Hughes
Agreement have been met (subject to certain exceptions); that we have a minimum amount of cash on hand at the
closing; that we have provided certain financial statements and other information relating to us and Hughes in specified
time periods; and that our aggregate indebtedness not exceed specified levels. There is no assurance that we will be
able to satisfy these conditions. The initial term of the Bridge Commitment is six months. We have the option to
extend the term of the Bridge Commitment to nine months so long as we have delivered certain required information,
including certain financial statements, and have complied with our obligations to issue debt securities in lieu of
borrowing under the Bridge Commitment. Subject to certain exceptions, we do not have the ability to terminate the
Hughes Agreement until nine months after the date the Hughes Agreement was executed. Accordingly, there is no
assurance that the Bridge Commitment will remain in effect for the duration of our obligations under the Hughes
Agreement. We do not have the ability to terminate the Hughes Agreement if we are unable to obtain sufficient funds
to satisfy our obligations under the Hughes Agreement. If the funding under the Bridge Commitment were to become
unavailable for any reason, there is no assurance that we will be able to obtain sufficient funds to satisfy our obligations
under the Hughes Agreement.
59
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
In addition, if we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not
successful in developing and deploying potential new alternative technology and we are unable to reach a license
agreement with Tivo on reasonable terms, we may be required to cease distribution of digital set-top boxes with DVR
functionality. In that event, our sales of digital set-top boxes to DISH Network and others would likely significantly
decrease and could even potentially cease for a period of time. Furthermore, the inability to offer DVR functionality
would place us at a significant disadvantage to our competitors and make it even more difficult for us to penetrate new
markets for digital set-top boxes. The adverse effect on our financial position and results of operations if the District
Court’s contempt order is upheld would be significant.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in
defending against any subsequent claim in a new action that our original alternative technology or any potential new
alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs. In that event, we would
be at a significant disadvantage to our competitors who could continue offering DVR functionality and the adverse
effect on our business would be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District Court. DISH Network
has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for
substantially all liability arising from this lawsuit. We contributed an amount equal to our $5 million intellectual
property liability limit under the Receiver Agreement, and during 2009, we recorded a charge included in “General and
administrative expenses – DISH Network” on our Consolidated Statements of Operations and Comprehensive Income
(Loss) for this amount to reflect this contribution. We and DISH Network have further agreed that our $5 million
contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise
under the Receiver Agreement. We and DISH Network also agreed that we would each be entitled to joint ownership
of, and a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is unable
to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these damages
and sanctions not paid by DISH Network. Any amounts that DISH Network may be required to pay could impair its
ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at a
time and in circumstances in which we would normally not raise capital and there can be no assurance that such
capital would be available on terms that would be attractive to us or at all. Therefore, any capital we raise may be
on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and
might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and
initiatives.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make
estimates, judgments and assumptions that affect amounts reported therein. Management bases its estimates,
judgments and assumptions on historical experience and on various other factors that are believed to be reasonable
under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future
periods may be affected by changes in those estimates. The following represent what we believe are the critical
accounting policies that may involve a high degree of estimation, judgment and complexity. For a summary of our
significant accounting policies, including those discussed below, see Note 2 in the Notes to the Consolidated Financial
Statements in Item 15 of this Annual Report on Form 10-K.
60
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
• Accounting for investments in private and publicly-traded securities. We hold debt and equity interests in
companies, some of which are publicly traded and have highly volatile prices. We record an investment
impairment charge in “Unrealized and realized gains (losses) on marketable investment securities and other
investments” within “Other Income (Expense)” on our Consolidated Statements of Operations and
Comprehensive Income (Loss) when we believe an investment has experienced a decline in value that is
judged to be other-than-temporary. We monitor our investments for impairment by considering current
factors including economic environment, market conditions and the operational performance and other
specific factors relating to the business underlying the investment. Future adverse changes in these factors
could result in losses or an inability to recover the carrying value of the investments that may not be reflected
in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
• Fair value of financial instruments. Fair value estimates of our financial instruments are made at a point
in time, based on relevant market data as well as the best information available about the financial
instrument. Weak economic conditions have resulted in inactive markets for certain of our financial
instruments, including “Marketable and other investment securities” on our Consolidated Balance Sheets.
For certain of these instruments, there is no or limited observable market data. Fair value estimates for
financial instruments for which no or limited observable market data is available are based on judgments
regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss
experience, bankruptcy and other factors. These estimates involve significant uncertainties and judgments
and may be a less precise measurement of fair value as compared to financial instruments where observable
market data is available. We make certain assumptions related to expected maturity date, credit and
interest rate risk based upon market conditions and prior experience. As a result, such calculated fair value
estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition,
changes in the underlying assumptions used in the fair value measurement technique, including liquidity
risks, and estimate of future cash flows, could significantly affect these fair value estimates, which could
have a material adverse impact on our financial position and results of operations. For example, as of
December 31, 2010, we held $609 million of securities that lack observable market quotes and a 10%
decrease in our estimated fair value of these securities would result in a decrease of the reported amount by
approximately $61 million.
Furthermore, our investments accounted for at fair value are speculative. The changes in the fair value of
these investments have historically been volatile. If the fair value of these investments of $613 million as
of December 31, 2010 decreased by 50%, for example, we would have recorded a decrease in the reported
amount by $307 million in unrealized losses under “Unrealized gains (losses) on investments accounted for
at fair value, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss).
• Acquisition of investments in non-marketable investment securities. We calculate the fair value of our
interest in non-marketable investment securities either as consideration given, or for non-cash acquisitions,
based on the results of valuation analyses utilizing a discounted cash flow or DCF model. The DCF
methodology involves the use of various estimates relating to future cash flow projections and discount
rates for which significant judgments are required.
61
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
• Valuation of long-lived assets. We evaluate the carrying value of long-lived assets to be held and used, other
than goodwill and intangible assets with indefinite lives, when events and circumstances warrant such a
review. See Note 2 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on
Form 10-K. The carrying value of a long-lived asset or asset group is considered impaired when the
anticipated undiscounted cash flows from such asset or asset group is less than its carrying value. In that
event, a loss is recorded in “Impairments of goodwill, indefinite-lived and long-lived assets” on our
Consolidated Statements of Operations and Comprehensive Income (Loss) based on the amount by which the
carrying value exceeds the fair value of the long-lived asset or asset group. Fair value is determined primarily
using the estimated cash flows associated with the asset or asset group under review, discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed of by sale are determined in
a similar manner, except that fair values are reduced for estimated selling costs. Among other reasons,
changes in estimates of future cash flows could result in a write-down of the asset in a future period.
• Valuation of goodwill and intangible assets with indefinite lives. We evaluate the carrying value of goodwill
and intangible assets with indefinite lives annually, and also when events and circumstances warrant. We use
estimates of fair value to determine the amount of impairment, if any, of recorded goodwill and intangible
assets with indefinite lives. Fair value is determined primarily using the estimated future cash flows,
discounted at a rate commensurate with the risk involved. While our impairment tests in 2010 indicated the
fair value of our intangible assets were significantly above their carrying amounts, significant changes in our
estimates of future cash flows could result in a write-down of goodwill and intangible assets with indefinite
lives in a future period, which would be recorded in “Impairments of goodwill, indefinite-lived and long-lived
assets” on our Consolidated Statements of Operations and Comprehensive Income (Loss) and could be
material to our consolidated results of operations and financial position. A 10% decrease in the estimated
future cash flows or a 10% increase in the discount rate used in estimating the fair value of these assets (while
all other assumptions remain unchanged) would not result in these assets being impaired.
•
Income taxes. Our income tax policy is to record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. Determining necessary valuation allowances
requires us to make assessments about the timing of future events, including the probability of expected future
taxable income and available tax planning opportunities. We periodically evaluate our need for a valuation
allowance based on both historical evidence, including trends, and future expectations in each reporting
period. Any such valuation allowance is recorded in either “Income tax (provision) benefit, net” on our
Consolidated Statements of Operations and Comprehensive Income (Loss) or “Accumulated other
comprehensive income (loss) within “Stockholders’ equity (deficit)” on our Consolidated Balance Sheets.
Future performance could have a significant effect on the realization of tax benefits, or reversals of valuation
allowances, as reported in our consolidated results of operations.
• Uncertainty in tax positions. Management evaluates the recognition and measurement of uncertain tax
positions based on applicable tax law, regulations, case law, administrative rulings and pronouncements and
the facts and circumstances surrounding the tax position. Changes in our estimates related to the recognition
and measurement of the amount recorded for uncertain tax positions could result in significant changes in our
“Income tax provision (benefit),” which could be material to our consolidated results of operations.
• Contingent liabilities. A significant amount of management judgment is required in determining when, or if,
an accrual should be recorded for a contingency and the amount of such accrual. Estimates generally are
developed in consultation with outside counsel and are based on an analysis of potential outcomes. Due to the
uncertainty of determining the likelihood of a future event occurring and the potential financial statement
impact of such an event, it is possible that upon further development or resolution of a contingent matter, a
charge could be recorded in a future period to “Selling, general and administrative expenses” on our
Consolidated Statements of Operations and Comprehensive Income (Loss) that would be material to our
consolidated results of operations and financial position.
62
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
New Accounting Pronouncements
Revenue Recognition – Multiple-Deliverable Arrangements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-13
(“ASU 2009-13”), Revenue Recognition - Multiple-Deliverable Revenue Arrangements. ASU 2009-13 changes the
requirements for establishing separate units of accounting in a multiple deliverable arrangement and requires the
allocation of arrangement consideration to each deliverable to be based on the relative selling price. This standard was
effective January 1, 2011. We do not expect the adoption of ASU 2009-13 to have a material impact on our
financial position or results of operations.
Seasonality
We are affected by seasonality to the extent it impacts our customers. Our customers in the pay-TV industry,
including DISH Network, our largest customer, typically experience seasonality. Historically, the first half of the
year generally produces fewer new subscribers for the pay-TV industry than the second half of the year. However,
we can not provide assurance that this will continue in the future.
Inflation
Inflation has not materially affected our operations during the past three years. We believe that our ability to
increase the prices charged for our products and services in future periods will depend primarily on competitive
pressures or contractual terms.
Backlog
We do not have any material backlog.
63
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks Associated With Financial Instruments
Our investments and debt are exposed to market risks, discussed below.
Cash, Cash Equivalents and Current Marketable Investment Securities
As of December 31, 2010, our cash, cash equivalents and current marketable investment securities had a fair value
of $1.131 billion. Of that amount, a total of $898 million was invested in: (a) cash; (b) VRDNs convertible into cash
at par value plus accrued interest generally in five business days or less; (c) debt instruments of the United States
Government and its agencies; (d) commercial paper and corporate notes with an overall average maturity of less than
one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating
organizations; and/or (e) instruments with similar risk, duration and credit quality characteristics to the commercial
paper and corporate obligations described above. The primary purpose of these investing activities has been to
preserve principal until the cash is required to, among other things, fund operations, make strategic investments and
expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is received and used in
our business. The value of this portfolio is negatively impacted by credit losses; however, this risk is mitigated
through diversification that limits our exposure to any one issuer.
Interest Rate Risk
A change in interest rates would affect the fair value of our cash, cash equivalents and current marketable investment
securities portfolio. Based on our December 31, 2010 current non-strategic investment portfolio of $898 million, a
hypothetical 10% increase in average interest rates would result in a decrease of approximately $8 million in fair value
of this portfolio. We normally hold these investments to maturity; however, the hypothetical loss in fair value would
be realized if we sold the investments prior to maturity.
Our cash, cash equivalents and current marketable investment securities had an average annual rate of return for the
year ended December 31, 2010 of 0.8%. A change in interest rates would affect our future annual interest income from
this portfolio, since funds would be re-invested at different rates as the instruments mature. A hypothetical 10%
decrease in average interest rates during 2010 would result in a decrease of approximately $1 million in annual interest
income.
Strategic Marketable Investment Securities
As of December 31, 2010, we held strategic and financial debt and equity investments of public companies with a fair
value of $233 million. These investments, which are held for strategic and financial purposes, are concentrated in a
small number of companies, are highly speculative and have experienced and continue to experience volatility. The
fair value of our strategic and financial debt and equity investments can be significantly impacted by the risk of
adverse changes in securities markets generally, as well as risks related to the performance of the companies whose
securities we have invested in, risks associated with specific industries, and other factors. These investments are
subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying
businesses. In general, the debt instruments held in our strategic marketable investment securities portfolio are not
significantly impacted by interest rate fluctuations as their value is more closely related to factors specific to the
underlying business. A hypothetical 10% adverse change in the price of our public strategic debt and equity
investments would result in a decrease of approximately $23 million in the fair value of these investments.
64
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Continued
Restricted Cash and Marketable Investment Securities and Noncurrent Marketable and Other Investment
Securities
Restricted Cash and Marketable Investment Securities
As of December 31, 2010, we had $17 million of restricted cash and marketable investment securities invested in:
(a) cash; (b) VRDNs convertible into cash at par value plus accrued interest generally in five business days or less;
(c) debt instruments of the United States Government and its agencies; (d) commercial paper and corporate notes
with an overall average maturity of less than one year and rated in one of the four highest rating categories by at
least two nationally recognized statistical rating organizations; and/or (e) instruments with similar risk, duration and
credit quality characteristics to the commercial paper described above. Based on our December 31, 2010 investment
portfolio, a hypothetical 10% increase in average interest rates would not have a material impact in the fair value of
our restricted cash and marketable investment securities.
Other Investment Securities
As of December 31, 2010, we had $726 million of public and nonpublic debt and equity instruments that we hold for
strategic business purposes and account for under the cost, equity and/or fair value methods of accounting. Of this
amount, $613 million relates to our investments in TerreStar Networks and TerreStar Corporation, which are
accounted for under the fair value method. TerreStar Networks and TerreStar Corporation filed for bankruptcy
protection under the U.S. Bankruptcy Code on October 19, 2010 and February 16, 2011, respectively. See Note 4 in
the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K for further
discussion. A hypothetical 10% adverse change in the price of these debt and equity instruments would result in a
decrease of approximately $61 million in the fair value of these investments. The remaining amount of our other
investment securities portfolio of $113 million is accounted for under the cost and/or equity methods of accounting.
A hypothetical 10% adverse change in the price of these debt and equity instruments would result in a decrease of
approximately $11 million in the fair value of these investments.
Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the
success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans.
Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell
these investments, or that when we desire to sell them we will not be able to obtain fair value for them.
Long-Term Debt
As of December 31, 2010, we had $413 million of long-term debt, of which $406 million represented our capital lease
obligations, which are not subject to fair value disclosure requirements.
Derivative Financial Instruments
In general, we do not use derivative financial instruments for hedging or speculative purposes, but we may do so in
the future.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report beginning on page F-4.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
65
Item 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report.
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934) during our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
(i)
(ii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our
transactions and dispositions of our assets;
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our
financial statements in accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and our
directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may
deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based
on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over
financial reporting was effective as of December 31, 2010. Our evaluation of internal control over financial
reporting did not include the internal control of Move Networks which we acquired on December 31, 2010. Our
consolidated financial statements as of and for the year ended December 31, 2010 included $45 million of assets and
zero of revenue associated with this business.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a)
of this Annual Report on Form 10-K.
Item 9B.
OTHER INFORMATION
None.
66
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to the identity and business experience of our directors will be set
forth in our Proxy Statement for the 2011 Annual Meeting of Shareholders under the caption “Election of Directors,”
which information is hereby incorporated herein by reference.
The information required by this Item with respect to the identity and business experience of our executive officers is
set forth on page 13 of this report under the caption “Executive Officers of the Registrant.”
Item 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in our Proxy Statement for the 2011 Annual Meeting of
Shareholders under the caption “Executive Compensation and Other Information,” which information is hereby
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item will be set forth in our Proxy Statement for the 2011 Annual Meeting of
Shareholders under the captions “Election of Directors,” “Equity Security Ownership” and “Equity Compensation Plan
Information,” which information is hereby incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item will be set forth in our Proxy Statement for the 2011 Annual Meeting of
Shareholders under the caption “Certain Relationships and Related Transactions,” which information is hereby
incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be set forth in our Proxy Statement for the 2011 Annual Meeting of
Shareholders under the caption “Principal Accounting Fees and Services,” which information is hereby incorporated
herein by reference.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
PART IV
(1) Financial Statements
Page
Report of KPMG LLP, Independent Registered Public Accounting Firm ................................................ F-2
Consolidated Balance Sheets at December 31, 2010 and 2009.................................................................. F-4
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
years ended December 31, 2010, 2009 and 2008 ................................................................................... F-5
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended
December 31, 2008, 2009 and 2010........................................................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008.......... F-7
Notes to Consolidated Financial Statements............................................................................................... F-8
(2) Financial Statement Schedules
None. All schedules have been included in the Consolidated Financial Statements or Notes thereto.
67
(3) Exhibits
2.1*
2.2*
3.1*
3.2*
4.1*
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
Form of Separation Agreement between EchoStar Corporation and DISH Network Corporation
(incorporated by reference to Exhibit 2.1 to Amendment No. 3 of EchoStar Corporation’s Form 10
dated December 28, 2007, Commission File No. 001-33807).
Agreement and Plan of Merger between EchoStar Corporation, EchoStar Satellite Services L.L.C.,
Broadband Acquisition Corporation and Hughes Communications, Inc. dated as of February 13,
2011 (incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K of Hughes
Communications, Inc. filed February 15, 2011, Commission File No. 1-33040). *****
Articles of Incorporation of EchoStar Corporation (incorporated by reference to Exhibit 3.1 to
Amendment No. 3 of EchoStar Corporation’s Form 10 dated December 28, 2007, Commission
File No. 001-33807).
Bylaws of EchoStar Corporation (incorporated by reference to Exhibit 3.2 to Amendment No. 3 of
EchoStar Corporation’s Form 10 dated December 28, 2007, Commission File No. 001-33807).
Specimen Class A Common Stock Certificate of EchoStar Corporation (incorporated by reference
to Exhibit 3.2 to Amendment No. 3 of EchoStar Corporation’s Form 10 dated December 28, 2007,
Commission File No. 001-33807).
Form of Tax Sharing Agreement between EchoStar Corporation and DISH Network Corporation
(incorporated by reference to Exhibit 10.2 to Amendment No. 3 of EchoStar Corporation’s Form
10 dated December 28, 2007, Commission File No. 001-33807).
Form of Employee Matters Agreement between EchoStar Corporation and DISH Network
Corporation (incorporated by reference to Exhibit 10.3 to Amendment No. 3 of EchoStar
Corporation’s Form 10 dated December 28, 2007, Commission File No. 001-33807).**
Form of Intellectual Property Matters Agreement between EchoStar Corporation, EchoStar
Acquisition L.L.C., Echosphere L.L.C., DISH DBS Corporation, EIC Spain SL, EchoStar
Technologies L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit 10.4 to
Amendment No. 3 of EchoStar Corporation’s Form 10 dated December 28, 2007, Commission
File No. 001-33807).
Form of Management Services Agreement between EchoStar Corporation and DISH Network
Corporation (incorporated by reference to Exhibit 10.5 to Amendment No. 3 of EchoStar
Corporation’s Form 10 dated December 28, 2007, Commission File No. 001-33807).
Manufacturing Agreement, dated as of March 22, 1995, between HTS and SCI Technology, Inc.
(incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Dish
Ltd., Commission File No. 33-81234).
Agreement between HTS, DISH Network L.L.C. and ExpressVu Inc., dated January 8, 1997, as
amended (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K of DISH
Network Corporation for the year ended December 31, 1996, as amended, Commission File No. 0-
26176).
Agreement to Form NagraStar L.L.C., dated as of June 23, 1998, by and between Kudelski S.A.,
DISH Network Corporation and DISH Network L.L.C. (incorporated by reference to Exhibit 10.28
to the Annual Report on Form 10-K of DISH Network Corporation for the year ended December
31, 1998, Commission File No. 0-26176).
68
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
Satellite Service Agreement, dated as of March 21, 2003, between SES Americom, Inc., DISH
Network L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of DISH Network Corporation for the quarter ended March 31,
2003, Commission File No. 0-26176).****
Amendment No. 1 to Satellite Service Agreement dated March 31, 2003 between SES Americom
Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of DISH Network Corporation for the quarter ended
September 30, 2003, Commission File No. 0-26176).****
Satellite Service Agreement dated as of August 13, 2003 between SES Americom Inc., DISH
Network L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of DISH Network Corporation for the quarter ended September
30, 2003, Commission File No. 0-26176). ****
Satellite Service Agreement, dated February 19, 2004, between SES Americom, Inc., DISH
Network L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of DISH Network Corporation for the quarter ended March 31,
2004, Commission File No. 0-26176). ****
Amendment No. 1 to Satellite Service Agreement, dated March 10, 2004, between SES
Americom, Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of DISH Network Corporation for
the quarter ended March 31, 2004, Commission File No. 0-26176).****
Amendment No. 3 to Satellite Service Agreement, dated February 19, 2004, between SES
Americom, Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of DISH Network Corporation for
the quarter ended March 31, 2004, Commission File No. 0-26176). ****
Amendment No. 2 to Satellite Service Agreement, dated April 30, 2004, between SES Americom,
Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of DISH Network Corporation for the quarter ended
June 30, 2004, Commission File No. 0-26176). ****
Amendment No. 4 to Satellite Service Agreement, dated October 21, 2004, between SES
Americom, Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by
reference to Exhibit 10.23 to the Annual Report on Form 10-K of DISH Network Corporation for
the year ended December 31, 2004, Commission File No. 0-26176).****
Amendment No. 3 to Satellite Service Agreement, dated November 19, 2004 between SES
Americom, Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by
reference to Exhibit 10.24 to the Annual Report on Form 10-K of DISH Network Corporation for
the year ended December 1, 2004, Commission File No. 0-26176). ****
Amendment No. 5 to Satellite Service Agreement, dated November 19, 2004, between SES
Americom, Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by
reference to Exhibit 10.25 to the Annual Report on Form 10-K of DISH Network Corporation for
the year ended December 31, 2004, Commission File No. 0-26176). ****
Amendment No. 6 to Satellite Service Agreement, dated December 20, 2004, between SES
Americom, Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by
reference to Exhibit 10.26 to the Annual Report on Form 10-K of DISH Network Corporation for
the year ended December 31, 2004, Commission File No. 0-26176).****
69
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
Amendment No. 4 to Satellite Service Agreement, dated April 6, 2005, between SES Americom,
Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of DISH Network Corporation for the quarter ended
June 30, 2005, Commission File No. 0-26176).****
Amendment No. 5 to Satellite Service Agreement, dated June 20, 2005, between SES Americom,
Inc., DISH Network L.L.C. and DISH Network Corporation (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q of DISH Network Corporation for the quarter ended
June 30, 2005, Commission File No. 0-26176).****
Form of EchoStar Corporation 2008 Class B CEO Stock Option Plan (incorporated by reference to
Exhibit 10.25 to Amendment No. 3 of EchoStar Corporation’s Form 10 dated December 28, 2007,
Commission File No. 001-33807).**
Form of Satellite Capacity Agreement between EchoStar Corporation and DISH Network L.L.C.
(incorporated by reference from Exhibit 10.28 to Amendment No. 2 to Form 10 of EchoStar
Corporation filed on December 26, 2007, Commission File No. 001-33807).
Pricing Agreement, dated March 11, 2008, by and among EchoStar Technologies L.L.C., Bell
ExpressVu Inc., in its capacity as General Partner of Bell ExpressVu Limited Partnership, Bell
Distribution Inc, and Bell Canada (incorporated by reference to Exhibit 10.3 to the Quarterly Report
on Form 10-Q of EchoStar Corporation for the quarter ended March 31, 2008, Commission File No.
001-33807). ****
QuetzSat-1 Satellite Service Agreement, dated November 24, 2008, between SES Latin America
S.A. and EchoStar 77 Corporation, a direct wholly-owned subsidiary of EchoStar Corporation
(incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of EchoStar
Corporation for the year ended December 31, 2009, Commission File No. 001-33807). ****
QuetzSat-1 Transponder Service Agreement, dated November 24, 2008, between EchoStar 77
Corporation, a direct wholly-owned subsidiary of EchoStar Corporation, and DISH Network
L.L.C. (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of
EchoStar Corporation for the year ended December 31, 2009, Commission File No. 001-33807).
****
Bell TV Pricing Amendment, dated February 6, 2009, between EchoStar Corporation and Bell TV
(incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K of EchoStar
Corporation for the year ended December 31, 2009, Commission File No. 001-33807). ****
Amended and Restated EchoStar Corporation 2008 Employee Stock Purchase Plan (incorporated
by reference to EchoStar Corporation’s Definitive Proxy Statement on Form 14 filed March 31,
2009, Commission File No. 001-33807).
Amended and Restated EchoStar Corporation 2008 Stock Incentive Plan (incorporated by
reference to EchoStar Corporation’s Definitive Proxy Statement on Form 14 filed March 31, 2009,
Commission File No. 001-33807).
Amended and Restated EchoStar Corporation 2008 Non-Employee Director Stock Option Plan
(incorporated by reference to EchoStar Corporation’s Definitive Proxy Statement on Form 14 filed
March 31, 2009, Commission File No. 001-33807).
NIMIQ 5 Whole RF Channel Service Agreement, dated September 15, 2009, between Telesat
Canada and EchoStar Corporation (incorporated by reference to Exhibit 10.30 to the Annual
Report on Form 10-K of EchoStar Corporation for the year ended December 31, 2009,
Commission File No. 001-33807).****
70
10.31*
10.32*
10.33*
10.34*
10.35*
10.36*
NIMIQ 5 Whole RF Channel Service Agreement, dated September 15, 2009, between EchoStar
Corporation and DISH Network L.L.C. (incorporated by reference to Exhibit 10.31 to the Annual
Report on Form 10-K of EchoStar Corporation for the year ended December 31, 2009,
Commission File No. 001-33807).****
Professional Services Agreement, dated August 4, 2009, between EchoStar Corporation and DISH
Network Corporation (incorporated by reference from Exhibit 10.3 to the Quarterly Report on
Form 10-Q of EchoStar Corporation for the quarter ended September 30, 2009, Commission File
No. 001-33807).****
Allocation Agreement, dated August 4, 2009, between EchoStar Corporation and DISH Network
Corporation (incorporated by reference from Exhibit 10.4 to the Quarterly Report on Form 10-Q of
EchoStar Corporation for the quarter ended September 30, 2009, Commission File No. 001-
33807).
Amendment to form of Satellite Capacity Agreement (Form A) between EchoStar Corporation and
DISH Network L.L.C. (incorporated by reference to Exhibit 10.34 to the Annual Report on Form
10-K of EchoStar Corporation for the year ended December 31, 2009, Commission File No. 001-
33807).
Amendment to Form of Satellite Capacity Agreement (Form B) between EchoStar Satellite
Services L.L.C. and DISH Network L.L.C. (incorporated by reference to Exhibit 10.35 to the
Annual Report on Form 10-K of EchoStar Corporation for the year ended December 31, 2009,
Commission File No. 001-33807).
EchoStar XVI Satellite Capacity Agreement between EchoStar Satellite Services L.L.C. and DISH
Network L.L.C. (incorporated by reference to Exhibit 10.36 to the Annual Report on Form 10-K of
EchoStar Corporation for the year ended December 31, 2009, Commission File No. 001-
33807).****
10.37*
Assignment of Rights Under Launch Service Contract from EchoStar Corporation to DISH Orbital II
L.L.C. (incorporated by reference to Exhibit 10.37 to the Annual Report on Form 10-K of
EchoStar Corporation for the year ended December 31, 2009, Commission File No. 001-33807).
21(cid:31)
23(cid:31)
24(cid:31)
Subsidiaries of EchoStar Corporation.
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
Powers of Attorney authorizing signature of Charles W. Ergen, Joseph P. Clayton, David K.
Moskowitz, Tom A. Ortolf and C. Michael Schroeder.
31.1(cid:31)
Section 302 Certification of Chief Executive Officer.
31.2(cid:31)
Section 302 Certification of Chief Financial Officer.
32.1(cid:31)
Section 906 Certification of Chief Executive Officer.
32.2(cid:31)
Section 906 Certification of Chief Financial Officer.
99.1*
Amendment No. 1 to Receiver Agreement dated December 31, 2007 between EchoSphere L.L.C.
and EchoStar Technologies L.L.C. (incorporated by reference to Exhibit 99.1 to the Quarterly Report
on Form 10-Q of EchoStar Corporation for the quarter ended September 30, 2008, Commission File
No. 001-33807). ****
71
99.2*
101***
Amendment No. 1 to Broadcast Agreement dated December 31, 2007 between EchoStar Corporation
and DISH Network L.L.C. (incorporated by reference to Exhibit 99.2 to the Quarterly Report on
Form 10-Q of EchoStar Corporation for the quarter ended September 30, 2008, Commission File No.
001-33807). ****
The following materials from the Annual Report on Form 10-K of EchoStar Corporation for the
year ended December 31, 2010, filed on February 24, 2011, formatted in eXtensible Business
Reporting Language (“XBRL”): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of
Operations and Comprehensive Income (Loss), (iii) Consolidated Statement of Changes in
Stockholders’ Equity (Deficit), (iv) Consolidated Statements of Cash Flows, and (v) related notes
to these financial statements tagged as blocks of text.
_____________
(cid:31)
*
**
***
Filed herewith.
Incorporated by reference.
Constitutes a management contract or compensatory plan or arrangement.
In accordance with Rule 402 of Regulation S-T, the information in this Exhibit 101 shall not be deemed
“filed” for the purposes of section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into
any registration statement or other document filed under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by the specific reference in such filing.
**** Certain portions of the exhibit have been omitted and separately filed with the Securities and Exchange
Commission with a request for confidential treatment.
***** Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We agree to
furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or
exhibit upon request, subject to our right to request confidential treatment of any requested schedule or
exhibit.
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ECHOSTAR CORPORATION
By:
/s/ David J. Rayner
David J. Rayner
Chief Financial Officer
Date: February 24, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Michael T. Dugan
Michael T. Dugan
Chief Executive Officer, President and Director
February 24, 2011
(Principal Executive Officer)
/s/ David J. Rayner
David J. Rayner
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 24, 2011
Chairman
February 24, 2011
Director
Director
Director
Director
Director
February 24, 2011
February 24, 2011
February 24, 2011
February 24, 2011
February 24, 2011
*
Charles W. Ergen
*
Joseph P. Clayton
/s/ R. Stanton Dodge
R. Stanton Dodge
*
David K. Moskowitz
*
Tom A. Ortolf
*
C. Michael Schroeder
* By: /s/ R. Stanton Dodge
R. Stanton Dodge
Attorney-in-Fact
73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Page
Report of KPMG LLP, Independent Registered Public Accounting Firm ............................................................... F–2
Consolidated Balance Sheets at December 31, 2010 and 2009................................................................................. F–4
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31,
2010, 2009 and 2008............................................................................................................................................. F–5
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31,
2008, 2009 and 2010 ............................................................................................................................................. F–6
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008......................... F–7
Notes to Consolidated Financial Statements.............................................................................................................. F–8
F–1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
EchoStar Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar Corporation and subsidiaries as of
December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income
(loss), changes in stockholders’ equity (deficit) and cash flows for each of the years in the three-year period ended
December 31, 2010. We also have audited EchoStar Corporation’s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). EchoStar Corporation’s
management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion on EchoStar
Corporation’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
F–2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of EchoStar Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, EchoStar Corporation
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control – Integrated Framework issued by the COSO.
Management’s evaluation of the effectiveness of EchoStar Corporation and subsidiaries’ internal control over
financial reporting as of December 31, 2010, excluded Move Networks, which was acquired in 2010. Our audit of
internal control over financial reporting of EchoStar Corporation and subsidiaries also excluded an evaluation of the
internal control over financial reporting of this subsidiary. The aggregate amount of total assets and revenue of
Move Networks included in the consolidated financial statements of EchoStar Corporation and subsidiaries as of
and for the year ended December 31, 2010 was $45 million and $0, respectively.
/s/ KPMG LLP
Denver, Colorado
February 24, 2011
F–3
As of December 31,
2010
2009
$
141,814
989,086
238,997
$
23,330
805,832
373,454
42,247
30,433
-
92,890
1,535,467
84,178
53,014
5,053
18,997
1,363,858
18,003
1,233,185
69,810
151,813
562,019
69,380
2,104,210
3,468,068
$
ECHOSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
Assets
Current Assets:
Cash and cash equivalents....................................................................................................................................
Marketable investment securities.........................................................................................................................
Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero .............................
Trade accounts receivable - other, net of allowance
for doubtful accounts of $7,644 and $5,605, respectively.............................................................................
Inventory.............................................................................................................................................................
Deferred tax assets..............................................................................................................................................
Other current assets.............................................................................................................................................
Total current assets..................................................................................................................................................
Noncurrent Assets:
Restricted cash and marketable investment securities.........................................................................................
Property and equipment, net................................................................................................................................
FCC authorizations..............................................................................................................................................
Intangible assets, net ..........................................................................................................................................
Marketable and other investment securities........................................................................................................
Other noncurrent assets, net ...............................................................................................................................
Total noncurrent assets............................................................................................................................................
Total assets........................................................................................................................................................
17,426
1,263,303
69,810
165,451
725,588
64,975
2,306,553
3,842,020
$
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Trade accounts payable - other............................................................................................................................
Trade accounts payable - DISH Network............................................................................................................
Accrued royalties.................................................................................................................................................
Accrued expenses and other................................................................................................................................
Deferred tax liabilities.........................................................................................................................................
Current portion of long-term debt and capital lease obligations..........................................................................
Total current liabilities............................................................................................................................................
$
145,203
14,155
20,199
62,079
64,121
53,060
358,817
$
171,335
38,347
22,052
78,070
-
54,206
364,010
Long-Term Obligations, Net of Current Portion:
Long-term debt and capital lease obligations, net of current portion..................................................................
Deferred tax liabilities.........................................................................................................................................
Other long-term liabilities...................................................................................................................................
Total long-term obligations, net of current portion.................................................................................................
Total liabilities..................................................................................................................................................
359,825
75,840
34,348
470,013
828,830
392,163
31,588
15,457
439,208
803,218
Commitments and Contingencies (Note 15)
Stockholders' Equity (Deficit):
Preferred Stock, $.001 par value, 20,000,000 shares authorized, none issued and outstanding.........................
Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 43,103,166 shares and
42,655,772 shares issued, and 37,570,848 shares and 37,157,314 shares outstanding, respectively.............
Class B common stock, $.001 par value, 800,000,000 shares authorized,
47,687,039 shares issued and outstanding......................................................................................................
Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding...........
Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding...........
Additional paid-in capital...................................................................................................................................
Accumulated other comprehensive income (loss)..............................................................................................
Accumulated earnings (deficit)..........................................................................................................................
Treasury stock, at cost........................................................................................................................................
Total stockholders' equity (deficit)..........................................................................................................................
Total liabilities and stockholders' equity (deficit)...........................................................................................
-
43
48
-
-
-
43
48
-
-
3,311,405
188,982
(389,126)
(98,162)
3,013,190
3,842,020
$
3,278,680
77,120
(593,484)
(97,557)
2,664,850
3,468,068
$
The accompanying notes are an integral part of these consolidated financial statements.
F–4
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
ECHOSTAR CORPORATION
For the Years Ended December 31,
2008
2009
2010
Revenue:
Equipment revenue - DISH Network....................................................................................
Equipment revenue - other....................................................................................................
Services and other revenue - DISH Network........................................................................
Services and other revenue - other........................................................................................
Total revenue.................................................................................................................
$
1,470,173
347,765
468,399
64,032
2,350,369
$
1,174,763
302,787
373,226
52,783
1,903,559
$
1,491,556
246,655
367,890
44,419
2,150,520
Costs and Expenses:
Cost of sales - equipment .....................................................................................................
Cost of sales - services and other (exclusive of depreciation shown below - Note 6)...........
Research and development expenses....................................................................................
Selling, general and administrative expenses........................................................................
General and administrative expenses - DISH Network.........................................................
Depreciation and amortization (Note 6)................................................................................
Impairments of goodwill, indefinite-lived and long-lived assets...........................................
Total costs and expenses................................................................................................
1,553,129
236,356
46,093
128,366
15,189
228,911
-
2,208,044
1,267,172
203,123
44,009
116,737
23,497
244,129
-
1,898,667
1,494,641
220,817
34,901
138,459
25,354
264,197
612,745
2,791,114
Operating income (loss)........................................................................................................
142,325
4,892
(640,594)
Other Income (Expense):
Interest income......................................................................................................................
Interest expense, net of amounts capitalized ........................................................................
Unrealized and realized gains (losses) on marketable
investment securities and other investments....................................................................
Unrealized gains (losses) on investments
accounted for at fair value, net.........................................................................................
Other, net..............................................................................................................................
Total other income (expense).........................................................................................
14,472
(14,560)
26,441
(32,315)
34,694
(31,909)
2,923
119,461
(89,795)
144,473
(860)
146,448
313,000
(6,120)
420,467
(317,994)
(9,270)
(414,274)
Income (loss) before income taxes........................................................................................
Income tax (provision) benefit, net.......................................................................................
Net income (loss)..................................................................................................................
288,773
(84,415)
204,358
425,359
(60,655)
364,704
$
(1,054,868)
96,680
(958,188)
$
$
Comprehensive Income (Loss):
Foreign currency translation adjustments..............................................................................
Unrealized holding gains (losses) on available-for-sale securities........................................
Recognition of previously unrealized (gains) losses on
available-for-sale securities included in net income (loss).................................................
Comprehensive income (loss)...............................................................................................
$
927
141,161
$
569
212,070
$
(2,947)
(209,005)
(30,226)
316,220
$
(124,921)
452,422
$
146,954
(1,023,186)
$
Weighted-average common shares outstanding - Class A and B common stock:
Basic.....................................................................................................................................
Diluted..................................................................................................................................
85,084
85,203
85,765
86,059
89,324
89,324
Earnings per share - Class A and B common stock:
Basic net income (loss) per share..........................................................................................
Diluted net income (loss) per share.......................................................................................
$
$
2.40
2.40
$
$
4.25
4.24
$
$
(10.73)
(10.73)
The accompanying notes are an integral part of these consolidated financial statements.
F–5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
ECHOSTAR CORPORATION
Balance, December 31, 2007......................................................
Contribution from DISH Network
in connection with the Spin-off...............................................
Issuances of Class A common stock:
Exercise of stock options........................................................
Employee Stock Purchase Plan...............................................
Class A common stock repurchases, at cost.................................
Stock-based compensation and other, net of tax..........................
Change in unrealized holding gains (losses)
on available-for-sale securities, net.........................................
Foreign currency translation.........................................................
Net income (loss).........................................................................
Balance, December 31, 2008......................................................
Capital transaction with DISH Network in
connection with the launch service (Note 19)...........................
Issuances of Class A common stock:
Exercise of stock options........................................................
Employee benefits...................................................................
Employee Stock Purchase Plan...............................................
Class A common stock repurchases, at cost.................................
Stock-based compensation...........................................................
Income tax (expense) benefit related to
stock awards and other............................................................
Change in unrealized holding gains (losses)
on available-for-sale securities, net.........................................
Foreign currency translation.........................................................
Net income (loss).........................................................................
Balance, December 31, 2009......................................................
Capital transactions with DISH Network, net of tax (Note 19)
Issuances of Class A common stock:
Exercise of stock options........................................................
Employee benefits...................................................................
Employee Stock Purchase Plan...............................................
Class A common stock repurchases, at cost.................................
Stock-based compensation...........................................................
Change in unrealized holding gains (losses)
on available-for-sale securities, net.........................................
Foreign currency translation.........................................................
Net income (loss).........................................................................
Balance, December 31, 2010......................................................
Class
A and B
Common
Stock
$
-
Additional
Paid-In
Capital
$
-
Accumulated
Other
Comprehensive
Income (Loss)
$
66,696
Accumulated
Earnings/
(Deficit)
$
-
Net
Investment
in
EchoStar
1,140,822
$
Treasury
Stock
$
-
Total
1,207,518
$
90
3,230,578
(12,296)
-
-
-
-
-
-
-
$
90
4,877
1,398
-
11,474
-
-
-
$
3,248,327
1
-
-
-
-
-
-
-
-
-
91
$
-
-
-
-
-
-
-
-
-
$
91
14,460
217
1,391
1,803
-
13,371
(889)
-
-
-
$
3,278,680
11,309
1,577
3,856
2,437
-
13,546
-
-
-
-
-
-
-
-
(1,140,822)
-
2,077,550
-
-
-
-
-
-
(68,045)
-
4,877
1,398
(68,045)
11,474
-
-
-
-
(62,051)
(2,947)
-
(10,598)
$
-
-
(958,188)
(958,188)
$
-
-
-
$
-
-
-
-
(68,045)
$
(62,051)
(2,947)
(958,188)
2,211,586
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,460
-
-
-
(29,512)
-
218
1,391
1,803
(29,512)
13,371
-
(889)
87,149
569
-
77,120
-
$
-
-
364,704
(593,484)
-
$
-
-
-
-
$
-
-
-
-
(97,557)
-
$
87,149
569
364,704
2,664,850
11,309
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(605)
-
1,577
3,856
2,437
(605)
13,546
110,935
927
-
188,982
-
-
204,358
(389,126)
-
-
-
$
-
$
-
-
-
(98,162)
$
110,935
927
204,358
3,013,190
$
-
$
3,311,405
$
The accompanying notes are an integral part of these consolidated financial statements.
F–6
ECHOSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows From Operating Activities:
Net income (loss).............................................................................................................................................
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization....................................................................................................................
Equity in losses (earnings) of affiliates.......................................................................................................
Unrealized and realized (gains) losses on marketable investment securities and other investments..........
Unrealized (gains) losses on investments accounted for at fair value, net..................................................
Impairments of goodwill, indefinite-lived and long-lived assets................................................................
Non-cash, stock-based compensation.........................................................................................................
Deferred tax expense (benefit)...................................................................................................................
Other, net....................................................................................................................................................
Change in noncurrent assets.......................................................................................................................
Changes in current assets and current liabilities:
Trade accounts receivable - other...........................................................................................................
Allowance for doubtful accounts............................................................................................................
Trade accounts receivable - DISH Network...........................................................................................
Inventory................................................................................................................................................
Other current assets ...............................................................................................................................
Trade accounts payable - other...............................................................................................................
Trade accounts payable - DISH Network...............................................................................................
Accrued expenses and other ..................................................................................................................
Net cash flows from operating activities ........................................................................................
Cash Flows From Investing Activities:
Purchases of marketable investment securities................................................................................................
Sales and maturities of marketable investment securities................................................................................
Purchases of property and equipment..............................................................................................................
Launch service assigned to DISH Network (Note 19).....................................................................................
Proceeds from insurance settlement................................................................................................................
Change in restricted cash and marketable investment securities......................................................................
Purchase of strategic investments included in marketable and other investment securities ............................
Investment in Move Networks (Note 14) .......................................................................................................
Proceeds from sale of strategic investments....................................................................................................
Other, net.........................................................................................................................................................
Net cash flows from investing activities .........................................................................................
Cash Flows From Financing Activities:
Repayment of long-term debt and capital lease obligations............................................................................
Contribution of cash and cash equivalents from DISH Network in connection with the Spin-off...................
Class A common stock repurchases (Note 11)................................................................................................
Net proceeds from Class A common stock options exercised
and issued under the Employee Stock Purchase Plan ................................................................................
Net cash flows from financing activities ........................................................................................
For the Years Ended December 31,
2008
2009
2010
$
204,358
$
364,704
$
(958,188)
228,911
2,813
(2,923)
(144,473)
-
13,546
103,569
(3,067)
19,715
40,623
2,039
32,544
22,581
(61,862)
(33,404)
(24,192)
3,237
404,015
(2,300,631)
2,253,819
(196,736)
102,913
-
577
(69,072)
(44,991)
15,609
(46)
(238,558)
(50,382)
-
(605)
4,014
(46,973)
244,129
5,517
(119,461)
(313,000)
-
13,371
45,344
(12,584)
(6,785)
(52,797)
(1,576)
27,088
(6,521)
(1,376)
(15,255)
16,777
8,701
196,276
264,197
7,176
89,795
317,994
612,745
23,605
(162,011)
(26,352)
(36,230)
(7,861)
7,130
(297,629)
(15,493)
47,679
164,304
21,570
65,617
118,048
(2,050,495)
2,273,523
(213,921)
-
-
(15,009)
(114,164)
-
-
5,788
(114,278)
(3,069,716)
2,842,567
(229,870)
-
40,750
-
(148,736)
-
-
(4,737)
(569,742)
(55,644)
-
(29,512)
2,021
(83,135)
(47,217)
544,065
(68,045)
6,276
435,079
Net increase (decrease) in cash and cash equivalents .....................................................................................
Cash and cash equivalents, beginning of period..............................................................................................
Cash and cash equivalents, end of period........................................................................................................
118,484
23,330
141,814
$
(1,137)
24,467
23,330
$
(16,615)
41,082
24,467
$
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest.......................................................................................................................................
Capitalized interest..........................................................................................................................................
Cash received for interest................................................................................................................................
Cash paid for income taxes..............................................................................................................................
Employee benefits paid in Class A common stock..........................................................................................
Launch service assigned to DISH Network (Note 19).....................................................................................
Satellites and other assets financed under capital lease obligations.................................................................
Reduction of capital lease obligations and associated asset value for AMC-16 (Note 6)................................
Non-cash investing activities...........................................................................................................................
Non-cash proceeds from the sale of a company which held certain FCC authorizations.................................
Net assets contributed in connection with the Spin-off, excluding cash and cash equivalents........................
41,021
$
25,812
$
19,028
$
15,240
$
$
3,856
$
-
$
57,397
39,442
$
$
-
$
-
$
-
$
31,767
$
-
$
11,717
$
31,500
$
1,391
$
102,913
$
155,574
-
$
$
-
$
-
$
-
$
31,812
$
-
$
23,470
$
47,758
$
-
$
-
$
16,531
$
-
$
15,862
$
132,900
$
1,533,485
The accompanying notes are an integral part of these consolidated financial statements.
F–7
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business Activities
Principal Business
EchoStar Corporation is a holding company, whose subsidiaries (which together with EchoStar Corporation are
referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) operate two primary business units:
•
•
“Digital Set-Top Box” Business – which designs, develops and distributes digital set-top boxes and related
products, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers,
telecommunication and cable companies and, with respect to Slingboxes, directly to consumers via retail
outlets. Our “Digital Set-Top Box” business also provides digital broadcast operations including satellite
uplinking/downlinking, transmission services, signal processing, conditional access management and other
services primarily to DISH Network.
“Satellite Services” Business – which uses our ten owned and leased in-orbit satellites and related Federal
Communications Commission (“FCC”) licenses to lease capacity on a full-time and occasional-use basis
primarily to DISH Network, and secondarily to Dish Mexico, U.S. government service providers, state
agencies, Internet service providers, broadcast news organizations, programmers and private enterprise
customers. We also use certain of our satellites to offer our ViP-TV service, which transports MPEG-4 IP
encapsulated standard-definition and high-definition programming on behalf of telecommunications
companies and rural cable operators.
Effective January 1, 2008, DISH Network completed its distribution to us (the “Spin-off”) of its digital set-top box
business and certain infrastructure and other assets, including certain of its satellites, uplink and satellite
transmission assets, real estate and other assets and related liabilities. Since the Spin-off, we and DISH Network
have operated as separate publicly-traded companies, and neither entity has any ownership interest in the other.
However, a substantial majority of the voting power of the shares of both companies is owned beneficially by
Charles W. Ergen, our Chairman, or by certain trusts established by Mr. Ergen for the benefit of his family.
2.
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and
variable interest entities where we have been determined to be the primary beneficiary. Non-majority owned
investments are accounted for using the equity method when we have the ability to significantly influence the
operating decisions of the investee. When we do not have the ability to significantly influence the operating
decisions of an investee, the cost method is used. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period
presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expense for each reporting period. Estimates are used in accounting for, among other
things, allowances for doubtful accounts, allowance for sales returns, warranty obligations, self-insurance
obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value
of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets
and liabilities acquired in business combinations, capital leases, asset impairments, useful lives of property,
equipment and intangible assets, and royalty obligations. Weakened economic conditions have increased the
F–8
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
inherent uncertainty in the estimates and assumptions indicated above. Actual results may differ from previously
estimated amounts, and such differences may be material to the Consolidated Financial Statements. Estimates and
assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they
occur.
Foreign Currency Translation
The functional currency of the majority of our consolidated foreign subsidiaries is the U.S. dollar because their sales
and purchases are predominantly denominated in that currency. However, for our subsidiaries where the functional
currency is the local currency, we translate assets and liabilities into U.S. dollars at the period-end exchange rate
and revenue and expenses based on the exchange rates at the time such transactions arise, if known, or at the
average rate for the period. The difference is recorded to equity as a component of other comprehensive income
(loss). Financial assets and liabilities denominated in currencies other than the functional currency are recorded at
the exchange rate at the time of the transaction and subsequent gains and losses related to changes in the foreign
currency are included in “Other, net” income or expense in our Consolidated Statements of Operations and
Comprehensive Income (Loss). During the year ended December 31, 2010, net transaction gains were $1 million.
During each of the years ended December 31, 2009 and 2008, net transaction losses were less than $1 million and
$1 million, respectively.
Cash and Cash Equivalents
We consider all liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash
equivalents as of December 31, 2010 and 2009 primarily consist of money market funds, government bonds, corporate
notes and commercial paper. The cost of these investments approximates their fair value.
Marketable Investment Securities
We currently classify all marketable investment securities as available-for-sale, except for the fair value method
securities discussed below. We adjust the carrying value of our available-for-sale securities to fair value and report
the related temporary unrealized gains and losses as a separate component of “Accumulated other comprehensive
income (loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax. Declines in the fair
value of a marketable investment security which are determined to be “other-than-temporary” are recognized in the
Consolidated Statements of Operations and Comprehensive Income (Loss), thus establishing a new cost basis for such
investment.
We evaluate our marketable investment securities portfolio on a quarterly basis to determine whether declines in the
fair value of these securities are other-than-temporary. This quarterly evaluation consists of reviewing, among other
things:
•
•
•
the fair value of our marketable investment securities compared to the carrying amount,
the historical volatility of the price of each security, and
any market and company specific factors related to each security.
F–9
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Declines in the fair value of investments below cost basis are generally accounted for as follows:
Length of Time
Investment Has Been In a
Continuous Loss Position
Less than six months
Six to nine months
Treatment of the Decline in Value
(absent specific factors to the contrary)
Generally, considered temporary.
Evaluated on a case by case basis to determine whether any company or
market-specific factors exist which would indicate that such decline is
other-than-temporary.
Greater than nine months
Generally, considered other-than-temporary. The decline in value is
recorded as a charge to earnings.
In situations where the fair value of a debt security is below its carrying amount, we consider the decline to be
other-than-temporary and record a charge to earnings if any of the following factors apply:
i. We have the intent to sell the security.
ii.
iii. We do not expect to recover the security’s entire amortized cost basis, even if there is no intent to sell the
It is more likely than not that we will be required to sell the security before maturity or recovery.
security.
In general, we use the first in, first out method to determine the cost basis on sales of marketable investment
securities.
Accounts Receivable
Management estimates the amount of required allowances for the potential non-collectability of accounts receivable
based upon past collection experience and consideration of other relevant factors. However, past experience may
not be indicative of future collections and therefore additional charges could be incurred in the future to reflect
differences between estimated and actual collections.
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
Proprietary products are built by contract manufacturers to our specifications. We depend on a few manufacturers,
and in some cases a single manufacturer, for the production of our digital set-top boxes and related components.
Manufactured inventories include materials, labor, freight-in and royalties.
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded on a straight-line basis over lives ranging from one
to forty years. Repair and maintenance costs are charged to expense when incurred. Renewals and betterments are
capitalized.
The cost of satellites under construction, including certain amounts prepaid under our satellite service agreements, is
capitalized during the construction phase, assuming the eventual successful launch and in-orbit operation of the
satellite. If a satellite were to fail during launch or while in-orbit, the resultant loss would be charged to expense in
the period such loss was incurred. The amount of any such loss would be reduced to the extent of insurance
proceeds estimated to be received, if any.
F–10
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This evaluation is performed at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets which are
held and used in operations, the asset would be impaired if the carrying value of the asset exceeded its undiscounted
future net cash flows. Once an impairment is determined, the actual impairment is reported as the difference
between the carrying value and the fair value as estimated using discounted cash flows. Assets which are to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell. We consider relevant
cash flow, estimated future operating results, trends and other available information in assessing whether the
carrying value of assets are recoverable.
Intangible Assets and FCC Authorizations
We do not amortize goodwill and intangible assets with indefinite useful lives, but test for impairment annually or
whenever indicators of impairments arise. Intangible assets that have finite lives are amortized over their estimated
useful lives and tested for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Generally, we have determined that our FCC licenses have indefinite
useful lives due to the following:
• FCC spectrum is a non-depleting asset;
•
replacement satellite applications are generally authorized by the FCC subject to certain conditions,
without substantial cost under a stable regulatory, legislative and legal environment;
• maintenance expenditures in order to obtain future cash flows are not significant; and
• we intend to use these assets indefinitely.
In conducting our annual impairment test in 2010, we determined that the estimated fair value of the FCC licenses,
calculated using the discounted cash flow analysis, exceeded their carrying amount.
Marketable and Other Investment Securities – Cost and Equity Method
Generally, we account for our unconsolidated equity investments under either the equity method or cost method of
accounting. Because these equity securities are generally not publicly traded, it is not practical to regularly estimate the
fair value of the investments; however, these investments are subject to an evaluation for other-than-temporary
impairment on a quarterly basis. This quarterly evaluation consists of reviewing, among other things, company
business plans and current financial statements, if available, for factors that may indicate an impairment of our
investment. Such factors may include, but are not limited to, cash flow concerns, material litigation, violations of debt
covenants, bankruptcy and changes in business strategy. The fair value of these equity investments is not estimated
unless there are identified changes in circumstances that may indicate an impairment exists and these changes are likely
to have a significant adverse effect on the fair value of the investment. When impairments occur related to our foreign
investments, any cumulative translation adjustment associated with these investments will remain in “Accumulated
other comprehensive income (loss)” within “Total stockholders’ equity (deficit)” on our Consolidated Balance Sheets
until the investments are sold or otherwise liquidated; at which time, they will be released into our Consolidated
Statements of Operations and Comprehensive Income (Loss).
F–11
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Marketable and Other Investment Securities – Fair Value Method
We elect the fair value method for certain debt and equity investments in affiliates when we believe the fair value
method of accounting provides more meaningful information to our investors. Changes in the fair value of
marketable investment securities, non-marketable convertible debt, and interest on debt investment securities
accounted for at fair value are recognized as “Unrealized gains (losses) on investments accounted for at fair value,
net” on our Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the non-
marketable convertible debt is determined each reporting period based upon inputs other than quoted market prices
that are observable for the debt, either directly or indirectly. The fair value analysis takes into consideration the
price of the underlying company stock as well as changes in the credit market, including yield curves and interest
rates. In addition, the fair value of these debt and equity investment securities takes into consideration the impact of
any bankruptcy proceedings.
Sales Taxes
We account for sales taxes imposed on our goods and services on a net basis in our Consolidated Statements of
Operations and Comprehensive Income (Loss). Since we primarily act as an agent for the governmental authorities,
the amount charged to the customer is collected and remitted directly to the appropriate jurisdictional entity.
Income Taxes
We establish a provision for income taxes currently payable or receivable and for income tax amounts deferred to
future periods. Deferred tax assets and liabilities are recorded for the estimated future tax effects of differences that
exist between the book and tax basis of assets and liabilities. Deferred tax assets are offset by valuation allowances
when we believe it is more likely than not that such net deferred tax assets will not be realized.
Accounting for Uncertainty in Income Taxes
From time to time, we engage in transactions where the tax consequences may be subject to uncertainty. We record
a liability when, in management’s judgment, a tax filing position does not meet the more likely than not threshold.
For tax positions that meet the more likely than not threshold, we may record a liability depending on management’s
assessment of how the tax position will ultimately be settled. We adjust our estimates periodically based on
ongoing examinations by and settlements with various taxing authorities, as well as changes in tax laws, regulations
and precedent. We classify interest and penalties, if any, associated with our uncertain tax positions as a component
of “Interest expense, net of amounts capitalized” and “Other, net,” respectively.
Fair Value of Financial Instruments
As of December 31, 2010 and 2009, the carrying value of our cash and cash equivalents, current marketable
investment securities, trade accounts receivable, net of allowance for doubtful accounts, and current liabilities is
equal to or approximates fair value due to their short-term nature. Disclosure regarding fair value of capital leases is
not required.
Revenue Recognition
Revenue is recognized when an arrangement exists, prices are determinable, collectibility is reasonably assured and the
goods or services have been delivered. If any of these criteria are not met, revenue recognition is deferred until such
time as all of the criteria are met. Revenue from equipment sales are generally recognized upon shipment to customers.
Revenue from digital broadcast operations and satellite services and other is recognized when the related services are
performed.
F–12
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cost of Equipment and Other Sales
Cost of equipment and other sales associated with digital set-top boxes, Slingboxes and related components includes
materials, labor, freight-in and royalties. We have designed and developed digital set-top boxes, antennae and other
equipment for DISH Network and international satellite service providers and other international customers. The
costs associated with digital broadcast operations and satellite services and other are recognized as the services are
performed or as incurred.
Research and Development
The cost of research and development is charged to expense as incurred.
New Accounting Pronouncements
Revenue Recognition – Multiple-Deliverable Arrangements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-13
(“ASU 2009-13”), Revenue Recognition - Multiple-Deliverable Revenue Arrangements. ASU 2009-13 changes the
requirements for establishing separate units of accounting in a multiple deliverable arrangement and requires the
allocation of arrangement consideration to each deliverable to be based on the relative selling price. This standard was
effective January 1, 2011. We do not expect the adoption of ASU 2009-13 to have a material impact on our
financial position or results of operations.
3.
Basic and Diluted Net Income (Loss) Per Share
We present both basic earnings per share (“EPS”) and diluted EPS. Basic EPS excludes potential dilution and is
computed by dividing “Net income (loss)” by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if stock awards were exercised.
The potential dilution from stock awards was computed using the treasury stock method based on the average
market value of our Class A common stock. The following table presents earnings per share amounts for all periods
and the basic and diluted weighted-average shares outstanding used in the calculation.
For the Years Ended December 31,
2010
2008
2009
(In thousands, except per share amounts)
Net income (loss)...............................................................................................................
$
204,358
$
364,704
$
(958,188)
Weighted-average common shares outstanding - Class A and B common stock:
Basic...................................................................................................................................
Dilutive impact of stock awards outstanding......................................................................
Diluted................................................................................................................................
85,084
119
85,203
85,765
294
86,059
89,324
-
89,324
Earnings per share - Class A and B common stock:
Basic net income (loss) per share.......................................................................................
Diluted net income (loss) per share....................................................................................
$
$
2.40
2.40
$
$
4.25
4.24
$
$
(10.73)
(10.73)
We had a net loss for the year ended December 31, 2008; therefore, the effect of stock awards is excluded from the
computation of diluted earnings (loss) per share since the effect is anti-dilutive. As of December 31, 2010 and
2009, there were stock awards to purchase 5.9 million and 4.7 million shares, respectively, of Class A common
stock outstanding, not included in the weighted-average common shares outstanding above, as their effect is
antidilutive.
F–13
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Vesting of options and rights to acquire shares of our Class A common stock (“Restricted Performance Units”)
granted pursuant to a performance-based stock incentive plan is contingent upon meeting a certain company goal
which is not yet probable of being achieved. As a consequence, the following are also not included in the diluted
EPS calculation.
2010
As of December 31,
2009
(In thousands)
2008
Performance-based options.......................
Restricted Performance Units...................
Total........................................................
697
93
790
724
100
824
886
109
995
4. Marketable Investment Securities, Restricted Cash and Other Investment Securities
Our marketable investment securities, restricted cash, and other investment securities consist of the following:
As of December 31,
2009
2010
(In thousands)
Marketable investment securities:
Current marketable investment securities - VRDNs ........................................................................
Current marketable investment securities - strategic........................................................................
Current marketable investment securities - other..............................................................................
Total marketable investment securities - current........................................................................
Restricted marketable investment securities (1)...............................................................................
Total ...........................................................................................................................................
$
395,715
232,718
360,653
989,086
1,337
990,423
$
398,630
126,622
280,580
805,832
2,995
808,827
Restricted cash and cash equivalents (1)......................................................................................
16,089
15,008
Marketable and other investment securities - noncurrent:
Marketable and other investment securities - cost method...............................................................
Marketable and other investment securities - equity method............................................................
Marketable and other investment securities - fair value method.......................................................
Total marketable and other investment securities - noncurrent...........................................
Total marketable investment securities, restricted cash and other investment securities........
3,097
109,366
613,125
725,588
1,732,100
$
33,288
94,826
433,905
562,019
1,385,854
$
(1) Restricted marketable investment securities and restricted cash and cash equivalents are included in
“Restricted cash and marketable investment securities” on our Consolidated Balance Sheets.
Marketable Investment Securities
Our marketable investment securities portfolio consists of various debt and equity instruments, all of which are
classified as available-for-sale (see Note 2).
F–14
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Current Marketable Investment Securities - VRDNs
Variable rate demand notes (“VRDNs”) are long-term floating rate municipal bonds with embedded put options that
allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged
liquidity source. Our VRDN portfolio is comprised of investments in many municipalities, which are backed by
financial institutions or other highly rated companies that serve as the pledged liquidity source. While they are
classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same
day or on a five business day settlement basis.
Current Marketable Investment Securities - Strategic
Our current strategic marketable investment securities are highly speculative and have experienced and continue to
experience volatility. As of December 31, 2010, a significant portion of our strategic investment portfolio consisted of
securities of several issuers and the value of that portfolio depends on those issuers.
Current Marketable Investment Securities - Other
Our other current marketable investment securities portfolio includes investments in various debt instruments
including corporate and government bonds.
Restricted Cash and Marketable Investment Securities
As of December 31, 2010 and 2009, our restricted marketable investment securities, together with our restricted
cash, included amounts required as collateral for our letters of credit or surety bonds.
Marketable and Other Investment Securities - Noncurrent
We account for our unconsolidated debt and equity investments under the fair value, equity and/or cost method of
accounting. We have several strategic investments in certain equity securities that are included in noncurrent
“Marketable and other investment securities” on our Consolidated Balance Sheets.
Marketable and Other Investment Securities – Cost and Equity
Non-majority owned investments are generally accounted for using the equity method when we have the ability to
significantly influence the operating decisions of an investee. However, when we do not have the ability to
significantly influence the operating decisions of an investee, the cost method is used.
Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the
success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans.
Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to
sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.
Marketable and Other Investment Securities – Fair Value
We elect the fair value method for certain debt and equity investments in affiliates when we believe the fair value
method of accounting provides more meaningful information to our investors. For our investments carried at fair
value, interest and dividends are measured at fair value and are recorded in “Unrealized gains (losses) on
investments accounted for at fair value, net.” See “Investments in TerreStar” below for more information.
F–15
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unrealized Gains (Losses) on Marketable Investment Securities
As of December 31, 2010 and 2009, we had accumulated net unrealized gains of $188 million and $77 million, both
net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total
stockholders’ equity (deficit).” A full valuation allowance has been established against any net tax assets that are
capital in nature. The components of our available-for-sale investments are detailed in the table below.
2010
2009
As of December 31,
Marketable
Investment
Securities
Gains
Unrealized
Losses
Net
Marketable
Investment
Securities
Gains
Unrealized
Losses
Net
(In thousands)
Debt securities:
VRDNs.....................................................
Other (including restricted)......................
Equity securities:
Other.........................................................
Total marketable investment securities....
$
395,715
375,814
-
$
1,154
-
$
(233)
-
$
921
$
398,630
316,793
-
$
15,696
-
$
(137)
-
$
15,559
218,894
990,423
$
186,745
187,899
$
-
(233)
$
186,745
187,666
$
93,404
808,827
$
61,172
76,868
$
-
(137)
$
61,172
76,731
$
As of December 31, 2010, restricted and non-restricted marketable investment securities include debt securities of
$762 million with contractual maturities of one year or less and $10 million with contractual maturities greater than
one year. Actual maturities may differ from contractual maturities as a result of our ability to sell these securities
prior to maturity.
Marketable Investment Securities in a Loss Position
The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have
been in an unrealized loss position, aggregated by investment category. We do not intend to sell our investments in
debt securities before they recover or mature, and it is more likely than not that we will hold these debt investments
until that time. In addition, we are not aware of any specific factors indicating that the underlying issuers of these
debt securities would not be able to pay interest as it becomes due or repay the principal at maturity. Therefore, we
believe that these changes in the estimated fair values of these marketable investment securities are related to
temporary market fluctuations.
Primary
Reason for
Unrealized
Loss
Temporary
market
fluctuations
Primary
Reason for
Unrealized
Loss
Temporary
market
fluctuations
Investment
Category
Debt securities.....
Total...................
Investment
Category
Debt securities.....
Total...................
Total
Fair
Value
As of December 31, 2010
Less than Six Months
Unrealized
Loss
Fair
Value
Six to Nine Months
Fair
Value
(In thousands)
Unrealized
Loss
Nine Months or More
Unrealized
Loss
Fair
Value
$
$
119,135
119,135
$
$
26,358
26,358
$
$
(44)
(44)
$
$
17,566
17,566
$
$
(71)
(71)
$
$
75,211
75,211
$
$
(118)
(118)
As of December 31, 2009
Total
Fair
Value
Less than Six Months
Unrealized
Loss
Fair
Value
Six to Nine Months
Fair
Value
(In thousands)
Unrealized
Loss
Nine Months or More
Unrealized
Loss
Fair
Value
$
$
57,683
57,683
$
$
50,648
50,648
$
$
(94)
(94)
$
$
7,035
7,035
$
$
(43)
(43)
$
-
$
-
$
-
$
-
F–16
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Fair Value Measurements
We determine fair value based on the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants. Market or observable inputs are the preferred source of values, followed
by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs. We
apply the following hierarchy in determining fair value:
• Level 1, defined as observable inputs being quoted prices in active markets for identical assets;
• Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which significant inputs and significant value
drivers are observable in active markets; and
• Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably
available assumptions made by other participants therefore requiring assumptions based on the best
information available.
Our assets measured at fair value on a recurring basis were as follows:
December 31, 2010
December 31, 2009
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
(In thousands)
As of
Debt securities:
VRDNs..............................................
Other (including restricted)................
$
395,715
375,814
$
-
-
$
395,715
375,814
$
-
-
$
398,630
316,793
$
-
2,998
$
398,630
313,795
$
-
-
Equity securities...................................
218,894
218,894
Marketable and other investment
securities - noncurrent.....................
613,125
4,170
-
-
-
93,404
93,404
-
-
608,955
433,905
28,200
339,677
66,028
Total assets at fair value......................
$
1,603,548
$
223,064
$
771,529
$
608,955
$
1,242,732
$
124,602
$
1,052,102
$
66,028
Changes in Level 3 instruments are as follows:
Balance as of December 31, 2009........................................................
Net realized and unrealized gains (losses) included in earnings............
Purchases, issuances and settlements, net .............................................
Transfers from level 2 to level 3............................................................
Balance as of December 31, 2010........................................................
Level 3
Investment
Securities
(In thousands)
66,028
$
80,727
74,927
387,273
608,955
$
Transfers from Level 2 into Level 3 are due to a lack of observable market data for these securities during the year
ended December 31, 2010.
F–17
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unrealized and Realized Gains (Losses) on Marketable Investment Securities and Other Investments
“Unrealized and realized gains (losses) on marketable investment securities and other investments” on our
Consolidated Statements of Operations and Comprehensive Income (Loss) includes changes in the carrying amount
of our investments as follows:
For the Years Ended December 31,
2009
(In thousands)
2010
2008
Unrealized and realized gains (losses) on marketable
investment securities and other investments:
Marketable investment securities - gains (losses) on sales/exchange............................
$ 30,231
Marketable investment securities - other-than-temporary impairments ........................ -
Gain on sale of a company which held certain FCC authorizations............................... -
Marketable and other investment securities - gains (losses) on sales/exchange............. 9,437
Marketable and other investment securities - other-than-temporary impairments ........ (36,745)
Total unrealized and realized gains (losses) on marketable
$ 126,232
-
-
-
(6,771)
$ 16,195
(163,139)
67,624
-
(10,475)
investment securities and other investments..........................................................
$
2,923
$
119,461
$
(89,795)
Investments in TerreStar
We account for our investments in TerreStar Corporation (“TerreStar Corporation”) and TerreStar Networks Inc.
(“TerreStar Networks”), an indirect, majority-owned subsidiary of TerreStar Corporation, using the fair value
method of accounting which we believe provides more meaningful information to our investors. TerreStar
Networks is the principal operating subsidiary of TerreStar Corporation. As discussed further below, TerreStar
Networks and TerreStar Corporation filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code
on October 19, 2010 and February 16, 2011, respectively.
We have been an investor in TerreStar Corporation and TerreStar Networks for over three years. In February 2008,
we completed several transactions under a Master Investment Agreement between us, TerreStar Corporation and
TerreStar Networks. Under the Master Investment Agreement, we acquired $50 million in aggregate principal
amount of TerreStar Networks’ 6 1/2% Senior Exchangeable Paid-in-Kind Notes due June 15, 2014
(“Exchangeable Notes”) as well as $50 million aggregate principal amount of TerreStar Networks’ 15% Senior
Secured Paid-in-Kind Notes due February 15, 2014 (“15% PIK Notes”). The Master Investment Agreement also
provides that we have the right to appoint two representatives to TerreStar Corporation’s Board of Directors. We
do not presently have any representatives on TerreStar Corporation’s Board of Directors. We have from time to
time acquired, and we currently hold, other securities issued by TerreStar Corporation and TerreStar Networks.
Furthermore, in February 2008, we entered into a Spectrum Agreement with TerreStar Corporation, under which, in
June 2008, TerreStar Corporation completed the acquisition of our holdings of 1.4 GHz spectrum in exchange for
the issuance of 30 million shares of its common stock to us. On February 16, 2011, TerreStar Corporation and its
subsidiary, TerreStar Holdings Inc. (together, the “TSC Debtors”), filed for protection under Chapter 11 of the U.S.
Bankruptcy Code in the Bankruptcy Court.
We also entered into an agreement with TerreStar Networks and Harbinger Capital Partners Master Fund I, Ltd. and
Harbinger Capital Partners Special Situations Fund LP (collectively, “Harbinger”), in February 2008, in which we
and Harbinger each committed to provide up to $50 million in secured financing, the proceeds of which were
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. As of
December 31, 2010, we were owed $44 million by TerreStar Networks under the terms of this credit agreement.
F–18
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In connection with the filings by TerreStar Networks and certain of its affiliates (other than TerreStar Corporation)
(the “Debtors”) for protection under Chapter 11 of the U.S. Bankruptcy Code and an ancillary proceeding under the
Companies’ Creditors Arrangement Act in Canada, on October 19, 2010, we entered into a commitment to provide
a debtor-in-possession credit facility (the “Credit Facility”) to the Debtors. On November 18, 2010, the United
States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) approved the Credit
Facility on a final basis and authorized the Debtors to enter into the Credit Facility. The Credit Facility consists of a
non-revolving, multiple draw term loan in the aggregate principal amount of $75 million, with drawings subject to
the terms and conditions set forth in the Credit Facility. As of December 31, 2010, we had funded $25 million to
the Debtors under this Credit Facility which is included in “Marketable and other investment securities” on our
Consolidated Balance Sheets.
Our debt investments in TerreStar Networks had a fair value of $609 million and $406 million as of December 31,
2010 and 2009, respectively. Our equity investments in TerreStar Corporation had a fair value of $4 million and
$28 million as of December 31, 2010 and 2009, respectively. TerreStar Corporation and its subsidiary, TerreStar
Holdings Inc. filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February 16, 2011. As a result,
the fair value of our equity investment as of December 31, 2010 may be negatively impacted. Our debt and equity
investments in TerreStar Corporation and TerreStar Networks had an aggregate fair value of $613 million and $434
million as of December 31, 2010 and 2009, respectively. Fluctuations in fair value of these investments are
recorded in “Unrealized gains (losses) on investments accounted for at fair value, net” on our Consolidated
Statements of Operations and Comprehensive Income (Loss) and directly impact our profitability. For the years
ended December 31, 2010, 2009 and 2008, we recorded a $144 million gain, a $313 million gain and a $318 million
loss on these investments, respectively.
On November 19, 2010, we entered into an agreement with the Debtors (the “Restructuring Support Agreement”)
pursuant to which we committed to (i) support the Debtors’ proposed plan of reorganization and (ii) backstop a
rights offering for preferred shares of TerreStar Networks, which rights offering was to be completed upon the
Debtors’ emergence from bankruptcy, on the terms set forth in the Restructuring Support Agreement. The
Bankruptcy Court approved the Restructuring Support Agreement on December 22, 2010.
On February 15, 2011, the Restructuring Support Agreement was terminated by mutual agreement of the parties. It
is impossible to predict with certainty the amount of time that the Debtors may spend in bankruptcy or whether the
Debtors will be able to obtain confirmation of a plan of reorganization.
Our investments in TerreStar Corporation and TerreStar Networks are highly speculative and have experienced and
continue to experience significant volatility. The investments in TerreStar Networks are determined using Level 3
inputs under the fair value hierarchy. In estimating those fair values we consider quotes from brokers and other
pricing services, if available, and obtain both observable and unobservable inputs in our valuation models which
include the use of option pricing and discounted cash flow techniques. The fair value of these investments can be
significantly impacted by adverse changes in securities markets generally, as well as risks related to the performance
of TerreStar Corporation and TerreStar Networks, their ability to obtain sufficient capital to execute their business
plans, risks associated with their specific industries, bankruptcy and other factors. We are continuing to evaluate
the effect of developments in the Debtors’ and the TSC Debtors’ chapter 11 cases on the fair value of our
investment in TerreStar Networks and TerreStar Corporation. In particular, as a result of the termination of the
Restructuring Support Agreement on February 15, 2011, the fair value of our investments in TerreStar Networks
may be significantly impacted.
On January 14, 2011, TerreStar Corporation filed a Form 15, terminating the registration of its common stock and
Series A Voting Convertible Preferred Stock under Section 12(g) of the Securities Exchange Act of 1934 and
suspending its obligations to file reports with the Securities and Exchange Commission (other than with respect to
its fiscal year ended December 31, 2010).
F–19
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The balance sheets for TerreStar Corporation are presented below as of September 30 and the statements of
operations data include twelve months ended September 30 for each respective period presented. As of February
24, 2011, TerreStar Corporation had not filed its quarterly report on Form 10-Q for the quarter ended September 30,
2010. As such, we have relied on TerreStar Corporation’s management to provide us with accurate summary
financial information, including portions of the information shown below. We are not aware of any errors in, or
possible misstatements of, the financial information provided to us that would have a material effect on our
Consolidated Financial Statements. The following table provides summarized financial information from TerreStar
Corporation:
Balance Sheets (unaudited):
2010
2009
(In thousands)
Assets
Current assets.................................................................................
Noncurrent assets...........................................................................
Total assets...............................................................................
$
17,149
1,384,863
1,402,012
$
Liabilities and Stockholders' Equity (Deficit)
Current liabilities...........................................................................
Long-term liabilities.......................................................................
Cumulative preferred dividend.......................................................
Stockholders' equity (deficit).........................................................
Total liabilities and stockholders' equity (deficit)..................
$
633,917
1,080,364
-
(312,269)
1,402,012
$
$
80,970
1,259,783
1,340,753
$
$
53,521
929,427
408,500
(50,695)
1,340,753
$
Statement of Operations (unaudited):
2010
Revenue.............................................................................
Operating expenses............................................................
Net income (loss) from continuing operations...................
Net income (loss)...............................................................
Net income (loss) available to common stockholders........
$
$
$
$
$
17,120
230,644
(323,705)
(298,257)
(321,441)
2009
(In thousands)
$
$
$
$
$
-
152,203
(217,669)
(201,357)
(226,690)
2008
$
-
$
215,246
$
-
$
(286,757)
$
(314,418)
5.
Inventory
Inventory consists of the following:
As of December 31,
2010
2009
(In thousands)
$
$
Finished goods ..........................
Raw materials ...........................
Work-in-process........................
Total inventory...........................
21,084
6,819
2,530
30,433
$
$
32,988
16,647
3,379
53,014
F–20
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6.
Property and Equipment
Property and equipment consist of the following:
Depreciable
Life
(In Years)
As of December 31,
2010
2009
Land...............................................................................
Buildings and improvements.........................................
Furniture, fixtures, equipment and other........................
Satellites:
EchoStar III - fully depreciated................................
EchoStar IV - fully depreciated................................
EchoStar VI..............................................................
EchoStar VIII...........................................................
EchoStar IX..............................................................
EchoStar XII.............................................................
Satellites acquired under capital leases ....................
Construction in process.................................................
Total property and equipment....................................
Accumulated depreciation.............................................
Property and equipment, net.......................................
-
1-40
1-10
12
N/A
12
12
12
10
10-15
-
“Construction in process” consists of the following:
(In thousands)
$
$
28,240
232,208
791,247
28,301
226,964
756,827
234,083
78,511
244,305
175,801
127,376
190,051
534,673
393,098
3,029,593
(1,766,290)
1,263,303
$
234,083
78,511
244,305
175,801
127,376
190,051
508,553
271,490
2,842,262
(1,609,077)
1,233,185
$
As of December 31,
2009
2010
(In thousands)
Progress amounts for satellite construction, including certain amounts
prepaid under satellite service agreements and launch costs:
EchoStar XVI.......................................................................................... $ 100,312
QuetzSat-1............................................................................................... 162,947
Other ....................................................................................................... 93,958
Uplinking equipment........................................................................................ 11,933
Other ................................................................................................................ 23,948
393,098
Construction in process...............................................................................
$
$ 30,400
102,315
102,974
27,331
8,470
$
271,490
During the year ended December 31, 2010, $26 million of interest was capitalized into construction in progress,
including $7 million which relates to interest expense that should have been capitalized in 2009.
F–21
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Depreciation and amortization expense consists of the following:
For the Years Ended December 31,
2009
(In thousands)
2008
2010
Satellites.............................................................................
Furniture, fixtures, equipment and other.............................
Identifiable intangible assets subject to amortization ........
Buildings and improvements .............................................
Total depreciation and amortization..............................
92,750
98,481
31,095
6,585
228,911
105,270
99,428
33,057
6,374
244,129
$
$
$
$
$
$
139,079
86,629
32,606
5,883
264,197
Cost of sales and operating expense categories included in our accompanying Consolidated Statements of Operations
and Comprehensive Income (Loss) do not include depreciation expense related to satellites or equipment leased to
customers.
Satellites
We currently utilize ten satellites in geostationary orbit approximately 22,300 miles above the equator, four of
which are leased. Three of our leased satellites are accounted for as capital leases and are depreciated over the
terms of the satellite service agreements. We also lease capacity on one satellite from DISH Network that is
accounted for as an operating lease.
Degree
Orbital
Location
Original
Useful Life/
Lease Term
(In Years)
Satellites
Owned:
EchoStar III (1)..................................
EchoStar IV (2)..................................
EchoStar VI (1).................................
EchoStar VIII (1)..............................
EchoStar IX (1)..................................
EchoStar XII (1)................................
Launch
Date
October 1997
May 1998
July 2000
August 2002
August 2003
July 2003
61.5
77
77
77
121
61.5
Leased from DISH Network:
EchoStar I (1)....................................
December 1995
77
Leased from Other Third Parties:
AMC-15 (3).......................................
AMC-16 (3).......................................
Nimiq 5 (1) (3)..................................
December 2004
January 2005
September 2009
Under Construction:
QuetzSat-1 (leased) (1).....................
EchoStar XVI (owned) (1)................
CMBStar (owned)..............................
2011
2012
Construction
Suspended
105
85
72.7
77
61.5
(1) See Note 19 for further discussion of our Related Party Agreements.
(2) Fully depreciated and not currently in service.
(3) These satellites are accounted for as capital leases.
F–22
12
12
12
12
12
10
12
10
10
15
10
15
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Prior to 2010, certain satellites in our fleet experienced anomalies, some of which have had a significant adverse
impact on their remaining useful life and/or commercial operation. There can be no assurance that future anomalies
will not further impact the remaining useful life and commercial operation of any of these satellites. See “Long-
Lived Satellite Assets” below for further discussion of evaluation of impairment. There can be no assurance that we
can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail. We
generally do not carry insurance for any of the in-orbit satellites that we use, and therefore we will bear the risk of
any in-orbit failures. Recent developments with respect to certain of our satellites are discussed below.
Owned Satellites
EchoStar III. EchoStar III was originally designed to operate a maximum of 32 DBS transponders in a mode that
provides service to the entire continental United States (“CONUS”) at approximately 120 watts per channel,
switchable to 16 transponders operating at over 230 watts per channel, and was equipped with a total of 44 traveling
wave tube amplifiers (“TWTAs”) to provide redundancy. As a result of TWTA failures in previous years, during
January and May 2010, and February 2011, only 10 transponders are currently available for use. Although these
failures have impacted the commercial operation of the satellite, the satellite has been fully depreciated. It is likely
that additional TWTA failures will occur from time to time in the future and such failures could further impact
commercial operation of the satellite.
EchoStar VI. EchoStar VI was designed with 108 solar array strings, of which approximately 102 are required to
assure full power availability for the original minimum 12-year useful life of the satellite. During March and August of
2010, EchoStar VI experienced anomalies resulting in the loss of 24 solar array strings, reducing the number of
functional solar array strings to 84. While these anomalies did not reduce the estimated useful life of the satellite to less
than 12 years, commercial operation has been impacted and there can be no assurance that future anomalies will not
reduce its useful life or further impact its commercial operation. The satellite was designed to operate 32 DBS
transponders in CONUS at approximately 125 watts per channel, switchable to 16 DBS transponders operating at
approximately 250 watts per channel. The power reduction resulting from the solar array failures currently limits us to
operating 24 DBS transponders in CONUS at approximately 125 watts per channel, switchable to 12 DBS transponders
operating at approximately 250 watts per channel. The number of transponders to which power can be provided is
expected to decline in the future at the rate of approximately one transponder every three years.
EchoStar VIII. EchoStar VIII was designed to operate 32 DBS transponders in CONUS at approximately 120
watts per channel, switchable to 16 DBS transponders operating at approximately 240 watts per channel. EchoStar
VIII was also designed with spot-beam technology. This satellite has experienced several anomalies prior to 2011,
but none have reduced its useful life or impacted its commercial operation. During January 2011, the satellite
experienced an anomaly, which temporarily disrupted electrical power to some components causing an interruption
of broadcast service. Testing is being performed to determine if this anomaly will reduce the satellite’s useful life
or impact its commercial operations. There can be no assurance that this anomaly or any future anomalies will not
reduce its useful life or impact its commercial operation.
Leased Satellites
AMC-16. AMC-16 commenced commercial operation during February 2005 and currently operates at the 85
degree orbital location. This SES World Skies satellite is equipped with 24 Ku-band fixed satellite services (“FSS”)
transponders that operate at approximately 120 watts per channel and a Ka-band payload consisting of 12 spot
beams. During the first quarter 2010, SES World Skies notified us that AMC-16 had experienced a solar-array
anomaly that further reduced its available transponder capacity. As a result, our monthly recurring payment was
reduced accordingly and our capital lease obligation and the corresponding asset value were lowered by
approximately $39 million.
F–23
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Long-Lived Satellite Assets
We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable. This evaluation is performed at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Certain of the anomalies
discussed above, and previously disclosed, may be considered to represent a significant adverse change in the physical
condition of a particular satellite. However, based on the redundancy designed within each satellite, these anomalies
are not considered to be significant events that would require evaluation for impairment recognition because the
projected cash flows have not been significantly affected by these anomalies.
7.
Intangible Assets
As of December 31, 2010 and 2009, our identifiable intangibles subject to amortization consisted of the following:
As of
December 31, 2010
December 31, 2009
Intangible
Assets
Accumulated
Amortization
Intangible
Assets
Accumulated
Amortization
Contract-based............................................
Customer relationships...............................
Technology-based.......................................
Total ........................................................
190,566
23,632
118,305
332,503
$
$
(In thousands)
$
(108,361)
(23,605)
(35,086)
(167,052)
190,566
23,600
73,314
287,480
$
(91,733)
(17,700)
(26,234)
(135,667)
$
$
$
$
Amortization of these intangible assets is recorded on a straight line basis over an average finite useful life primarily
ranging from approximately three to 20 years. Amortization was $31 million, $33 million and $33 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
Estimated future amortization of our identifiable intangible assets as of December 31, 2010 is as follows (in
thousands):
$
27,944
26,124
26,120
24,910
20,279
40,074
165,451
$
For the Years Ended December 31,
2011............................................................
2012............................................................
2013............................................................
2014............................................................
2015............................................................
Thereafter...................................................
Total .......................................................
F–24
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Impairments of Goodwill, Indefinite-Lived and Long-Lived Assets
During the years ended December 31, 2010 and 2009, we did not record any impairments on goodwill, indefinite-
lived or long-lived assets. During the year ended December 31, 2008, we recorded impairment charges in
“Impairments of goodwill, indefinite-lived and long-lived assets” on our Consolidated Statements of Operations and
Comprehensive Income (Loss), detailed in the table below.
For the Year Ended
December 31, 2008
Pre-Tax
After-Tax
(In thousands)
Impairments of goodwill, indefinite-lived and long-lived assets:
Goodwill impairment.......................................................................................... $ 247,253
FCC authorization impairment........................................................................... 38,720
Satellite impairments:
AMC-15........................................................................................................ 137,955
AMC-16........................................................................................................ 79,745
85,000
CMBStar.......................................................................................................
Casualty loss - AMC-14..................................................................................... 12,799
Other impairments.............................................................................................. 11,273
612,745
Total impairments of goodwill, indefinite-lived and long-lived assets.........
$
$
247,253
33,434
85,339
49,331
52,581
7,918
8,678
484,534
$
The after tax amounts presented in the table above consider their specific tax attributes, including the effect of any
required valuation allowance for deferred tax assets (see Note 10).
Goodwill and Indefinite-Lived Asset Impairments
We assess the carrying value of goodwill and other indefinite-lived intangible assets for impairment annually, or
more frequently whenever events occur and circumstances change indicating potential impairment.
Goodwill Impairment. The fair value of goodwill carried in our “Digital Set-Top Box” reporting unit was
determined using a discounted cash flow model. The discounted cash flows were based on probability weighted
financial forecasts developed by management. This model used Level 3 inputs. The implied fair value of goodwill
was measured as the difference between the fair value of the “Digital Set-Top Box” reporting unit and the reporting
unit’s carrying value.
Based on this assessment, during 2008, we recorded a $247 million charge to fully impair our goodwill. This
impairment was the result of the significant decline in the fair value of our “Digital Set-Top Box” reporting unit
caused by the weak economic conditions and the effect of those conditions on our expected cash flows.
FCC Authorization Impairment. Prior to September 2008, we held certain FCC licenses with an aggregate carrying
amount of $43 million in our “All Other” reporting unit. During 2008, as a result of the weak domestic economy,
we determined that we no longer plan to invest additional amounts to exploit these assets. As a result of this change
in the business environment and changes in our business plan for these assets, we determined that we had a
triggering event related to these FCC frequencies. Based on this triggering event we performed an impairment
review of these assets using Level 3 inputs in a discounted cash flow model to determine our estimated fair value.
Based on this assessment, during 2008, we recorded an impairment charge of $39 million.
F–25
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Long-Lived Asset Impairments
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
AMC-15 and AMC-16 Impairments. In connection with the Spin-off, the satellite lease agreements for AMC-15 and
AMC-16, two in-orbit satellites with substantial unused satellite capacity, were contributed to us by DISH Network.
These assets are part of our “Satellite Services” business. Our business plan contemplated sufficient cash inflows to
support the carrying amount of these satellites. However, during 2008, due to our inability to successfully generate
planned cash inflows from business opportunities, together with a decrease in demand for satellite services as a
result of the weak economy we performed an impairment analysis and determined that the respective undiscounted
cash flows would not recover the carrying amount of these satellites. We estimated the fair values of these satellites
using a discounted cash flow model based on discrete financial forecasts developed by management. The
discounted cash flow models used Level 3 inputs.
Based on the results of this analysis, the carrying value of AMC-15 and AMC-16 exceeded the fair value by $138
million and $80 million, respectively, and we recorded these amounts as impairment charges during 2008. These
assets are included in our “Satellite Services” segment.
CMBStar Impairment. In connection with the Spin-off, DISH Network contributed to us, a satellite under
construction, CMBStar. We have suspended construction of the CMBStar satellite and during April 2008, we
notified the State Administration of Radio, Film and Television of China that we were suspending construction of
the CMBStar satellite pending, among other things, further analysis relating to efforts to meet the satellite
performance criteria and/or confirmation that alternative performance criteria would be acceptable. During 2008,
we continued to explore remedies and alternative uses for this satellite. During the fourth quarter of 2008, there
were significant adverse changes in the business climate, and we were unable to secure a commercial agreement for
an alternative use. As a result, we performed an impairment analysis and determined that the undiscounted cash
flows would not recover the carrying amount of this satellite. We determined the fair value of this satellite by
evaluating the probable cash flows that we may receive from potential uses, including what other purchasers in the
market may have paid for a reasonably similar asset and the fair value we could realize should we deploy the
satellite in a manner different from its original intended use (for example, we considered component resale values).
The valuation model used Level 3 inputs.
Based on the results of this analysis, the carrying value of CMBStar exceeded its fair value by $85 million, and we
recorded an impairment charge during 2008. This asset is included in our “All Other” segment.
AMC-14 Casualty Loss. In connection with the Spin-off, the satellite lease agreement for AMC-14 was contributed
to us by DISH Network. During 2008, AMC-14 experienced a launch anomaly and failed to reach its intended
orbit. SES World Skies subsequently declared the AMC-14 satellite a total loss due to a lack of viable options to
reposition the satellite to its proper geostationary orbit. Therefore, we have no obligation to make any future
monthly lease payments to SES World Skies with respect to the satellite. However, we did make up-front payments
with respect to the satellite prior to launch and recorded capitalized interest and insurance costs related to the
satellite. These amounts, net of insurance proceeds of $41 million, totaled $13 million and were written-off during
2008 and were attributed to our “Satellite Services” segment.
F–26
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
9. Long-Term Debt and Capital Lease Obligations
Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following:
As of December 31,
2009
2010
(In thousands)
Capital lease obligations:
Satellites financed under capital lease obligations............................... $ 405,449
Other equipment financed under capital lease obligations...................
901
8% note payable for EchoStar IX satellite vendor
financing, payable over 14 years from launch.....................................
8% mortgage payable due in installments through 2015...........................
Total ........................................................................................................
Less current portion ............................................................................
Capital lease obligations, mortgages
and other notes payable, net of current portion ................................... $ 359,825
6,315
220
412,885
(53,060)
$ 436,924
2,210
6,970
265
446,369
(54,206)
$ 392,163
Capital Lease Obligations
As of December 31, 2010 and 2009, we had $535 million and $509 million capitalized for the estimated fair value
of satellites acquired under capital leases included in “Property and equipment, net,” with related accumulated
depreciation of $268 million and $240 million, respectively. In our Consolidated Statements of Operations and
Comprehensive Income (Loss), we recognized $28 million, $21 million and $55 million in depreciation expense on
satellites acquired under capital lease agreements during the years ended December 31, 2010, 2009 and 2008,
respectively.
Nimiq 5. Nimiq 5 was launched in September 2009 and commenced commercial operation at the 72.7 degree
orbital location during October 2009, where it provides additional high-powered capacity to our satellite fleet. See
Note 19 for further discussion.
AMC-15. AMC-15, an FSS satellite, commenced commercial operation during January 2005. This lease is
renewable by us on a year-to-year basis following the initial ten-year term, and provides us with certain rights to
lease capacity on replacement satellites.
AMC-16. AMC-16 commenced commercial operation during February 2005. This lease is renewable by us on a
year-to-year basis following the initial ten-year term, and provides us with certain rights to lease capacity on
replacement satellites.
F–27
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Future minimum lease payments under these capital lease obligations, together with the present value of the net
minimum lease payments as of December 31, 2010 are as follows (in thousands):
For the Years Ended December 31,
2011............................................................................................................................................................
2012............................................................................................................................................................
2013............................................................................................................................................................
2014............................................................................................................................................................
2015............................................................................................................................................................
Thereafter...................................................................................................................................................
Total minimum lease payments..................................................................................................................
Less: Amount representing lease of the orbital location and estimated executory costs (primarily
insurance and maintenance) including profit thereon, included in total minimum lease payments..........
Net minimum lease payments.....................................................................................................................
Less: Amount representing interest...........................................................................................................
Present value of net minimum lease payments...........................................................................................
Less: Current portion.................................................................................................................................
Long-term portion of capital lease obligations...........................................................................................
$
118,134
117,412
117,315
111,971
44,150
377,521
886,503
(260,309)
626,194
(219,844)
406,350
(52,311)
354,039
$
10. Income Taxes
Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of
assets and liabilities and amounts reported on our Consolidated Balance Sheets, as well as probable operating loss, tax
credit and other carryforwards. Deferred tax assets are offset by valuation allowances when we believe it is more
likely than not that net deferred tax assets will not be realized. We periodically evaluate our need for a valuation
allowance. Determining necessary valuation allowances requires us to make assessments about historical financial
information as well as the timing of future events, including the probability of expected future taxable income and
available tax planning opportunities. Our deferred tax assets included tax effected net operating losses (“NOLs”) and
credits of $4 million as of December 31, 2010 which has been offset by a valuation allowance. As of December 31,
2010, we had capital loss carryforwards for federal income tax purposes of $58 million, which has been offset by a
valuation allowance.
The components of pretax income (loss) are as follows:
Domestic ............................... $ 284,501
Foreign .................................. 4,272
Total....................................... $ 288,773
For the Years Ended December 31,
2008
2009
2010
(In thousands)
$ 425,793
(434)
$ 425,359
$(1,046,999)
(7,869)
$(1,054,868)
F–28
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of the (provision for) benefit from income taxes are as follows:
For the Years Ended December 31,
2009
2008
2010
(In thousands)
Current (provision) benefit:
Federal ............................................................... $ 21,542
State... ................................................................ (579)
Foreign ............................................................... (1,809)
19,154
Deferred (provision) benefit:
Federal ............................................................... (98,626)
State ...................................................................
(6,593)
Decrease (increase) in valuation allowance ....... 1,650
(103,569)
$
(84,415)
Total benefit (provision).....................................
$ (9,240)
(5,216)
(855)
(15,311)
$ (55,166)
(7,953)
(2,212)
(65,331)
(134,287)
(16,162)
105,105
(45,344)
$
(60,655)
297,201
42,846
(178,036)
162,011
$
96,680
The actual tax provisions for 2010, 2009 and 2008 reconcile to the amounts computed by applying the statutory Federal
tax rate to income before taxes as shown below:
2008
2010
For the Years Ended December 31,
2009
% of pre-tax (income)/loss
(35.0)
(4.4)
-
(0.4)
-
24.7
-
0.8
(14.3)
(35.0)
(1.9)
(0.1)
0.1
-
2.0
2.0
3.7
(29.2)
35.0
2.3
(0.5)
0.1
(8.3)
(17.1)
-
(2.3)
9.2
Statutory rate.................................................................
State income taxes, net of Federal benefit ....................
Foreign taxes and income not U.S. taxable...................
Stock option compensation............................................
Goodwill impairment.....................................................
Decrease (increase) in valuation allowance ..................
Stock write-off...............................................................
Other..............................................................................
Total benefit (provision) for income taxes.................
F–29
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The temporary differences, which give rise to deferred tax assets and liabilities as of December 31, 2010 and 2009,
are as follows:
As of December 31,
2009
2010
(In thousands)
Deferred tax assets:
NOL, credit and other carryforwards ....................................
Unrealized (gains) losses on investments ..............................
Accrued expenses ..................................................................
Stock compensation ..............................................................
State taxes net of federal effect..............................................
Total deferred tax assets........................................................
Valuation allowance ..............................................................
Deferred tax asset after valuation allowance .........................
$
23,062
15,243
12,042
8,998
(1,843)
57,502
(46,670)
10,832
$
5,140
79,099
13,532
9,062
8,287
115,120
(95,102)
20,018
Deferred tax liabilities:
Unrealized (gains) losses on investments...............................
Depreciation, amortization and intangible assets...................
Total deferred tax liabilities ..................................................
Net deferred tax asset (liability) ............................................
(61,797)
(88,996)
(150,793)
(139,961)
$
(38,380)
(8,173)
(46,553)
(26,535)
$
Current portion of net deferred tax asset (liability) ...............
Noncurrent portion of net deferred tax asset (liability) .........
Total net deferred tax asset (liability) ...................................
$
(64,121)
(75,840)
(139,961)
$
$
5,053
(31,588)
(26,535)
$
Overall, our net deferred tax assets are offset by a valuation allowance of $47 million and $95 million as of
December 31, 2010 and 2009, respectively, principally related to losses that are capital in nature. The decrease in
the valuation allowance primarily relates to realized and unrealized gains on marketable investment securities and
other investments. Approximately $43 million of the change in valuation allowance is accounted for in accumulated
other comprehensive income in 2010. We evaluated and assessed the expected near-term utilization of NOLs, book
and taxable income trends, available tax strategies and the overall deferred tax position to determine the valuation
allowance required as of December 31, 2010 and 2009.
As of December 31, 2010, we had undistributed earnings attributable to foreign subsidiaries. Since net
undistributed earnings are positive, and we intend to permanently reinvest in our foreign subsidiaries, we have not
recognized a deferred tax liability for any outside basis differences. It is not practicable to determine the amount of
the unrecognized deferred tax liability at this time.
Accounting for Uncertainty in Income Taxes
In addition to filing federal income tax returns, we and one or more of our subsidiaries will file income tax returns
in all states that impose an income tax. We are not currently under any to U.S. federal, state or local income tax
examinations. We also file income tax returns in the United Kingdom, The Netherlands, Spain and a number of
other foreign jurisdictions where we have insignificant operations. We are generally open to income tax
examination in these foreign jurisdictions by tax authorities in taxable years beginning in 2003. As of December
31, 2010, no taxing authority has proposed any significant adjustments to our tax positions. We have no significant
current tax examinations in process in our foreign jurisdictions.
F–30
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Unrecognized tax benefit
Balance as of beginning of period.........................................................
Additions based on tax positions related to the current year.................
Additions based on tax positions related to prior years.........................
Reductions based on tax positions related to prior years.......................
Balance as of end of period...................................................................
For the Years Ended December 31,
2009
(In thousands)
2010
2008
$
$
$
14,559
-
15,440
-
29,999
15,181
155
-
(777)
14,559
800
14,381
-
-
15,181
$
$
$
We have $15 million in unrecognized tax benefits that, if recognized, could favorably affect our effective tax rate.
We do not expect to pay or effectively settle any of the unrecognized tax benefits within the next twelve months.
Accrued interest and penalties on uncertain tax positions are recorded as a component of “Interest expense, net of
amounts capitalized” and “Other, net,” respectively, on our Consolidated Statements of Operations and
Comprehensive Income (Loss). During the year ended December 31, 2010, we recorded a $1 million benefit for
interest and penalty in earnings. There was no accrued interest and penalties at December 31, 2010. The table
above excludes these amounts.
11. Stockholders’ Equity (Deficit)
Common Stock
The Class A, Class B and Class C common stock are equivalent except for voting rights. Holders of Class A and Class
C common stock are entitled to one vote per share and holders of Class B common stock are entitled to 10 votes per
share. Each share of Class B and Class C common stock is convertible, at the option of the holder, into one share of
Class A common stock. Upon a change in control of DISH Network, each holder of outstanding shares of Class C
common stock is entitled to 10 votes for each share of Class C common stock held. Our principal stockholder owns the
majority of all outstanding Class B common stock and, together with all other stockholders, owns outstanding Class A
common stock. There are no shares of Class C common stock outstanding.
Each holder of Class D common stock is not entitled to a vote on any matter. Each share of Class D common stock is
entitled to receive dividends and distributions upon liquidation on a basis equivalent to that of the Class A common
stock. There are no shares of Class D common stock outstanding.
Preferred Stock
Our Board of Directors is authorized to divide the preferred stock into series and, with respect to each series, to
determine the preferences and rights and the qualifications, limitations or restrictions of the series, including the
dividend rights, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund
provisions, the number of shares constituting the series and the designation of such series. Our Board of Directors
may, without stockholder approval, issue additional preferred stock of existing or new series with voting and other
rights that could adversely affect the voting power of the holders of common stock and could have certain anti-
takeover effects.
F–31
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Common Stock Repurchase Program
During the years ended December 31, 2010, 2009 and 2008, we repurchased 34,000, 1.9 million and 3.6 million
shares of our common stock for $605,000, $30 million and $68 million, respectively. On November 3, 2010, our
Board of Directors extended the plan and authorized an increase in the maximum dollar value of shares that may be
repurchased under the plan, such that we are currently authorized to repurchase up to $500 million of our
outstanding shares of Class A common stock through and including December 31, 2011. As of December 31, 2010,
we may repurchase up to $500 million under this plan.
12. Employee Benefit Plans
Employee Stock Purchase Plan
Our employees participate in EchoStar’s employee stock purchase plan (the “ESPP”), in which we are authorized to
issue 2.5 million shares of Class A common stock. At December 31, 2010, we had 2.0 million shares of Class A
common stock which remain available for issuance under this plan. Substantially all full-time employees who have
been employed by us for at least one calendar quarter are eligible to participate in the ESPP. Employee stock
purchases are made through payroll deductions. Under the terms of the ESPP, employees may not deduct an
amount which would permit such employee to purchase our capital stock under all of our stock purchase plans at a
rate which would exceed $25,000 in fair value of capital stock in any one year. The purchase price of the stock is
85% of the closing price of the Class A common stock on the last business day of each calendar quarter in which
such shares of Class A common stock are deemed sold to an employee under the ESPP. During each of the years
ended December 31, 2010, 2009 and 2008, employee purchases of Class A common stock through the ESPP totaled
0.1 million shares.
401(k) Employee Savings Plan
We sponsor a 401(k) Employee Savings Plan (the “401(k) Plan”) for eligible employees. Voluntary employee
contributions to the 401(k) Plan may be matched 50% by us, subject to a maximum annual contribution of $1,500
per employee. Forfeitures of unvested participant balances which are retained by the 401(k) Plan may be used to
fund matching and discretionary contributions. We also may make an annual discretionary contribution to the plan
with approval by our Board of Directors, subject to the maximum deductible limit provided by the Internal Revenue
Code of 1986, as amended. These contributions may be made in cash or in our stock.
The following table summarizes the expense associated with matching contributions and discretionary
contributions:
For the Years Ended December 31,
2010
2008
2009
(In thousands)
$ 1,424
$ 3,719
$ 1,481
$ 4,032
$ 1,251
$ 1,467
Expense Recognized Related to the 401(k) Plan
Matching contributions, net of forfeitures..........................
Discretionary stock contributions, net of forfeitures..........
F–32
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13. Stock-Based Compensation
Stock Incentive Plans
We maintain stock incentive plans to attract and retain officers, directors and key employees. Stock awards under
these plans include both performance and non-performance based stock incentives. As of December 31, 2010, we
had outstanding under these plans stock options to acquire 7.8 million shares of our Class A common stock and 0.1
million restricted stock units. Stock options granted prior to and on December 31, 2010 were granted with exercise
prices equal to or greater than the market value of our Class A common stock at the date of grant and with a
maximum term of ten years. While historically we have issued stock awards subject to vesting, typically at the rate
of 20% to 33% per year, some stock awards have been granted with immediate vesting, and other stock awards vest
only upon the achievement of certain company-wide objectives. As of December 31, 2010, we had 6.9 million
shares of our Class A common stock available for future grant under our stock incentive plans.
In connection with the Spin-off, as permitted by DISH Network’s existing stock incentive plans and consistent with
the Spin-off exchange ratio, each DISH Network stock option was converted into two stock options as follows:
•
•
an adjusted DISH Network stock option for the same number of shares that were exercisable
under the original DISH Network stock option, with an exercise price equal to the exercise price
of the original DISH Network stock option multiplied by 0.831219.
a new EchoStar stock option for one-fifth of the number of shares that were exercisable under the
original DISH Network stock option, with an exercise price equal to the exercise price of the
original DISH Network stock option multiplied by 0.843907.
Similarly, each holder of DISH Network restricted stock units retained his or her DISH Network restricted stock
units and received one EchoStar restricted stock unit for every five DISH Network restricted stock units that they
held.
Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award immediately
following the Spin-off was equivalent to the fair value of such stock award immediately prior to the Spin-off.
As of December 31, 2010, the following stock awards were outstanding:
Stock Awards Outstanding
Held by EchoStar employees....................
Held by DISH Network employees...........
Total..........................................................
As of December 31, 2010
EchoStar Awards
DISH Network Awards
Stock
Options
6,757,399
1,037,974
7,795,373
Restricted
Stock
Units
48,465
58,784
107,249
Stock
Options
3,471,496
N/A
3,471,496
Restricted
Stock
Units
292,348
N/A
292,348
We are responsible for fulfilling all stock awards related to EchoStar common stock, and DISH Network is
responsible for fulfilling all stock awards related to DISH Network common stock, regardless of whether such stock
awards are held by our or DISH Network’s employees. Notwithstanding the foregoing, our stock-based
compensation expense, resulting from stock awards outstanding at the Spin-off date, is based on the stock awards
held by our employees regardless of whether such stock awards were issued by EchoStar or DISH Network.
Accordingly, stock-based compensation that we expense with respect to DISH Network stock awards is included in
“Additional paid-in capital” on our Consolidated Balance Sheets.
F–33
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Exercise prices for stock options outstanding and exercisable as of December 31, 2010 are as follows:
Options Outstanding
Options Exercisable
Number
Outstanding
as of
December 31,
2010
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Number
Exercisable as of
December 31,
2010
Weighted-
Average
Remaining
Contractual
Life
$
-
$
10.00
$
15.00
$
20.00
$
25.00
$
30.00
$
35.00
$
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
10.00
15.00
20.00
25.00
30.00
35.00
40.00
40.00
16,758
1,155,808
1,416,150
2,067,644
2,894,932
96,581
147,500
7,795,373
5.44
8.22
9.31
6.82
6.07
5.09
6.21
7.17
$
$
$
$
$
$
$
$
2.77
14.83
18.67
22.24
28.68
32.15
36.84
23.24
16,140
173,008
59,950
685,744
1,643,330
65,840
78,697
2,722,709
5.41
8.07
6.70
6.48
5.29
4.35
6.07
5.80
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
$
2.71
14.83
16.89
22.09
28.22
32.26
36.78
25.77
Stock Award Activity
Our stock option activity was as follows:
Total options outstanding, beginning of period..........................
Granted .....................................................................................
Exercised ...................................................................................
Forfeited and cancelled..............................................................
Total options outstanding, end of period....................................
Performance based options outstanding, end of period (1)........
Exercisable at end of period.......................................................
2010
For the Years Ended December 31,
2009
2008
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
24.85
19.15
15.06
33.99
23.24
25.38
25.77
Options
7,203,101
1,258,000
(105,573)
(560,155)
7,795,373
697,100
2,722,709
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
28.61
17.09
5.73
26.08
24.85
25.40
29.46
Options
5,184,415
2,523,000
(37,931)
(466,383)
7,203,101
724,450
1,904,479
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
22.96
29.33
21.77
12.63
28.61
25.61
29.45
Options
4,182,755
2,498,500
(228,090)
(1,268,750)
5,184,415
885,650
1,296,512
(1) These stock options, which are included in the caption “Total options outstanding, end of period,” were issued
pursuant to a performance-based stock incentive plan. Vesting of these stock options is contingent upon meeting a
certain company goal which is not yet probable of being achieved. See discussion of the 2005 LTIP below.
We realized tax benefits from stock awards exercised during the years ended December 31, 2010, 2009 and 2008 as
follows:
2010
For the Years Ended December 31,
2009
(In thousands)
$ 1,044
$ 1,810
$ 1,933
2008
Tax benefit from stock awards exercised...........
F–34
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Based on the closing market price of our Class A common stock on December 31, 2010, the aggregate intrinsic value of
our stock options was as follows:
As of December 31, 2010
Options
Options
Exercisable
Outstanding
(In thousands)
Aggregate intrinsic value.............
$
26,665
$
4,571
Our restricted stock unit activity was as follows:
Total restricted stock units outstanding, beginning of period.........
Granted ..........................................................................................
Vested.............................................................................................
Forfeited and cancelled...................................................................
Total restricted stock units outstanding, end of period...................
Restricted Performance Units outstanding, end of period (1).........
2010
For the Years Ended December 31,
2009
2008
Restricted
Stock
Units
130,040
-
(13,975)
(8,816)
107,249
93,274
Weighted-
Average
Grant Date
Fair Value
$
27.78
$
-
$
31.84
$
26.70
$
27.33
$
26.66
Restricted
Stock
Units
272,856
-
(21,025)
(121,791)
130,040
99,990
Weighted-
Average
Grant Date
Fair Value
$
29.40
$
-
$
30.26
$
31.00
$
27.78
$
26.56
Restricted
Stock
Units
343,386
-
(56,000)
(14,530)
272,856
108,856
Weighted-
Average
Grant Date
Fair Value
$
29.69
$
-
$
31.24
$
29.14
$
29.40
$
26.42
(1) These Restricted Performance Units, which are included in the caption “Total restricted stock units
outstanding, end of period,” were issued pursuant to a performance-based stock incentive plan. Vesting of these
Restricted Performance Units is contingent upon meeting a certain company goal which is not yet probable of being
achieved. See discussion of the 2005 LTIP below.
Long-Term Performance-Based Plans
2005 LTIP. During 2005, DISH Network adopted a long-term, performance-based stock incentive plan (the “2005
LTIP”). The 2005 LTIP provides stock options and restricted stock units, either alone or in combination, which
vest over seven years at the rate of 10% per year during the first four years, and at the rate of 20% per year
thereafter. Exercise of the stock awards is subject to a performance condition that a company-specific goal is
achieved by March 31, 2015.
Contingent compensation related to the 2005 LTIP will not be recorded in our financial statements unless and until
the achievement of the performance condition is probable. The competitive nature of our industry and certain other
factors can significantly impact achievement of the goal. Consequently, while it was determined that achievement
of the goal was not probable as of December 31, 2010, this assessment could change at any time.
F–35
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
If all of the stock awards under the 2005 LTIP were vested and the goal had been met, or if we had determined that
achievement of the goal was probable during the year ended December 31, 2010, we would have recorded total non-
cash, stock-based compensation expense for our employees as indicated in the table below. If the goal is met and
there are unvested stock awards at that time, the vested amounts would be expensed immediately on our
Consolidated Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized
ratably over the remaining vesting period.
2005 LTIP
Total
Vested
Portion
DISH Network awards held by EchoStar employees...............
EchoStar awards held by EchoStar employees.........................
Total.........................................................................................
$
$
17,641
3,455
21,096
10,108
1,977
12,085
$
(In thousands)
$
Of the 7.8 million stock options and 0.1 million restricted stock units outstanding under our stock incentive plans as
of December 31, 2010, the following awards were outstanding pursuant to the 2005 LTIP:
As of December 31, 2010
Weighted-
Average
Exercise
Price
$
25.38
Number of
Awards
697,100
93,274
790,374
Stock options...............................
Restricted performance units.......
Total............................................
Stock-Based Compensation
Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the
years ended December 31, 2010, 2009 and 2008 and was allocated to the same expense categories as the base
compensation for such employees:
Cost of sales - services and other..........................
Research and development expenses....................
Selling, general and administrative expenses........
Total non-cash, stock-based compensation...........
For the Years Ended December 31,
2010
2008
2009
(In thousands)
$
-
3,663
9,708
13,371
-
$
3,579
9,967
13,546
$
$
722
6,901
15,982
23,605
$
$
As of December 31, 2010, our total unrecognized compensation cost related to our non-performance based unvested
stock awards was $27 million and includes compensation expense that we will recognize for DISH Network stock
awards held by our employees as a result of the Spin-off. This cost is based on an estimated future forfeiture rate of
approximately 1.2% per year and will be recognized over a weighted-average period of approximately three years.
Share-based compensation expense is recognized based on stock awards ultimately expected to vest and is reduced
for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Changes in the estimated forfeiture rate can have a
significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the
period the forfeiture estimate is changed.
F–36
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Valuation
The fair value of each stock award for the years ended December 31, 2010, 2009 and 2008 was estimated at the date
of the grant using a Black-Scholes option valuation model with the following assumptions:
Stock Options
Risk-free interest rate ................................................
Volatility factor .........................................................
Expected term of options in years..............................
Weighted-average fair value of options granted .......
2010
1.64% - 2.97%
31.00% - 32.73%
6.1 - 6.2
$6.44 - $9.11
For the Years Ended December 31,
2009
1.70% - 3.16%
28.48% - 42.68%
3.0 - 6.4
$4.76 - $7.43
2008
2.74% - 3.42%
19.98% - 24.90%
6.0 - 6.1
$7.63 - $9.29
We do not currently intend to pay dividends on our common stock and accordingly, the dividend yield percentage
used in the Black-Scholes option valuation model is set at zero for all periods. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded stock options which have no vesting restrictions
and are fully transferable. Consequently, our estimate of fair value may differ from other valuation models.
Further, the Black-Scholes option valuation model requires the input of subjective assumptions. Changes in the
subjective input assumptions can materially affect the fair value estimate. Therefore, we do not believe the existing
models provide as reliable a single measure of the fair value of stock-based compensation awards as a market-based
model would.
We will continue to evaluate the assumptions used to derive the estimated fair value of our stock options as new
events or changes in circumstances become known.
14. Acquisition of Move Networks
On December 31, 2010, we acquired certain assets of Move Networks, Inc. (“Move Networks”) for $45 million, of
which $2.25 million was placed into escrow for certain potential contingencies. These assets include patented
technology that enables the adaptive delivery of video content via the Internet which will enable us to expand our
portfolio of advanced technologies serving cable, satellite, telecommunications companies and IPTV video
providers. This transaction was accounted for as a business combination. However, we have not completed
allocating the purchase price amongst the assets that were acquired and thus the allocation in the table below may
change.
Acquisition intangibles (1)...........................
Total purchase price....................................
Purchase Price
Allocation
(In thousands)
$
44,991
$
44,991
(1) “Acquisition Intangibles” in the table above are primarily comprised of technology-based intangibles with an
estimated useful life of approximately fifteen years.
The transaction did not have an impact on our results of operations for the year ended December 31, 2010 and
would not have materially impacted our results of operations for this period had the transaction occurred on January
1, 2010. Furthermore, the transaction would not have had a material impact on our results of operations for the
comparable period in 2009 or 2008 had the transaction occurred on January 1, 2009 or January 1, 2008,
respectively.
F–37
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. Commitments and Contingencies
Commitments
Future maturities of our contractual obligations are summarized as follows:
Long-term debt obligations..................
Capital lease obligations.......................
Interest expense on long-term
debt and capital lease obligations......
Satellite-related obligations..................
Operating lease obligations..................
Purchase and other obligations ............
Total.....................................................
Total
2011
$
6,535
406,350
$
749
52,311
2012
Payments due by period
2013
(In thousands)
871
$
62,651
$
808
56,928
2014
2015
Thereafter
$
940
64,850
$
1,005
11,088
$
2,162
158,522
222,057
1,020,744
17,554
287,513
1,960,753
$
37,256
160,930
6,977
287,513
545,736
$
32,504
160,058
4,609
-
254,907
$
27,267
79,583
2,566
-
172,938
$
21,489
76,451
1,635
-
165,365
$
17,852
65,289
1,014
-
96,248
$
85,689
478,433
753
-
725,559
$
In certain circumstances the dates on which we are obligated to make these payments could be delayed. These
amounts will increase to the extent we procure insurance for our satellites or contract for the construction, launch or
lease of additional satellites.
The table above does not include $30 million of liabilities associated with unrecognized tax benefits which were
accrued and are included on our Consolidated Balance Sheets as of December 31, 2010. We do not expect any
portion of this amount to be paid or settled within the next twelve months.
In connection with TerreStar Networks’ bankruptcy, we entered into agreements to provide a $75 million Credit
Facility to TerreStar Networks and certain of its affiliates, of which $25 million has been funded as of December 31,
2010. The table above does not include any unfunded amounts. See Note 4 under “Investments in TerreStar” for
further discussion.
During December 2009, we entered into a joint venture to provide a direct-to-home (“DTH”) satellite service in
Taiwan and certain other targeted regions in Asia. We own 50% and have joint control of the joint venture.
Pursuant to these arrangements, we sell hardware such as digital set-top boxes and provide certain technical support
services to the joint venture. We have provided $18 million of cash to the joint venture, and an $18 million line of
credit that the joint venture may only use to purchase set-top boxes from us. This investment is subject to an
evaluation for other-than-temporary impairment on a quarterly basis. This quarterly evaluation consists of reviewing,
among other things, company business plans and current financial statements, if available, for factors that may indicate
an impairment of our investment. During the year ended December 31, 2010, we recorded a $14 million charge to
fully impair this investment, which is included in “Unrealized and realized gains (losses) on marketable investment
securities and other investments” on our Consolidated Statements of Operations and Comprehensive Income (Loss).
As of December 31, 2010, the remaining amount available under the line of credit is $10 million and if advanced
would be subject to our evaluation for other-than-temporary impairment. The table above includes this $10 million
under “Purchase and other obligations.”
F–38
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Satellite-Related Obligations
Satellites Under Construction. As of December 31, 2010, we had entered into the following contracts to construct
new satellites which are contractually scheduled to be completed within the next two years. Future commitments
related to these satellites are included in the table above under “Satellite-related obligations.”
• QuetzSat-1. During 2008, we entered into a ten-year satellite service agreement with SES Latin America
S.A. (“SES”) to lease all of the capacity on QuetzSat-1. QuetzSat-1 is expected to be launched during the
second half of 2011 and will operate at the 77 degree orbital location. Upon expiration of the initial term,
we have the option to renew the transponder service agreement on a year-to-year basis through the end-of-
life of the QuetzSat-1 satellite. DISH Network has agreed to lease 24 of the 32 DBS transponders on this
satellite from us. The expected future payments related to QuetzSat-1 included in the table above are $301
million.
• EchoStar XVI. During November 2009, we entered into a contract for the construction of EchoStar XVI, a
DBS satellite, which is expected to be completed during the second half of 2012 and will operate at the
61.5 degree orbital location. DISH Network has agreed to lease all of the capacity on this satellite from us
for a portion of its useful life. The expected future payments related to EchoStar XVI included in the table
above are $85 million.
Purchase Obligations
Our purchase obligations primarily consist of binding purchase orders for digital set-top boxes and related
components, digital broadcast operations and transitional service agreements. Our purchase obligations can
fluctuate significantly from period to period due to, among other things, management’s control of inventory levels,
and can materially impact our future operating asset and liability balances, and our future working capital
requirements.
Rent Expense
For the years ended December 31, 2010, 2009, and 2008, total rent expense for operating leases approximated $25
million, $7 million and $12 million, respectively. The increase in rent expense from 2009 to 2010 primarily resulted
from an increase in costs related to the EchoStar I satellite, which we began leasing from DISH Network during the
first quarter of 2010. The decrease in rent expense from 2008 to 2009 was primarily attributable to a decrease in
transponder lease expense primarily resulting from the termination of a lease agreement.
Patents and Intellectual Property
Many entities, including some of our competitors, now have and may in the future obtain patents and other
intellectual property rights that cover or affect products or services directly or indirectly related to those that we
offer. We may not be aware of all patents and other intellectual property rights that our products and services may
potentially infringe. Damages in patent infringement cases can include a tripling of actual damages in certain cases.
Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to
intellectual property rights held by others and the availability and cost of any such licenses. Various parties have
asserted patent and other intellectual property rights with respect to components within our direct broadcast satellite
products and services. We cannot be certain that these persons do not own the rights they claim, that these rights
are not valid, that our products and services 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 and services to avoid infringement.
F–39
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Contingencies
In connection with the Spin-off, we entered into a separation agreement with DISH Network, which provides,
among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the
terms of the separation agreement, we have assumed certain liabilities that relate to our business including certain
designated liabilities for acts or omissions prior to the Spin-off. Certain specific provisions govern intellectual
property related claims under which, generally, we will only be liable for our acts or omissions following the Spin-
off and DISH Network will indemnify us for any liabilities or damages resulting from intellectual property claims
relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off.
Acacia
During 2004, Acacia Media Technologies (“Acacia”) filed a lawsuit against us and DISH Network in the United
States District Court for the Northern District of California. The suit also named DirecTV, Comcast, Charter, Cox
and a number of smaller cable companies as defendants. Acacia is an entity that seeks to license an acquired patent
portfolio without itself practicing any of the claims recited therein. The suit alleges infringement of United States
Patent Nos. 5,132,992; 5,253,275; 5,550,863; 6,002,720; and 6,144,702, which relate to certain systems and
methods for transmission of digital data. On September 25, 2009, the District Court granted summary judgment to
the defendants on invalidity grounds, and dismissed the action with prejudice. On October 8, 2010, the Federal
Circuit Court of Appeals affirmed the dismissal. Acacia may no longer appeal this dismissal since their time to seek
en banc review with the Federal Circuit Court of Appeal or petition the United States Supreme Court for certiorari
have now expired.
Broadcast Innovation, L.L.C.
During 2001, Broadcast Innovation, L.L.C. (“Broadcast Innovation”) filed a lawsuit against DISH Network,
DirecTV, Thomson Consumer Electronics and others in United States District Court in Denver, Colorado.
Broadcast Innovation is an entity that seeks to license an acquired patent portfolio without itself practicing any of
the claims recited therein. The suit alleges infringement of United States Patent Nos. 6,076,094 (the ‘094 patent)
and 4,992,066 (the ‘066 patent). The ‘094 patent relates to certain methods and devices for transmitting and
receiving data along with specific formatting information for the data. The ‘066 patent relates to certain methods
and devices for providing the scrambling circuitry for a pay television system on removable cards. Subsequently,
DirecTV and Thomson settled with Broadcast Innovation leaving DISH Network as the only defendant.
During 2004, the District Court issued an order finding the ‘066 patent invalid. Also in 2004, the District Court
found the ‘094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and Comcast. In 2005,
the United States Court of Appeals for the Federal Circuit overturned that finding of invalidity with respect to the
‘094 patent and remanded the Charter case back to the District Court. During June 2006, Charter filed a
reexamination request with the United States Patent and Trademark Office. The District Court has stayed the
Charter case pending reexamination, and our case has been stayed pending resolution of the Charter case.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe any of the
asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain user-friendly features that we currently offer to consumers. We
are being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the
period prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
F–40
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, an entity that seeks to license an acquired patent
portfolio without itself practicing any of the claims recited therein, alleged that DirecTV’s electronic program guide
and other elements of its system infringe United States Patent No. 5,404,505 (the ‘505 patent).
During 2006, we and DISH Network, together with NagraStar L.L.C., filed a Complaint for Declaratory Judgment
in the United States District Court for the District of Delaware against Finisar that asks the Court to declare that we
do not infringe, and have not infringed, any valid claim of the ‘505 patent. Finisar brought counterclaims against
us, DISH Network and NagraStar alleging that we infringed the ‘505 patent. During April 2008, the Federal Circuit
reversed the judgment against DirecTV and ordered a new trial. On remand, the District Court granted summary
judgment in favor of DirecTV and during January 2010, the Federal Circuit affirmed the District Court’s grant of
summary judgment, and dismissed the action with prejudice. Finisar then agreed to dismiss its counterclaims
against us, DISH Network and NagraStar without prejudice. We also agreed to dismiss our Declaratory Judgment
action without prejudice.
Joao Control
During December 2010, Joao Control & Monitoring Systems (“Joao”) filed suit against Sling Media Inc., our
indirect wholly owned subsidiary, ACTI Corporation, ADT Security, Alarmclub.Com, American Honda Motor
Company. BMW, Byremote, Drivecam, Honeywell, Iveda Corporation, Magtec Products, Mercedes-Benz, On-Net
Surveillance, OnStar, SafeFreight Technology, Skyway Security, SmartVue Corporation, Toyota Motor Sales,
Tyco, UTC Fire and Xanboo in the United States District Court for the Central District of California alleging
infringement of United States Patent Nos. 6,549,130 and 6,587,046. The abstracts of the patents state that the
claims are directed to the remote control of devices and appliances. Joao is an entity that seeks to license an
acquired patent portfolio without itself practicing any of the claims recited therein.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the
asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain features that we currently offer to consumers. We cannot predict
with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Nazomi Communications
On February 10, 2010, Nazomi Communications, Inc. (“Nazomi”) filed suit against Sling Media, Inc., a subsidiary
of ours, Nokia Corp, Nokia Inc., Microsoft Corp., Amazon.com Inc., Western Digital Corp., Western Digital
Technologies, Inc., Garmin Ltd., Garmin Corp., Garmin International, Inc., Garmin USA, Inc., Vizio Inc. and
iOmega Corp in the United States District Court for the Central District of California alleging infringement of
United States Patent No. 7,080,362 (“the ‘362 patent”) and United States Patent No. 7,225,436 (“the ‘436 patent”).
The ‘362 patent and the ‘436 patent relate to Java hardware acceleration. The suit alleges that the Slingbox-Pro-HD
product infringes the ‘362 patent and the ‘436 patent because the Slingbox-PRO HD allegedly incorporates an
ARM926EJ-S processor core capable of Java hardware acceleration.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the
asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain features that we currently offer to consumers. We cannot predict
with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
F–41
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NorthPoint Technology
On July 2, 2009, NorthPoint Technology, Ltd filed suit against us, DISH Network, and DirecTV in the United
States District Court for the Western District of Texas alleging infringement of United States Patent No. 6,208,636
(the ‘636 patent). The ‘636 patent relates to the use of multiple low-noise block converter feedhorns, or LNBFs,
which are antennas used for satellite reception.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted
patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could
require us to materially modify certain features that we currently offer to consumers. We are being indemnified by
DISH Network for any potential liability or damages resulting from this suit relating to the period prior to the effective
date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of
any potential liability or damages.
Personalized Media Communications
During 2008, Personalized Media Communications, Inc. (“PMC”) filed suit against us, DISH Network and Motorola,
Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent
Nos. 4,694,490; 5,109,414; 4,965,825; 5,233,654; 5,335,277; and 5,887,243, which relate to satellite signal
processing. PMC is an entity that seeks to license an acquired patent portfolio without itself practicing any of the
claims recited therein.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe any of the
asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain user-friendly features that we currently offer to consumers. We are
being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period
prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
Suomen Colorize Oy
During October 2010, Suomen Colorize Oy (“Suomen”) filed suit against us and DISH Network L.L.C., an indirect
wholly owned subsidiary of DISH Network, in the United States District Court for the Middle District of Florida
alleging infringement of United States Patent No. 7,277,398. Suomen is an entity that seeks to license an acquired
patent portfolio without itself practicing any of the claims recited therein. The abstract of the patent states that the
claims are directed to a method and terminal for providing services in a telecommunication network.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the
asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction
that could require us to materially modify certain features that we currently offer to consumers. We are being
indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior
to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
F–42
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Technology Development Licensing
On January 22, 2009, Technology Development and Licensing L.L.C. (“TDL”) filed suit against us and DISH Network
in the United States District Court for the Northern District of Illinois alleging infringement of United States Patent No.
Re. 35,952, which relates to certain favorite channel features. TDL is an entity that seeks to license an acquired patent
portfolio without itself practicing any of the claims recited therein. In July 2009, the Court granted our motion to stay
the case pending two re-examination petitions before the Patent and Trademark Office.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted
patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could
require us to materially modify certain user-friendly features that we currently offer to consumers. We are being
indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior
to the effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
Tivo Inc.
During January 2008, the United States Court of Appeals for the Federal Circuit affirmed in part and reversed in part
the April 2006 jury verdict concluding that certain of our digital video recorders, or DVRs, infringed a patent held by
Tivo. In its January 2008 decision, the Federal Circuit affirmed the jury’s verdict of infringement on Tivo’s “software
claims,” and upheld the award of damages from the District Court. 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. On October 6, 2008, the Supreme Court denied our petition for certiorari. As a result, DISH Network
paid approximately $105 million to Tivo.
We also developed and deployed “next-generation” DVR software. This improved software was automatically
downloaded to our current customers’ DVRs, and is fully operational (our “original alternative technology”). The
download was completed as of April 2007. We received written legal opinions from outside counsel that concluded
our original alternative technology does not infringe, literally or under the doctrine of equivalents, either the hardware
or software claims of Tivo’s patent. Tivo filed a motion for contempt alleging that we are in violation of the Court’s
injunction. We opposed this motion on the grounds that the injunction did not apply to DVRs that have received our
original alternative technology, that our original alternative technology does not infringe Tivo’s patent, and that we
were in compliance with the injunction.
In June 2009, the United States District Court granted Tivo’s motion for contempt, finding that our original alternative
technology was not more than colorably different than the products found by the jury to infringe Tivo’s patent, that the
original alternative technology still infringed the software claims, and that even if the original alternative technology
was “non-infringing,” the original injunction by its terms required that DISH Network disable DVR functionality in all
but approximately 192,000 digital set-top boxes in the field. The District Court also amended its original injunction to
require that we inform the court of any further attempts to design around Tivo’s patent and seek approval from the court
before any such design-around is implemented. The District Court awarded Tivo $103 million in supplemental
damages and interest for the period from September 2006 through April 2008, based on an assumed $1.25 per
subscriber per month royalty rate. DISH Network posted a bond to secure that award pending appeal of the contempt
order. On July 1, 2009, the Federal Circuit Court of Appeals granted a permanent stay of the District Court’s contempt
order pending resolution of our appeal.
The District Court held a hearing on July 28, 2009 on Tivo’s claims for contempt sanctions. Tivo sought up to $975
million in contempt sanctions for the period from April 2008 to June 2009 based on, among other things, profits Tivo
alleges DISH Network made from subscribers using DVRs. We opposed Tivo’s request arguing, among other things,
that sanctions are inappropriate because we made good faith efforts to comply with the Court’s injunction. We also
challenged Tivo’s calculation of profits. On September 4, 2009, the District Court partially granted Tivo’s motion for
contempt sanctions and awarded $2.25 per DVR subscriber per month for the period from April 2008 to July 2009 (as
F–43
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
compared to the award for supplemental damages for the prior period from September 2006 to April 2008, which was
based on an assumed $1.25 per DVR subscriber per month). By the District Court’s estimation, the total award for the
period from April 2008 to July 2009 is approximately $200 million. The District Court also awarded Tivo its attorneys’
fees and costs incurred during the contempt proceedings. Enforcement of these awards has been stayed by the
District Court pending resolution of our appeal of the underlying June 2009 contempt order. On February 8, 2010,
we and Tivo submitted a stipulation to the District Court that the attorneys’ fees and costs, including expert witness fees
and costs, that Tivo incurred during the contempt proceedings amounted to $6 million.
In light of the District Court’s finding of contempt, and its description of the manner in which it believes our original
alternative technology infringed the ‘389 patent, we are also developing and testing potential new alternative
technology in an engineering environment. As part of our development process, we downloaded several of our design-
around options to less than 1,000 subscribers for “beta” testing. On March 11, 2010, we requested that the District
Court approve the implementation of one of our design-around options on an expedited basis. There can be no
assurance that the District Court will approve this request.
Oral argument on our appeal of the contempt ruling took place on November 2, 2009, before a three-judge panel of
the Federal Circuit Court of Appeals. On March 4, 2010, the Federal Circuit affirmed the District Court’s contempt
order in a 2-1 decision. On May 14, 2010, our petition for en banc review of that decision by the full Federal
Circuit was granted and the opinion of the three-judge panel was vacated. Oral argument occurred on November 9,
2010. There can be no assurance that the full Federal Circuit will reverse the decision of the three-judge panel.
Tivo has stated that it will seek additional damages for the period from June 2009 to the present.
On October 6, 2010, the Patent and Trademark Office (the “PTO”) issued an office action confirming the validity of
certain of the software claims of United States Patent No. 6,233,389 (the ‘389 patent). However, the PTO only
confirmed the validity of the ‘389 patent after Tivo made statements that we believe narrow the scope of its claims.
The claims that were confirmed thus should not have the same scope as the claims that we were found to have
infringed and which underlie the contempt ruling that we are now appealing. Therefore, we believe that the PTO’s
conclusions are relevant to the issues on appeal. The PTO’s conclusions support our position that our original
alternative technology does not infringe and that we acted in good faith to design around Tivo’s patent.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful
in developing and deploying potential new alternative technology and we are unable to reach a license agreement with
Tivo on reasonable terms, we may be required to cease distribution of digital set-top boxes with DVR functionality. In
that event, our sales of digital set-top boxes to DISH Network and others would likely significantly decrease and could
even potentially cease for a period of time. Furthermore, the inability to offer DVR functionality would place us at a
significant disadvantage to our competitors and make it even more difficult for us to penetrate new markets for digital
set-top boxes. The adverse effect on our financial position and results of operations if the District Court’s contempt
order is upheld would be significant.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in
defending against any subsequent claim in a new action that our original alternative technology or any potential new
alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs. In that event, we would
be at a significant disadvantage to our competitors who could continue offering DVR functionality and the adverse
effect on our business would be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District Court. DISH Network
has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for
substantially all liability arising from this lawsuit. We contributed an amount equal to our $5 million intellectual
property liability limit under the Receiver Agreement, and during 2009, we recorded a charge included in “General and
administrative expenses – DISH Network” on our Consolidated Statements of Operations and Comprehensive Income
(Loss) for this amount to reflect this contribution. We and DISH Network have further agreed that our $5 million
F–44
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise under
the Receiver Agreement. We and DISH Network also agreed that we would each be entitled to joint ownership of, and
a cross-license to use, any intellectual property developed in connection with any potential new alternative technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is unable
to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these damages
and sanctions not paid by DISH Network. Any amounts that DISH Network may be required to pay could impair its
ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at
a time and in circumstances in which we would normally not raise capital and there can be no assurance that such
capital would be available on terms that would be attractive to us or at all. Therefore, any capital we raise may be
on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and
might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and
initiatives.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims which arise in the
ordinary course of business. In our opinion, the amount of ultimate liability with respect to any of these actions is
unlikely to materially affect our financial position, results of operations or liquidity.
16. Segment Reporting
Operating segments are components of an enterprise for which separate financial information is available and
regularly evaluated by the chief operating decision maker(s) of an enterprise. Total assets by segment have not been
specified because the information is not available to the chief operating decision-maker. Under this definition, we
operate two primary business units.
•
•
“Digital Set-Top Box” Business – which designs, develops and distributes digital set-top boxes and related
products, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers,
telecommunication and cable companies and, with respect to Slingboxes, directly to consumers via retail
outlets. Our “Digital Set-Top Box” business also provides digital broadcast operations including satellite
uplinking/downlinking, transmission services, signal processing, conditional access management and other
services primarily to DISH Network.
“Satellite Services” Business – which uses our ten owned and leased in-orbit satellites and related FCC
licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and
secondarily to Dish Mexico, U.S. government service providers, state agencies, Internet service providers,
broadcast news organizations, programmers and private enterprise customers. We also use certain of our
satellites to offer our ViP-TV service, which transports MPEG-4 IP encapsulated standard-definition and
high-definition programming on behalf of telecommunications companies and rural cable operators.
F–45
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The “All Other” category consists of revenue and net income (loss) from other operations including our corporate
investment portfolio for which segment disclosure requirements do not apply.
Digital
Set-Top Box
Business
Satellite
Services
Business
Year Ended December 31, 2010
Total revenue .................................................................
Total costs and expenses ................................................
Depreciation and amortization .......................................
Other...............................................................................
EBITDA (1)....................................................................
Interest income ...............................................................
Interest expense, net of amounts capitalized ..................
Income tax benefit (provision), net ................................
Net income (loss) ...........................................................
$
2,070,672
(2,025,125)
113,675
15,859
175,081
892
748
(23,957)
39,089
Year Ended December 31, 2009
Total revenue .................................................................
Total costs and expenses ................................................
Depreciation and amortization .......................................
Other...............................................................................
EBITDA (1)....................................................................
Interest income ...............................................................
Interest expense, net of amounts capitalized ..................
Income tax benefit (provision), net ................................
Net income (loss) ...........................................................
$
1,709,670
(1,732,295)
117,447
(11,517)
83,305
1,066
(167)
13,031
(20,212)
Year Ended December 31, 2008
Total revenue .................................................................
Total costs and expenses ................................................
Depreciation and amortization .......................................
Other...............................................................................
EBITDA (1)....................................................................
Interest income ...............................................................
Interest expense, net of amounts capitalized ..................
Income tax benefit (provision), net ................................
Net income (loss) ...........................................................
$
1,940,915
(2,231,756)
104,903
(18,736)
(204,674)
1,093
(641)
117,900
(191,225)
All
Other
(In thousands)
Eliminations
Consolidated
Total
$
262,022
(174,509)
94,943
1,214
183,670
20
(15,977)
(27,652)
45,118
$
173,673
(155,372)
107,440
92
125,833
-
(31,463)
5,124
(7,946)
$
189,166
(422,539)
141,701
4
(91,668)
-
(31,241)
100,922
(163,688)
$
17,675
(8,410)
20,293
129,463
159,021
13,560
669
(32,806)
120,151
$
20,216
(11,000)
19,242
437,766
466,224
25,375
(685)
(78,810)
392,862
$
20,459
(136,839)
17,593
(398,327)
(497,114)
36,057
(2,483)
(122,142)
(603,275)
-
$
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
$
(20)
20
-
-
-
(2,456)
2,456
-
-
$
2,350,369
(2,208,044)
228,911
146,536
517,772
14,472
(14,560)
(84,415)
204,358
$
1,903,559
(1,898,667)
244,129
426,341
675,362
26,441
(32,315)
(60,655)
364,704
$
2,150,520
(2,791,114)
264,197
(417,059)
(793,456)
34,694
(31,909)
96,680
(958,188)
(1) EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United
States, or GAAP, and should not be considered a substitute for operating income, net income or any other
measure determined in accordance with GAAP. Conceptually, EBITDA measures the amount of income
generated each period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA
should not be considered in isolation or as a substitute for measures of performance prepared in accordance with
GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial
performance for benchmarking against our peers and competitors. Management believes EBITDA provides
meaningful supplemental information regarding liquidity and the underlying operating performance of our
business. Management also believes that EBITDA is useful to investors because it is frequently used by securities
analysts, investors and other interested parties to evaluate companies in the digital set-top box industry.
F–46
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table reconciles EBITDA to reported net income in the Consolidated Statements of Operations and
Comprehensive Income (Loss):
EBITDA.....................................................
Interest expense, net ................................
Income tax (provision) benefit, net...........
Depreciation and amortization.................
Net income (loss).......................................
$
2010
2008
For the Years Ended December 31,
2009
(In thousands)
675,362
$
(5,874)
(60,655)
(244,129)
$
364,704
517,772
(88)
(84,415)
(228,911)
$
204,358
(793,456)
2,785
96,680
(264,197)
(958,188)
$
$
Geographic Information and Transactions with Major Customers
Geographic Information. Revenues are attributed to geographic regions based upon the location where the goods
and services are provided. North American revenue includes transactions with North American customers. All
other revenue includes transactions with customers in Europe, Asia, South America and the Middle East. The
following table summarizes total long-lived assets and revenue attributed to the North American and other foreign
locations.
As of December 31,
2010
2009
(In thousands)
$
$
1,457,208
41,356
1,498,564
$
$
1,411,292
43,516
1,454,808
For the Years Ended December 31,
2009
2008
2010
(In thousands)
$
1,845,839
57,720
1,903,559
2,302,901
47,468
2,350,369
2,075,451
75,069
2,150,520
$
$
$
$
$
Long-lived assets, including FCC authorizations:
North America..............................................................
All other........................................................................
Total..............................................................................
Revenue:
North America..............................................................
All other........................................................................
Total..............................................................................
F–47
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Transactions with Major Customers. During the years ended December 31, 2010, 2009 and 2008, our
revenue primarily included sales to three major customers. The following table summarizes sales to each
customer and its percentage of total revenue.
For the Years Ended December 31,
2008
2009
2010
(In thousands)
Total revenue:
DISH Network..................................
Bell TV.............................................
Dish Mexico......................................
Other.................................................
Total revenue................................
Percentage of total revenue:
DISH Network..................................
Bell TV.............................................
Dish Mexico......................................
$
1,938,572
202,407
89,430
119,960
2,350,369
$
$
1,547,989
200,601
44,589
110,380
1,903,559
$
$
1,859,446
180,470
175
110,429
2,150,520
$
82.5%
8.6%
3.8%
81.3%
10.5%
2.3%
86.5%
8.4%
0.0%
17. Valuation and Qualifying Accounts
Our valuation and qualifying accounts as of December 31, 2010, 2009 and 2008 are as follows:
Allowance for doubtful accounts
For the years ended:
December 31, 2010........................
December 31, 2009........................
December 31, 2008........................
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Recovery
of Amounts
Previously
Reserved
(In thousands)
Balance at
End of
Year
Deductions
$
$
$
5,605
7,182
51
$
$
$
3,801
2,963
6,432
(129)
$
(4,682)
$
$
-
$
$
$
(1,633)
142
699
$
$
$
7,644
5,605
7,182
F–48
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
18. Quarterly Financial Data (Unaudited)
Our quarterly results of operations are summarized as follows:
For the Three Months Ended
March 31
June 30
September 30 December 31
(In thousands, except per share amounts)
Year ended December 31, 2010:
Total revenue .............................................
Operating income (loss).............................
Net income (loss).......................................
Basic income (loss) per share ....................
Diluted income (loss) per share..................
Year ended December 31, 2009:
Total revenue .............................................
Operating income (loss).............................
Net income (loss).......................................
Basic income (loss) per share ....................
Diluted income (loss) per share .................
Year ended December 31, 2008:
Total revenue ............................................
Operating income (loss).............................
Net income (loss).......................................
Basic income (loss) per share.....................
Diluted income (loss) per share..................
$
627,080
40,766
71,746
0.85
0.84
$
$
$
603,049
31,313
(41,477)
(0.49)
(0.49)
$
$
$
479,547
(2,348)
(645)
(0.01)
(0.01)
$
$
$
554,571
13,661
5,701
0.06
0.06
$
$
$
383,148
(3,050)
101,814
1.18
1.18
$
$
$
483,340
(2,389)
47,824
0.53
0.53
$
$
$
607,040
38,603
5,151
0.06
0.06
$
$
$
482,932
(3,836)
293,940
3.45
3.45
$
$
$
616,173
2,081
(307,930)
(3.43)
(3.43)
$
$
$
513,200
31,643
168,938
1.98
1.98
$
$
$
557,932
14,126
(30,405)
(0.37)
(0.37)
$
$
$
496,436
(653,947)
(703,783)
(7.89)
(7.89)
$
$
19. Related Party Transactions
Related Party Transactions with DISH Network
Following the Spin-off, we and DISH Network have operated as separate public companies and DISH Network has
no ownership interest in us. However, a substantial majority of the voting power of the shares of both companies is
owned beneficially by our Chairman, Charles W. Ergen or by certain trusts established by Mr. Ergen for the benefit
of his family.
In connection with the Spin-off and subsequent to the Spin-off, we and DISH Network have entered into certain
agreements pursuant to which we obtain certain products, services and rights from DISH Network, DISH Network
obtains certain products, services and rights from us, and we and DISH Network have indemnified each other
against certain liabilities arising from our respective businesses. We also may enter into additional agreements with
DISH Network in the future. The following is a summary of the terms of the principal agreements that we have
entered into with DISH Network that may have an impact on our financial position and results of operations.
We expect that DISH Network will remain our principal customer. However, the agreements pursuant to which
DISH Network purchases digital set-top boxes or digital broadcast operation services from us expire on January 1,
2012. Therefore, if we are unable to extend these contracts on similar terms with DISH Network, or if we are
otherwise unable to obtain similar contracts from third parties before that date, there could be a significant adverse
effect on our business, results of operations and financial position.
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Generally, the prices charged for products and services provided under the agreements entered into in connection
with the Spin-off are based on our cost plus a fixed margin (unless noted differently below), which varies depending
on the nature of the products and services provided.
“Equipment revenue – DISH Network”
Receiver Agreement. In connection with the Spin-off, we entered into a receiver agreement pursuant to which DISH
Network has the right but not the obligation to purchase digital set-top boxes and related accessories, and other
equipment from us for a period ending January 1, 2012. The receiver agreement allows DISH Network to purchase
digital set-top boxes, related accessories and other equipment from us at cost plus a fixed margin, which varies
depending on the nature of the equipment purchased. Additionally, we provide DISH Network with standard
manufacturer warranties for the goods sold under the receiver agreement. DISH Network may terminate the
receiver agreement for any reason upon at least 60 days notice to us. We may terminate the receiver agreement if
certain entities were to acquire DISH Network. The receiver agreement also includes an indemnification provision,
whereby the parties indemnify each other for certain intellectual property matters.
“Services and other revenue – DISH Network”
Broadcast Agreement. In connection with the Spin-off, we and DISH Network entered into a broadcast agreement
pursuant to which we provide certain broadcast services to DISH Network, including teleport services such as
transmission and downlinking, channel origination services, and channel management services for a period ending
on January 1, 2012. DISH Network may terminate channel origination services and channel management services
for any reason and without any liability upon at least 60 days notice to us. If DISH Network terminates teleport
services for a reason other than our breach, DISH Network is obligated to pay us the aggregate amount of the
remainder of the expected cost of providing the teleport services. The fees for services provided under the
broadcast agreement are calculated at cost plus a fixed margin, which varies depending on the nature of the products
and services provided.
Broadcast Agreement for Certain Sports Related Programming. During May 2010, we and DISH Network entered
into a broadcast agreement pursuant to which we provide certain broadcast services to DISH Network in connection
with its carriage of certain sports related programming. The term of this agreement is for ten years. If DISH
Network terminates this agreement for a reason other than our breach, DISH Network is generally obligated to
reimburse us for any direct costs we incur related to any such termination that they cannot reasonably mitigate. The
fees for the broadcast services provided under this agreement depend, among other things, upon the cost to develop
and provide such services.
Satellite Capacity Agreements. In connection with the Spin-off and subsequent to the Spin-off, we entered into
certain satellite capacity agreements pursuant to which DISH Network leases certain satellite capacity on certain
satellites owned or leased by us. The fees for the services provided under these satellite capacity agreements
depend, among other things, upon the orbital location of the applicable satellite and the length of the lease. The
term of each of the leases is set forth below:
EchoStar III, VI, VIII and XII. DISH Network leases certain satellite capacity from us on EchoStar VI, VIII
and XII. The leases generally terminate upon the earlier of: (i) the end of life or replacement of the satellite
(unless DISH Network determines to renew on a year-to-year basis); (ii) the date the satellite fails; (iii) the date
the transponder on which service is being provided fails; or (iv) a certain date, which depends upon, among
other things, the estimated useful life of the satellite, whether the replacement satellite fails at launch or in orbit
prior to being placed into service, and the exercise of certain renewal options. DISH Network generally has the
option to renew each lease on a year-to-year basis through the end of the respective satellite’s life. There can
be no assurance that any options to renew such agreements will be exercised. In August 2010, DISH
Network’s lease of EchoStar III terminated when it was replaced by EchoStar XV, which is owned by DISH
Network.
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ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
EchoStar IX. DISH Network leases certain satellite capacity from us on EchoStar IX. Subject to availability,
DISH Network generally has the right to continue to lease satellite capacity from us on EchoStar IX on a
month-to-month basis.
EchoStar XVI. DISH Network will lease certain satellite capacity from us on EchoStar XVI after its service
commencement date and this lease generally terminates upon the earlier of: (i) the end of life or replacement of
the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided
under the agreement fails; or (iv) ten years following the actual service commencement date. Upon expiration
of the initial term, DISH Network has the option to renew on a year-to-year basis through the end of life of the
satellite. There can be no assurance that any options to renew this agreement will be exercised. EchoStar XVI
is expected to be launched during the second half of 2012.
EchoStar XV. EchoStar XV is owned by DISH Network and is operated at the 61.5 degree orbital location. The
FCC has granted us an authorization to operate the satellite at the 61.5 degree orbital location. For so long as
EchoStar XV remains in service at the 61.5 degree orbital location, DISH Network is obligated to pay us a fee
which varies depending on the number of frequencies being used by EchoStar XV.
Nimiq 5 Agreement. During September 2009, we entered into a fifteen-year satellite service agreement with Telesat
Canada (“Telesat”) to receive service on all 32 DBS transponders on the Nimiq 5 satellite at the 72.7 degree orbital
location (the “Telesat Transponder Agreement”). During September 2009, DISH Network also entered into a
satellite service agreement (the “DISH Telesat Agreement”) with us, pursuant to which they will receive service
from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement. We and DISH Network
are currently receiving service on 23 of these DBS transponders and will receive service on the remaining nine DBS
transponders over a phase-in period that will be completed in 2012.
Under the terms of the DISH Telesat Agreement, DISH Network makes certain monthly payments to us that
commenced in October 2009 when the Nimiq 5 satellite was placed into service and continue through the service
term. Unless earlier terminated under the terms and conditions of the DISH Telesat Agreement, the service term
will expire ten years following the date it was placed into service. Upon expiration of the initial term DISH
Network has the option to renew the DISH Telesat Agreement on a year-to-year basis through the end of life of the
Nimiq 5 satellite. Upon in-orbit failure or end of life of the Nimiq 5 satellite, and in certain other circumstances,
DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance
that any options to renew this agreement will be exercised or that DISH Network will exercise its option to receive
service on a replacement satellite.
QuetzSat-1 Lease Agreement. During 2008, we entered into a ten-year satellite service agreement with SES, which
provides, among other things, for the provision by SES to us of service on 32 DBS transponders on the QuetzSat-1
satellite expected to be placed into service at the 77 degree orbital location during the second half of 2011. During
2008, we also entered into a transponder service agreement (“QuetzSat-1 Transponder Agreement”) with DISH
Network pursuant to which they will receive service from us on 24 of the DBS transponders on QuetzSat-1, which
will replace certain other transponders leased from us. The remaining eight DBS transponders on QuetzSat-1 are
expected to be used by Dish Mexico.
Under the terms of the QuetzSat-1 Transponder Agreement, DISH Network will make certain monthly payments to
us commencing when the QuetzSat-1 satellite is placed into service and continuing through the service term. Unless
earlier terminated under the terms and conditions of the QuetzSat-1 Transponder Agreement, the service term will
expire ten years following the actual service commencement date. Upon expiration of the initial term, DISH
Network has the option to renew the QuetzSat-1 Transponder Agreement on a year-to-year basis through the end of
life of the QuetzSat-1 satellite. Upon a launch failure, in-orbit failure or end of life of the QuetzSat-1 satellite, and
in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
satellite. There can be no assurance that any options to renew this agreement will be exercised or that DISH
Network will exercise its option to receive service on a replacement satellite.
TT&C Agreement. In connection with the Spin-off, we entered into a telemetry, tracking and control (“TT&C”)
agreement pursuant to which we provide TT&C services to DISH Network and its subsidiaries for a period ending
on January 1, 2012. The fees for services provided under the TT&C agreement are calculated at cost plus a fixed
margin. DISH Network may terminate the TT&C agreement for any reason upon at least 60 days notice.
Real Estate Lease Agreements. We have entered into lease agreements pursuant to which DISH Network leases
certain real estate from us. The rent on a per square foot basis for each of the leases is comparable to per square
foot rental rates of similar commercial property in the same geographic area, and DISH Network is responsible for a
portion of the taxes, insurance, utilities and maintenance of the premises. The term of each of the leases is set forth
below:
Inverness Lease Agreement. The lease for certain space at 90 Inverness Circle East in Englewood,
Colorado expires on January 1, 2012.
Meridian Lease Agreement. DISH Network leases all of 9601 S. Meridian Blvd. in Englewood, Colorado
for a period ending on January 1, 2012 with a renewal option for one additional year.
Santa Fe Lease Agreement. DISH Network leases all of 5701 S. Santa Fe Dr. in Littleton, Colorado for a
period ending on January 1, 2012 with a renewal option for one additional year.
EchoStar Data Networks Sublease Agreement. The sublease for certain space at 211 Perimeter Center in
Atlanta, Georgia is for a period ending on October 31, 2016.
Gilbert Lease Agreement. The lease for certain space at 801 N. DISH Dr. in Gilbert, Arizona expired on
January 1, 2010.
Product Support Agreement. In connection with the Spin-off, we entered into a product support agreement pursuant
to which DISH Network has the right, but not the obligation, to receive product support (including certain
engineering and technical support services) for all set-top boxes and related accessories that our subsidiaries have
previously sold and in the future may sell to DISH Network. The fees for the services provided under the product
support agreement are calculated at cost plus a fixed margin, which varies depending on the nature of the services
provided. The term of the product support agreement is the economic life of such receivers and related accessories,
unless terminated earlier. DISH Network may terminate the product support agreement for any reason upon at least
60 days notice. In the event of an early termination of this agreement, DISH Network shall be entitled to a refund
of any unearned fees paid to us for the services.
Satellite Procurement Agreement. In connection with the Spin-off, we entered into a satellite procurement
agreement pursuant to which DISH Network had the right, but not the obligation, to engage us to manage the
process of procuring new satellite capacity for DISH Network. The satellite procurement agreement expired on
January 1, 2010. However, we and DISH Network have agreed that following January 1, 2010, DISH Network
shall continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite
capacity for DISH Network pursuant to the Professional Services Agreement as described below.
Services Agreement. In connection with the Spin-off, we entered into a services agreement pursuant to which DISH
Network had the right, but not the obligation, to receive logistics, procurement and quality assurance services from
us. This agreement expired on January 1, 2010. However, we and DISH Network have agreed that following
January 1, 2010, DISH Network shall continue to have the right, but not the obligation, to receive from us certain of
the services previously provided under the services agreement pursuant to the Professional Services Agreement as
discussed below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DISHOnline.com Services Agreement. Effective January 1, 2010, DISH Network entered into a two-year agreement
with us pursuant to which DISH Network will receive certain services associated with an online video portal. The
fees for the services provided under this services agreement depend, among other things, upon the cost to develop
and operate such services. DISH Network has the option to renew this agreement for three successive one year
terms and the agreement may be terminated for any reason upon at least 120 days notice to us.
DISH Remote Access Services Agreement. Effective February 23, 2010, DISH Network entered into an agreement
with us pursuant to which DISH Network will receive, among other things, certain remote DVR management
services. The fees for the services provided under this services agreement depend, among other things, upon the
cost to develop and operate such services. This agreement has a term of five years with automatic renewal for
successive one year terms and may be terminated for any reason upon at least 120 days notice to us.
SlingService Services Agreement. Effective February 23, 2010, DISH Network entered into an agreement with us
pursuant to which DISH Network will receive certain place-shifting services. The fees for the services provided
under this services agreement depend, among other things, upon the cost to develop and operate such services. This
agreement has a term of five years with automatic renewal for successive one year terms and may be terminated for
any reason upon at least 120 days notice to us.
International Programming Rights Agreement. DISH Network purchased certain international rights for sporting
events from us included in “Services and other revenue – DISH Network” on the Consolidated Statements of
Operations and Comprehensive Income (Loss), of which we only retain a certain portion.
“General and administrative expenses – DISH Network”
Management Services Agreement. In connection with the Spin-off, we entered into a management services
agreement with DISH Network pursuant to which DISH Network makes certain of its officers available to provide
services (which are primarily legal and accounting services) to us. Specifically, R. Stanton Dodge and Paul W.
Orban remain employed by DISH Network, but also serve as our Executive Vice President and General Counsel,
and Senior Vice President and Controller, respectively. We make payments to DISH Network based upon an
allocable portion of the personnel costs and expenses incurred by DISH Network with respect to such DISH
Network officers (taking into account wages and fringe benefits). These allocations are based upon the estimated
percentages of time to be spent by the DISH Network executive officers performing services for us under the
management services agreement. We also reimburse DISH Network for direct out-of-pocket costs incurred by
DISH Network for management services provided to us. We and DISH Network evaluate all charges for
reasonableness at least annually and make any adjustments to these charges as we and DISH Network mutually
agree upon.
The management services agreement automatically renewed on January 1, 2011 for an additional one-year period
until January 1, 2012 and renews automatically for successive one-year periods thereafter, unless terminated earlier:
(i) by us at any time upon at least 30 days notice; (ii) by DISH Network at the end of any renewal term, upon at least
180 days notice; or (iii) by DISH Network upon notice to us, following certain changes in control.
Real Estate Lease Agreement. During 2008, we entered into a sublease for space at 185 Varick Street, New York,
New York from DISH Network for a period of approximately seven years. The rent on a per square foot basis for
this sublease was comparable to per square foot rental rates of similar commercial property in the same geographic
area at the time of the sublease, and we are responsible for our portion of the taxes, insurance, utilities and
maintenance of the premises.
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ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Transition Services Agreement. In connection with the Spin-off, we entered into a transition services agreement
with DISH Network pursuant to which we had the right, but not the obligation, to receive the following services
from DISH Network: finance, information technology, benefits administration, travel and event coordination,
human resources, human resources development (training), program management, internal audit, legal, accounting
and tax, and other support services. The fees for the services provided under the transition services agreement were
calculated at cost plus a fixed margin, which varied depending on the nature of the services provided. The transition
services agreement expired on January 1, 2010. However, we and DISH Network have agreed that following
January 1, 2010 we shall continue to have the right, but not the obligation, to receive from DISH Network certain of
the services previously provided under the transition services agreement pursuant to the Professional Services
Agreement, as discussed below.
Professional Services Agreement. During 2009, we and DISH Network agreed that we shall continue to have the
right, but not the obligation, to receive from DISH Network the following services, among others, certain of which
were previously provided under the transition services agreement: information technology, travel and event
coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and
other support services. Additionally, we and DISH Network agreed that DISH Network shall continue to have the
right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH
Network (as discussed above, previously provided under the satellite procurement agreement) and receive logistics,
procurement and quality assurance services from us (as discussed above, previously provided under the services
agreement). The professional services agreement expires on January 1, 2012, but renews automatically for
successive one-year periods thereafter, unless terminated earlier by either party upon at least 60 days notice.
However, either party may terminate the services it receives with respect to a particular service for any reason upon
at least 30 days notice.
Other Agreements – DISH Network
Satellite Capacity Leased from DISH Network. During 2009, we entered into a satellite capacity agreement
pursuant to which we lease certain satellite capacity from DISH Network on EchoStar I. The fee for the services
provided under this satellite capacity agreement depends, among other things, upon the orbital location of the
satellite and the length of the lease. During the year ended December 31, 2010, the amount of those fees included in
“Cost of sales – services and other” on the Consolidated Statements of Operations and Comprehensive Income
(Loss) was approximately $19 million. During the years ended December 31, 2009 and 2008, we did not lease
satellite capacity from DISH Network on EchoStar I. The lease generally terminates upon the earlier of: (i) the end
of life or replacement of the satellite (unless we determine to renew on a year-to-year basis); (ii) the date the satellite
fails; (iii) the date the transponder on which service is being provided fails; or (iv) a certain date, which depends,
among other things, upon the estimated useful life of the satellite, whether the replacement satellite fails at launch or
in orbit prior to being placed into service, and the exercise of certain renewal options. We generally have the option
to renew this lease on a year-to-year basis through the end of the satellite’s life. There can be no assurance that any
options to renew this agreement will be exercised.
Packout Services Agreement. In connection with the Spin-off, we entered into a packout services agreement,
whereby we had the right, but not the obligation, to engage a DISH Network subsidiary to package and ship satellite
receivers to customers that are not associated with DISH Network or its subsidiaries. This agreement expired on
January 1, 2010.
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ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Remanufactured Receiver Agreement. In connection with the Spin-off, we entered into a remanufactured receiver
agreement with DISH Network pursuant to which we have the right, but not the obligation, to purchase
remanufactured receivers and accessories from DISH Network at cost plus a fixed margin, which varies depending
on the nature of the equipment purchased. This agreement expires on January 1, 2012. We may terminate the
remanufactured receiver agreement for any reason upon at least 60 days notice to us. DISH Network may also
terminate this agreement if certain entities acquire it. During the years ended December 31, 2010, 2009 and 2008,
we purchased remanufactured receivers and accessories from DISH Network for an aggregate amount of $3 million,
$7 million and $12 million, respectively.
Tax Sharing Agreement. In connection with the Spin-off, we entered into a tax sharing agreement with DISH
Network which governs our respective rights, responsibilities and obligations after the Spin-off with respect to taxes
for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are
incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network,
and DISH Network will indemnify us for such taxes. However, DISH Network is not liable for and will not
indemnify us for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to
qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Code because of: (i)
a direct or indirect acquisition of any of our stock, stock options or assets; (ii) any action that we take or fail to take;
or (iii) any action that we take that is inconsistent with the information and representations furnished to the IRS in
connection with the request for the private letter ruling, or to counsel in connection with any opinion being
delivered by counsel with respect to the Spin-off or certain related transactions. In such case, we will be solely
liable for, and will indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses.
The tax sharing agreement will only terminate after the later of the full period of all applicable statutes of
limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
Tivo. Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District Court. DISH Network
has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for
substantially all liability arising from this lawsuit. We contributed an amount equal to our $5 million intellectual
property liability limit under the Receiver Agreement, and during 2009, we recorded a charge included in “General and
administrative expenses – DISH Network” on our Consolidated Statements of Operations and Comprehensive Income
(Loss) for this amount to reflect this contribution. We and DISH Network have further agreed that our $5 million
contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise under
the Receiver Agreement. We and DISH Network also agreed that we would each be entitled to joint ownership of, and
a cross-license to use, any intellectual property developed in connection with any potential new alternative technology.
Multimedia Patent Trust. In December 2009, DISH Network agreed that it is obligated under the agreements
entered into in connection with the Spin-off to indemnify us for all of the costs to settle this lawsuit relating to the
period prior to the Spin-off and a portion of such settlement costs relating to the period after the Spin-off. We have
agreed that our contribution towards such settlement costs shall not be applied against our aggregate liability cap
under the Receiver Agreement.
Launch Service. During 2009, we assigned certain of our rights under a launch contract to DISH Network for its
fair value of $103 million. We recorded the assignment of these rights at our net book value of $89 million and
recorded the $14 million difference between our net book value and DISH Network’s purchase price as a capital
transaction with DISH Network. The $103 million was received in the first quarter 2010.
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ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Weather Related Programming Agreement. During May 2010, we and DISH Network entered into an agreement
pursuant to which, among other things, we agreed to develop certain weather related programming and DISH
Network received the right to distribute such programming. This agreement was terminated during June 2010. In
July 2010, we sold our interest in the entity that held such weather related programming for $5 million.
Acquisition of Alta Wireless, Inc. and Sale of South.com, L.L.C. During October 2010, we purchased an additional
equity interest in Alta Wireless, Inc. from another party for $2.8 million. This transaction increased our ownership
in Alta Wireless, Inc. from 49.9% to 95%. Alta Wireless Inc. holds certain authorizations for local multipoint
distribution service (“LMDS”) spectrum in the United States. Additionally, during October 2010, we and the same
counterparty sold our respective interests in South.com, L.L.C. to DISH Network for $2 million and $3 million,
respectively. South.com, L.L.C. holds certain authorizations for multichannel video and data distribution service
(“MVDDS”) spectrum in the United States.
Other Agreements
In November 2009, Mr. Roger Lynch became employed by both us and DISH Network as Executive Vice
President. Mr. Lynch is responsible for the development and implementation of advanced technologies that are of
potential utility and importance to both us and DISH Network. Mr. Lynch’s compensation consists of cash and
equity compensation and is borne by both DISH Network and us.
Related Party Transactions with NagraStar L.L.C.
We own 50% of NagraStar L.L.C. (“NagraStar”), a joint venture that is our primary provider of encryption and
related security technology used in our set-top boxes. Although we do not consolidate NagraStar, we have the
ability to significantly influence its operating policies; therefore, we account for our investment in NagraStar under
the equity method of accounting.
The table below summarizes our transactions with NagraStar.
Purchases:
Purchases from NagraStar..................................
For the Years Ended December 31,
2009
2008
2010
(In thousands)
$ 31,165
$ 18,557
$ 46,712
Amounts Payable and Commitments:
Amounts payable to NagraStar...........................
Commitments to purchase from NagraStar........
As of December 31,
2010
2009
(In thousands)
$ 799
$ 4,934
$ 3,683
$ 11,836
Related Party Transactions with Dish Mexico
During 2008, we entered into a joint venture for a DTH satellite service in Mexico known as Dish Mexico, S. de
R.L. de C.V. (“Dish Mexico”). Pursuant to these arrangements, we provide certain broadcast services and satellite
capacity and sell hardware such as digital set-top boxes and related equipment to Dish Mexico. Subject to a number
of conditions, we committed to provide $112 million of value over an initial ten year period in the form of cash,
equipment and services, which was satisfied as of December 31, 2010.
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ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table summarizes our transactions with Dish Mexico.
For the Years Ended December 31,
2009
(In thousands)
2008
2010
Sales not related to the original contribution commitment associated with our investment:
Digital set-top boxes and related accessories...................................................................................... $ 80,910
Sales of satellite services..................................................................................................................... $ 8,520
$ 36,289
$ 8,300
$ -
$ 175
Receivable:
Amounts receivable from Dish Mexico............................................................................................... $ 2,296
$ 15,132
As of December 31,
2010
2009
(In thousands)
Related Party Transactions with a Joint Venture in Taiwan
During December 2009, we entered into a joint venture to provide a DTH satellite service in Taiwan and certain
other targeted regions in Asia. We own 50% and have joint control of the joint venture. Pursuant to these
arrangements, we sell hardware such as digital set-top boxes and provide certain technical support services to the
joint venture. We have provided $18 million of cash to the joint venture, and an $18 million line of credit that the
joint venture may only use to purchase set-top boxes from us. This investment is subject to an evaluation for other-
than-temporary impairment on a quarterly basis. This quarterly evaluation consists of reviewing, among other things,
company business plans and current financial statements, if available, for factors that may indicate an impairment of our
investment. During the year ended December 31, 2010, we recorded a $14 million charge to fully impair this
investment, which is included in “Unrealized and realized gains (losses) on marketable investment securities and
other investments” on our Consolidated Statements of Operations and Comprehensive Income (Loss). As of
December 31, 2010, the remaining amount available under the line of credit is $10 million and if advanced would
be subject to our evaluation for other-than-temporary impairment.
20. Subsequent Events
Agreement and Plan of Merger
On February 13, 2011, Hughes Communications, Inc., a Delaware corporation (“Hughes”), and the parent company
of Hughes Network Systems, LLC (“HNS”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with EchoStar Corporation, a Nevada corporation (“EchoStar”), EchoStar Satellite Services L.L.C., a
Colorado limited liability company (“Satellite Services”), and Broadband Acquisition Corporation, a Delaware
corporation (“Merger Sub”), pursuant to which, subject to the terms and conditions set forth therein, Merger Sub
will merge with and into Hughes (the “Merger”), with Hughes continuing as the surviving entity, which will
become a wholly owned subsidiary of EchoStar.
Pursuant to the Merger Agreement, upon the closing of the Merger, each issued and outstanding share of common
stock, par value $0.001 per share (“Common Stock”), of Hughes (other than any Common Stock with respect to
which appraisal rights have been duly exercised under Delaware law) will automatically be converted into the right
to receive $60.70 in cash (without interest) and cancelled. The Merger Agreement also contemplates the repayment
of all of the outstanding debt of Hughes and HNS (including the 9½% Senior Notes due 2014 issued by HNS),
except that the $115 million loan facility guaranteed by COFACE, the French Export Credit Agency, will continue
to remain outstanding following the Merger if the requisite lender consents thereunder are obtained.
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ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Each of the boards of directors of Hughes and Merger Sub approved the Merger Agreement and deemed it advisable
and fair, and in the best interests of, their respective companies and stockholders, to enter into the Merger
Agreement and to consummate the Merger and the transactions and agreements contemplated thereby. The board of
directors of EchoStar approved the Merger Agreement and deemed it advisable and fair to, and in the best interests
of, its stockholders to enter into the Merger Agreement and to consummate the transactions and agreements
contemplated thereby.
The Merger is expected to close later this year, subject to certain closing conditions, including among others, (i)
receiving the required approvals of Hughes’ stockholders, which approval was effected on February 13, 2011, by
written consent of a majority of Hughes’ stockholders (the “Majority Stockholders’ Written Consents”), (ii) 20
business days having elapsed since the mailing to Hughes’ stockholders of the definitive information statement,
with respect to such adoption of the Merger Agreement, in accordance with the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, (iii) receiving certain
government regulatory approvals, including approval by the FCC, the expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of the
consents required under certain export control laws, (iv) the absence of any order or injunction by a court of
competent jurisdiction preventing the consummation of the Merger, and the absence of any action taken, or any law
enacted, entered, enforced or made applicable to the Merger, by any governmental entity that makes the
consummation of the Merger illegal or otherwise restrains, enjoins or prohibits the Merger, (v) the absence of any
proceeding in which the Office of Communications of the United Kingdom seeks to prohibit or enjoin the Merger,
(vi) the accuracy of the representations and warranties made by Hughes, EchoStar and Merger Sub, (vii) the
performance, in all material respects, by each of Hughes, EchoStar and Merger Sub of all its respective obligations,
agreements and covenants under the Merger Agreement, (viii) subject to certain customary exceptions, the absence
of (a) a change or event that has a material adverse effect on the business, financial condition or results of
operations of Hughes and its subsidiaries, taken as a whole or (b) any event, change, occurrence or effect that would
prevent, materially delay or materially impede the performance by Hughes of its obligations under the Merger
Agreement or the consummation of the transactions contemplated thereby, if not cured, in either case since February
13, 2011 and (ix) holders of shares of Common Stock representing in excess of 25% of the outstanding shares of
Common Stock shall not have exercised (or if exercised, shall not have withdrawn prior to the commencement of
the marketing period for the financing of the pending transaction) rights of dissent in connection with the Merger.
The Merger Agreement clarifies that no party may rely on a failure of conditions to be satisfied if such party’s
breach was the proximate cause of the failure.
The Merger Agreement contains customary representations, warranties and covenants of Hughes, EchoStar and
Merger Sub. In particular, Hughes makes certain representations and warranties related to the business in which it
operates, including with respect to its communications licenses; the health of its satellite currently in orbit and other
related information; that there are no claims under coordination and concession agreements; the status of Hughes’
earth stations; and compliance with regulatory and export control laws. EchoStar and Merger Sub also make a
representation that EchoStar and Satellite Services have sufficient financing in order to complete the Merger.
Hughes has agreed to various covenants in the Merger Agreement, including, among others, covenants (i) to use
commercially reasonable efforts to conduct its business in the ordinary course consistent with past practice during
the interim period between the execution of the Merger Agreement and completion of the Merger, (ii) not to engage
in certain kinds of transactions during this interim period and (iii) to cooperate and use commercially reasonable
efforts to take all actions necessary to obtain all governmental and antitrust, FCC and regulatory approvals, subject
to certain customary limitations. As noted above, EchoStar and Satellite Services represent and warrant in the
Merger Agreement that at the closing of the Merger they will have access to sufficient funds to consummate the
Merger and the other transactions contemplated by the Merger Agreement, and there is no closing condition related
to them having procured such financing.
F–58
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Merger Agreement also contains a covenant pursuant to which Hughes has agreed, subject to certain customary
exceptions described below, that it will not, and will cause its representatives not to, solicit, facilitate (including by
providing information) or participate in any negotiations or discussions with any person relating to, any takeover
proposal, as further described in the Merger Agreement. The Merger Agreement contains a “fiduciary-out”
provision, which provides that, prior to the time the stockholders of Hughes have adopted and approved the Merger
Agreement (which adoption and approval was obtained on February 13, 2011 pursuant to the Majority
Stockholders’ Written Consents), the board of directors of Hughes may engage with alternative purchasers, change
its recommendation to Hughes’ stockholders or enter into a definitive agreement with respect to an unsolicited
acquisition proposal, only if the board of directors of Hughes has determined in good faith (a) that failure to take
such action is likely to be inconsistent with the board’s fiduciary duties, and (b) that the acquisition proposal
constitutes a “Superior Proposal.” However, as Hughes’ stockholders have approved and adopted the Merger
Agreement pursuant to a written stockholders’ consent, the “fiduciary-out” provision no longer provides an
exception to the non-solicitation obligations described in this paragraph.
The Merger Agreement also contains a covenant pursuant to which EchoStar or the surviving entity must indemnify
officers, directors and employees of Hughes and its subsidiaries for a period of six years following the closing of the
Merger for all liabilities or claims related to their service or employment with Hughes or its subsidiaries occurring
prior to the closing of the Merger. This covenant further requires EchoStar to keep in place Hughes’ directors and
officers liability and fiduciary liability insurance policies in effect at the closing, or purchase a “tail policy” offering
similar coverage unless Hughes purchases such a policy prior to closing.
The Merger Agreement contains certain termination rights for both Hughes and EchoStar. In addition to certain
termination rights related to breaches of the agreement or actions taken by Hughes with respect to alternative
transactions, so long as the failure of the terminating party to comply with its obligations is not the cause for delay
in closing, each of EchoStar and Hughes has the right to terminate the Merger Agreement unilaterally if the Merger
has not closed by a date nine months from the execution of the Merger Agreement. In addition, the Merger
Agreement provides that, upon termination of the Merger Agreement under specified circumstances, Hughes may
be required to pay EchoStar a termination fee of $45 million.
The Merger Agreement also contains termination and other rights related to the occurrence of certain reductions in
performance or total loss of Hughes’ satellite currently in orbit, and certain waivers increasing risks associated with
construction, launch or operation of Hughes’ satellite currently under construction (a “Material Satellite Event”).
Upon a Material Satellite Event, EchoStar is entitled to terminate the Merger Agreement until 60 days after Hughes
provides a written plan describing its intended response (the “Mitigation Plan”). If EchoStar has not provided
written consent to the Mitigation Plan 30 days after delivery, Hughes can then terminate the Merger Agreement. In
addition, from the date of any Material Satellite Event until EchoStar’s approval of the Mitigation Plan, Hughes will
also be required to provide EchoStar with daily reports of customer complaints and subscriber cancellations.
F–59
ECHOSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The representations, warranties and covenants contained in the Merger Agreement were made by the parties thereto
only for purposes of that agreement and as of specific dates; were solely for the benefit of the parties to the Merger
Agreement; may be subject to limitations agreed upon by the contracting parties, including being qualified by
confidential disclosures made for the purposes of allocating contractual risk between the parties to the Merger
Agreement instead of establishing these matters as facts (such disclosures include information that has been
included in Hughes’ public disclosures, as well as additional non-public information); and may be subject to
standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors
are not third party beneficiaries under the Merger Agreement (except for the right of Hughes’ stockholders to
receive the transaction consideration from and after the consummation of the Merger) and should not rely on the
representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts
or condition of Hughes or EchoStar or any of their respective subsidiaries or affiliates. Additionally, the
representations, warranties, covenants, conditions and other terms of the Merger Agreement may be subject to
subsequent waiver or modification. Moreover, information concerning the subject matter of the representations,
warranties and covenants may change after the date of the Merger Agreement, which subsequent information may
or may not be fully reflected in Hughes’ public disclosures.
EchoStar and Satellite Services have obtained an aggregate financing commitment of $1.0 billion in senior secured
bridge financing and $800 million in senior unsecured bridge financing, in each case from Deutsche Bank AG
Cayman Islands Branch in connection with the pending transaction. These funds, in addition to existing cash
balances, will be sufficient to finance the cash consideration to Hughes stockholders and to refinance certain
existing Hughes debt. In addition to certain other conditions, the commitment of these funds is contingent on the
closing of the transaction. The funding of the financing commitment is not a condition to the transaction or to the
obligations of EchoStar or Merger Sub under the Merger Agreement.
F–60
COMPARATIVE PERFORMANCE
The graph below sets forth the cumulative total return to our shareholders during the period from January 2, 2008 (the
date EchoStar first traded on the NASDAQ Stock Market) to December 31, 2010. The graph assumes the investment on
January 2, 2008 of $100 in (i) our Class A Shares, (ii) an industry peer group and (iii) the NASDAQ Composite Index
and reflects reinvestment of dividends and market capitalization weighting.
We have included an industry peer group comprised of: Cisco Systems Inc., EchoStar Corporation, Loral Space &
Communications, Inc., Motorola Inc., and Pace Micro Technology Plc. Although the companies included in the
industry peer group were selected because of similar industry characteristics, they are not entirely representative of our
business. Historical point-in-time daily foreign currency exchange rates were utilized for the calculations for foreign
entities listed only on foreign exchanges included in our peer group.
Comparison of 3 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2010
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
1/2/2008
4/30/2008
8/31/2008
12/31/2008
4/30/2009
8/31/2009
12/31/2009
4/30/2010
8/31/2010
12/31/2010
EchoStar Corp.
NASDAQ Stock Market (US Companies)
Peer Group
Total Return
Analysis
EchoStar
Corporation
NASDAQ
Stock Market
Peer Group
1/2/2008
4/30/2008
8/31/2008
12/31/2008
4/30/2009
8/31/2009
12/31/2009
4/30/2010
8/31/2010
12/31/2010
$ 100.00
$ 95.46
$ 96.16
$ 45.63
$ 48.54
$ 56.92
$ 61.80
$ 58.94
$ 57.26
$ 76.62
$ 100.00
$ 100.00
$ 92.62
$ 90.22
$ 91.60
$ 84.89
$ 49.01
$ 55.10
$ 53.15
$ 66.00
$ 62.14
$ 75.03
$ 70.44
$ 82.91
$ 76.69
$ 91.07
$ 66.17
$ 70.99
$ 83.60
$ 74.17
CORPORATE PROFILE
BOARD OF DIRECTORS
ANNUAL MEETING
EXECUTIVE OFFICERS
The 2011 Annual Meeting of
Shareholders will be held on
May 3, 2011.
SHAREHOLDER
INFORMATION
Investor Relations Department
EchoStar Corporation
100 Inverness Terrace East
Englewood, Colorado 80112
www.echostar.com
R. Stanton Dodge
Executive Vice President,
General Counsel and Secretary
Michael T. Dugan
President and
Chief Executive Offi cer
Charles W. Ergen
Chairman
Mark W. Jackson
President,
EchoStar Technologies L.L.C.
Roger J. Lynch
Executive Vice President,
Advanced Technologies
David J. Rayner
Chief Financial Offi cer
Steven B. Schaver
President,
EchoStar International Corporation
Charles W. Ergen
Chairman of the Board
Joseph P. Clayton
Director
R. Stanton Dodge
Director
Michael T. Dugan
Director
David K. Moskowitz
Director
Tom A. Ortolf
Director
C. Michael Schroeder
Director
TRANSFER AGENT
Computershare
Trust Company
PO Box 43070
Providence, RI 02940-3070
NASDAQ: SATS
100 Inverness Terrace East
Englewood, CO 80112
303.706.4000
www.echostar.com