Exhibit 2.1
FORM OF
SEPARATION AGREEMENT
between
ECHOSTAR COMMUNICATIONS CORPORATION
and
ECHOSTAR HOLDING CORPORATION
TABLE OF CONTENTS
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Page
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ARTICLE I
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DEFINITIONS
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2
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ARTICLE II
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BUSINESS SEPARATION
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14
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Section 2.1
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Separation
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14
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Section 2.2
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Implementation
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14
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Section 2.3
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Transfer of Separated Assets; Assumption of Assumed Liabilities
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15
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Section 2.4
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Separated Assets
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15
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Section 2.5
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Liabilities
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17
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Section 2.6
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Excluded Assumed Liabilities
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18
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Section 2.7
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Deferred Separation Transactions
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18
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Section 2.8
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Termination of Agreements
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19
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Section 2.9
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Consents and Governmental Approvals
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20
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Section 2.10
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Novation of the Assumed Liabilities
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20
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Section 2.11
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Documents Relating to Transfer of
Real Property Interests and Tangible Property Located Thereon
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21
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Section 2.12
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Documents Relating to Transfers of
the Separated Assets and Assumption of the Assumed Liabilities
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22
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Section 2.13
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Release of Security Interest
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23
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Section 2.14
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No Representation or Warranty
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23
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Section 2.15
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Use of Cash
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23
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Section 2.16
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Plan of Reorganization
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24
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ARTICLE III
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THE DISTRIBUTION AND ACTIONS PENDING THE DISTRIBUTION
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24
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Section 3.1
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Transactions Prior to the Distribution
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24
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Section 3.2
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Conditions Precedent to Consummation of the Distribution
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25
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Section 3.3
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Documents to be Delivered by ECC
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26
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Section 3.4
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Documents to be Delivered by the Company
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27
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Section 3.5
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Distribution
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27
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ARTICLE IV
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ADDITIONAL COVENANTS, FURTHER ASSURANCES AND OTHER MATTERS
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29
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Section 4.1
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Provision of Corporate Records
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29
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Section 4.2
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Further Assurance
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30
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Section 4.3
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Agreement For Exchange Of Information
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31
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Section 4.4
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Production of Witnesses; Records; Cooperation
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32
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Section 4.5
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Confidentiality
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33
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Section 4.6
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Privileged Matters
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34
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Section 4.7
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Tax Sharing Agreement
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36
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ARTICLE V
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SURVIVAL AND INDEMNIFICATION
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36
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Section 5.1
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Mutual Release
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36
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(i)
Table of Contents
(cont)
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Page
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Section 5.2
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Indemnification by ECC
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38
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Section 5.3
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Indemnification by the Company
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39
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Section 5.4
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Tax Indemnification
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39
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Section 5.5
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Indemnification Obligations Net of Insurance Proceeds and Other Amounts
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39
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Section 5.6
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Procedures for Indemnification of Third Party Claims
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40
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Section 5.7
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Procedures for Indemnification of Direct Claims
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42
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Section 5.8
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Payments
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42
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Section 5.9
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Contribution
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43
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Section 5.10
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Remedies Cumulative
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43
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Section 5.11
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Survival of Indemnities
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43
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ARTICLE VI
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CONTINGENT GAINS AND CONTINGENT LIABILITIES
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43
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Section 6.1
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Contingent Gains
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43
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Section 6.2
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Exclusive Contingent Liabilities
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44
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Section 6.3
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Shared Contingent Liabilities
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44
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Section 6.4
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Payments
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45
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Section 6.5
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Procedures to Determine Status of Contingent Liability or Contingent Gain
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45
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Section 6.6
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Certain Case Allocation Matters
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46
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ARTICLE VII
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INSURANCE
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46
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Section 7.1
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Insurance Matters
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46
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ARTICLE VIII
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DISPUTE RESOLUTION
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47
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Section 8.1
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Agreement to Resolve Disputes
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47
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Section 8.2
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Dispute Resolution; Mediation
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48
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Section 8.3
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Arbitration
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49
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Section 8.4
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Continuity of Service and Performance
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49
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ARTICLE IX
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MISCELLANEOUS
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50
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Section 9.1
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Limitation of Liability
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50
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Section 9.2
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Counterparts
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50
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Section 9.3
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Entire Agreement
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50
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Section 9.4
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Construction
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50
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Section 9.5
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Signatures
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51
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Section 9.6
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Assignability
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51
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Section 9.7
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Third Party Beneficiaries
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51
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Section 9.8
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Payment Terms
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52
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Section 9.9
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Governing Law
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52
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Section 9.10
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Notices
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53
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Section 9.11
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Severability
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53
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Section 9.12
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Nonrecurring Costs and Expenses
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54
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Section 9.13
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Publicity
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54
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(ii)
Table of Contents
(cont)
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Page
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Section 9.14
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Survival of Covenants
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54
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Section 9.15
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Waiver of Default; Conflicts
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54
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Section 9.16
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Amendments
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54
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Section 9.17
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Controlling Documents
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55
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Section 9.18
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Specific Performance
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55
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Annex A
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Company Group Balance Sheet
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SCHEDULES
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Schedule 1.1
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Company Contracts
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Schedule 1.2
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Exclusive ECC Contingent Gain
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Schedule 1.3
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Exclusive ECC Contingent Liability
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Schedule 1.4
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Exclusive Company Contingent Gain
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Schedule 1.5
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Exclusive Company Contingent Liability
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Schedule 1.6
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Separation Transactions
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Schedule 1.7
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Shared Contingent Gain
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Schedule 1.8
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Shared Contingent Liability
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Schedule 2.4(a)
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Outstanding Capital Stock, Units or Other Equity Interests of the Entities
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Schedule 2.4(b)(i)
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Excluded Assets
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Schedule 2.5(b)(ii)
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Excluded Assumed Liabilities
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Schedule 2.11(b)
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Transfer of Tangible Property
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Schedule 3.2(j)
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Consents and Approvals
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Schedule 3.3(b)
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Director and Officer Resignations-ECC Group
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Schedule 3.4(b)
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Director and Officer Resignations-Company
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Schedule 5.1
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Mutual Release
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Schedule 6.5
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Contingent Liability; Contingent Gain
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EXHIBITS
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Exhibit A
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Broadcast Agreement
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Exhibit B
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Employee Matters Agreement
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Exhibit C
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Installation Services Agreement
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Exhibit D
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Intellectual Property Matters Agreement
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Exhibit E-1
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Inverness Lease Agreement
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Exhibit E-2
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Meridian Lease Agreement
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Exhibit E-3
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Santa Fe Lease Agreement
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Exhibit F
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Management Services Agreement
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Exhibit G
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Packout Services Agreement
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Exhibit H
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Product Support Agreement
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Exhibit I
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Receiver Agreement
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Exhibit J
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Remanufactured Receiver Agreement
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Exhibit K-1
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Satellite Transponder Service Agreement (Echo III)
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Exhibit K-2
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Satellite Transponder Service Agreement (Echo VI)
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Exhibit K-3
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Satellite Transponder Service Agreement (Echo VIII)
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Exhibit K-4
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Satellite Transponder Service Agreement (Echo XII)
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(iii)
Table of Contents
(cont)
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Exhibit L
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Satellite Procurement Agreement
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Exhibit M
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Services Agreement
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Exhibit N
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Tax Sharing Agreement
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Exhibit O
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Telemetry Tracking and Control Agreement
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Exhibit P
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Transition Services Agreement
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(iv)
FORM OF
SEPARATION AGREEMENT
This
Separation Agreement (this
Agreement
) is entered
into as of
, 2007, by
and between EchoStar Communications Corporation, a Nevada corporation (
ECC
), and EchoStar
Holding Corporation, a Nevada corporation (the
Company
).
RECITALS
WHEREAS, the Board of Directors of ECC (the
ECC Board
) has determined it is
appropriate and desirable to separate ECC and the Company into two publicly-traded companies by
separating from ECC and transferring to the Company ECCs non-Consumer Business (as defined below),
and related assets and liabilities, in a series of transactions on the terms and conditions set
forth herein.
WHEREAS, the ECC Board has determined that it would be advisable and in the best interests of
ECC and its stockholders for ECC to distribute, on a pro rata basis, (i) to the holders as of the
Record Date (as defined below) of the issued and outstanding shares of ECCs Class A common stock,
par value $0.01 per share (the
ECC Class A Common Stock
), all of the issued and
outstanding shares of the Companys Class A common stock, par value $0.001 per share (the
Company Class A Common Stock
), owned by ECC as of the Distribution Date (as defined
below) and (ii) to the holders as of the Record Date of the issued and outstanding shares of ECCs
Class B common stock, par value $0.001 per share (the
ECC Class B Common Stock
, together
with the ECC Class A Common Stock, the
ECC Common Stock
), all of the issued and
outstanding shares of the Companys Class B common stock, par value $0.001 per share (the
Company Class B Common Stock
, together with the Company Class A Common Stock, the
Company Common Stock
), owned by ECC as of the Distribution Date, in each case, as further
described herein (collectively, the
Distribution
);
WHEREAS, ECC and the Company intend that the Separation (as defined below) and the
Distribution will qualify for United States federal income tax purposes as transactions that are
generally tax free under, among other provisions, Sections 355 and 368(a)(1)(D) of the Internal
Revenue Code of 1986, as amended (the
Code
) and hereby adopt this Agreement as a
plan of reorganization
; and
WHEREAS, the parties hereto intend in this Agreement to set forth the principal arrangements
between them regarding the Separation and the Distribution and certain other agreements that will
govern the relationship of ECC and the Company following the Distribution.
NOW, THEREFORE, in consideration of the mutual promises, covenants, agreements,
representations and warranties contained herein, and for other good and valuable consideration the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree, intending
to be legally bound, as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the following meanings:
AAA
shall have the meaning set forth in
Section 8.3(a)
of this Agreement.
Action
means any demand, action, suit, counter suit, arbitration, inquiry,
proceeding or investigation by or before any federal, state, local, foreign or international
Governmental Authority or any arbitration or mediation tribunal.
Affiliate
of any Person means any other Person that, directly or indirectly,
controls, is controlled by, or is under common control with such first Person as of the date on
which or at any time during the period for when such determination is being made. For purposes of
this definition,
Control
means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person, whether through the
ownership of voting securities or other interests, by contract or otherwise, and the terms
Controlling
and
Controlled
have meanings correlative to the foregoing.
Agent
means the distribution agent to be appointed by ECC to distribute to the
stockholders of ECC pursuant to the Distribution all of the shares of the Company Common Stock.
Agreement
shall have the meaning set forth in the preamble of this Agreement.
Ancillary Agreements
means the (i) Broadcast Agreement, (ii) Employee Matters
Agreement, (iii) Installation Services Agreement, (iv) Intellectual Property Matters Agreement, (v)
Lease Agreements, (vi) Management Services Agreement, (vii) Packout Services Agreement, (viii)
Product Support Services Agreement, (ix) Receiver Agreement, (x) Remanufactured Receiver Agreement,
(xi) Satellite Transponder Service Agreements, (xii) Satellite Procurement Agreement, (xiii)
Services Agreement, (xiv) Tax Sharing Agreement, (xv) Telemetry Tracking and Control Agreement, and
(xvi) Transition Services Agreement, and, in the singular, means any one of them.
Applicable Law
means any applicable law, statute, rule or regulation of any
Governmental Authority or any outstanding order, judgment, injunction, ruling or decree by any
Governmental Authority.
Appurtenances
means, in respect of any Land, all privileges, rights, easements,
servitudes, hereditaments and appurtenances and similar interests belonging to or for the benefit
of such Land, including all easements and servitudes appurtenant to and for the benefit of such
Land (a
Dominant Parcel
) for, and as the primary means of, access between, the Dominant
Parcel and a public way, or for any other use upon which lawful use of the Dominant Parcel for the
purposes for which it is presently being used is dependent, and all rights existing in and to any
streets, alleys, passages and other rights-of-way included therein or adjacent thereto.
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Assets
means assets, properties and rights (including goodwill), wherever located
(including in the possession of vendors or other third parties or elsewhere), whether real,
personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or
reflected or required to be recorded or reflected on the books and records or financial statements
of any Person, including the following:
(i) all accounting and other books, records and files whether in paper, microfilm, microfiche,
computer tape or disc, magnetic tape or any other form;
(ii) all computers and other electronic data processing equipment, fixtures, machinery,
equipment, furniture, office equipment, motor vehicles and other transportation equipment, special
and general tools, prototypes and models and other tangible personal property, wherever located
that are owned or leased by the Person, together with any express or implied warranty by the
manufacturers, sellers or lessors of any item or component part thereof;
(iii) all inventories, wherever located, including all finished goods, (whether or not held at
any location or facility or in transit), work in process, raw materials, spare parts and all other
materials and supplies to be used or consumed in the production of finished goods;
(iv) all interests in any Land and Improvements and all Appurtenances thereto;
(v) all interests in any capital stock or other equity interests of any Subsidiary or any
other Person; all bonds, notes, debentures or other securities issued by any Subsidiary or any
other Person; all loans, advances or other extensions of credit or capital contributions to any
Subsidiary or any other Person; and all other investments in securities of any Person;
(vi) all license agreements, leases of personal property, including satellites, open purchase
orders for raw materials, supplies, parts or services, unfilled orders for the manufacture and sale
of products and other contracts, agreements or commitments;
(vii) all deposits and prepaid expenses, letters of credit and performance and surety bonds,
claims for refunds and rights of set-off in respect thereof;
(viii) all written technical information, data, specifications, research and development
information, engineering drawings, operating and maintenance manuals, and materials and analyses
whether prepared by Affiliates, by consultants or other third parties;
(ix) all Intellectual Property and licenses from third Persons granting the right to use any
Intellectual Property;
(x) all computer applications, programs and other software, including operating software,
network software, firmware, middleware, design software, design tools, systems documentation and
instructions;
(xi) all cost information, sales and pricing data, customer prospect lists, supplier records,
customer and supplier lists, customer and vendor data, correspondence and lists, product
literature, artwork, design, development and manufacturing files, vendor and customer drawings,
-3-
formulations and specifications, quality records and reports and other books, records,
studies, surveys, reports, plans and documents;
(xii) all trade accounts and notes receivable and other rights to payment from customers and
all security for such accounts or rights to payment, including all trade accounts receivable
representing amounts receivable in respect of goods shipped or products sold or otherwise disposed
of or services rendered to customers, (b) all other accounts and notes receivable and all security
for such accounts or notes, and (c) any claim, remedy or other right relating to any of the
foregoing;
(xiii) all rights under contracts or agreements, all claims or rights against any Person
arising from the ownership of any Asset, all rights in connection with any bids or offers and all
claims, choses in action or similar rights, whether accrued or contingent;
(xiv) all rights under insurance policies and all rights in the nature of insurance,
indemnification or contribution, including Insurance Proceeds;
(xv) all licenses (including radio and similar licenses), permits, approvals and
authorizations which have been issued by any Governmental Authority, including the FCC; and
(xvi) cash or cash equivalents, bank accounts, lock boxes and other deposit arrangements.
Assumed Liabilities
shall have the meaning set forth in
Section 2.5(a)
of
this Agreement.
Class A Distribution Ratio
shall have the meaning set forth in
Section
3.5(c)(ii)
of this Agreement.
Class B Distribution Ratio
shall have the meaning set forth in
Section
3.5(c)(ii)
of this Agreement.
Code
shall have the meaning set forth in the recital of this Agreement.
Commission
means the Securities and Exchange Commission.
Company
shall have the meaning set forth in the preamble of this Agreement.
Company
Business
means the Receiver Business, the fixed satellite transmission services
business, the satellite leasing business and the international businesses operated by the Company
Group.
Company Class A Common Stock
shall have the meaning set forth in the recital of this
Agreement.
Company Class B Common Stock
shall have the meaning set forth in the recital of this
Agreement.
-4-
Company Common Stock
shall have the meaning set forth in the recital of this
Agreement.
Company Contracts
means the following Contracts to which ECC or any member of the
ECC Group is a party or by which it or any of its Assets is bound, whether or not in writing,
except for any such Contract that is explicitly retained by ECC or any member of the ECC Group
pursuant to any provision of this Agreement or any Ancillary Agreement: (i) any Contract entered
into in the name of, or expressly on behalf of, the Company Business; (ii) any Contract that
relates substantially or exclusively to the Company Business; (iii) any Contract that is otherwise
expressly contemplated pursuant to this Agreement or any of the Ancillary Agreements to be assigned
to the Company or any member of the Company Group; (iv) any guarantee, indemnity, representation,
warranty or other Liability of any member of the ECC Group or the Company Group in respect of any
Company Contract, any Assumed Liability or the Company Business (including guarantees of financing
incurred by customers or other third parties in connection with purchases of products or services
from the Company Business); and (v) any other Contract identified on
Schedule 1.1
.
Company Group
means the Company, each Subsidiary of the Company and each other
Person that is controlled directly or indirectly by the Company immediately after the Distribution.
Company
Group Balance Sheet
means (i) the audited combined balance sheet of the
Company Group for the year ended December 31, 2006,
(ii) the unaudited combined balance sheet of the Company Group
for the nine months ended September 30, 2007 and (iii) the
unaudited pro forma combined and adjusted balance sheet of the
Company Group for the nine months ended September 30, 2007, in
each case, including the notes thereto, substantially in the form attached
as
Annex A
.
Company
Indemnified Parties
shall have the meaning set forth in
Section 5.2
of this Agreement.
Company Information
shall have the meaning set forth in
Section 4.6(a)
of
this Agreement.
Confidential Information
shall mean all proprietary, design or operational
information, data or material including, without limitation, (a) specifications, ideas and concepts
for products and services, (b) manufacturing specifications and procedures, (c) design drawings and
models, (d) materials and material specifications, (e) quality assurance policies, procedures and
specifications, (f) customer information, (g) computer software and derivatives thereof relating to
design development or manufacture of products, (h) training materials and information, (i) all
other know-how, methodology, procedures, techniques and trade secrets related to design,
development and manufacturing, (j) proprietary earnings reports and forecasts, (k) proprietary
macro-economic reports and forecasts, (l) proprietary business plans, (m) proprietary general
market evaluations and surveys and (o) proprietary financing and credit-related information of one
party hereto which, prior to or following the Distribution Date, has been disclosed by ECC or
members of its Group on the one hand, or the Company or members of its Group, on the other hand, in
written, oral (including by recording), electronic, or visual form to, or otherwise has come into
the possession of, the other Group, including pursuant to the access provisions of
Section
4.3
hereof or any other provision of this Agreement (except to the extent that such Information
can be shown to have been (x) in the public domain through no fault of such party
-5-
(or such partys Group) or (y) later lawfully acquired from other sources by the party (or
such partys Group) to which it was furnished;
provided
,
however
, in the case of
(y) that such sources did not provide such Information in breach of any confidentiality
obligations.
Consents
means any consents, waivers or approvals, or notification requirements.
Consumer Business
means the United States subscriber television services business,
which consists of numerous video, audio and data channels, interactive television channels, digital
video recording, high definition television, international programming, professional installation
and 24 hour customer service called DISH and known as the DISH Network.
Contingent Claim Committee
shall mean a committee composed of one representative
designated from time to time by each of ECC and the Company that shall be established in accordance
with
Section 6.5
.
Contingent Gain
means any claim or right of a member of the ECC Group or the Company
Group, whenever arising, against any Person (other than a member of the ECC Group or the Company
Group);
provided
, that (i) such claim or right has accrued as of the Distribution Date, and
(ii) the existence or scope of the claim or right against such other Person was not acknowledged,
fixed or determined in any material respect as of the Distribution Date as a result of a dispute
or other uncertainty due to the failure of such claim or right to have been discovered or asserted
as of the Distribution Date. For purposes of the foregoing, a claim or right shall be deemed to
have accrued as of the Distribution Date if all the elements of the claim necessary for its
assertion shall have occurred on or prior to the Distribution Date such that the claim or right,
where it is asserted in an Action on or prior to the Distribution Date would not be dismissed by a
court on ripeness or similar grounds, regardless of whether there was any Action pending,
threatened or contemplated as of the Distribution Date with respect thereto.
Contingent Liability
means any Liability of a member of the ECC Group or the Company
Group, whenever arising, against any Person (other than a member of the ECC Group or the Company
Group);
provided
, that (i) such Liability has accrued as of the Distribution Date and (ii)
the existence or scope of such Liability was not acknowledged, fixed or determined in any material
respect as of the Distribution Date as a result of a dispute or other uncertainty due to the
failure of such Liability to have been discovered or asserted as of the Distribution Date. For
purposes of the foregoing, a Liability shall be deemed to have accrued as of the Distribution Date
if all the elements necessary for the assertion of a claim with respect to such Liability shall
have occurred on or prior to the Distribution Date such that the claim, where it is asserted in an
Action on or prior to the Distribution Date would not be dismissed by a court on ripeness or
similar grounds.
Contract
means any contract, agreement, lease, purchase and/or commitment, license,
consensual obligation, promise or undertaking (whether written or oral and whether express or
implied) that is legally binding on any Person or any part of its property under Applicable Law,
including all claims or rights against any Person, choses in action and similar rights, whether
accrued or contingent with respect to any such contract, agreement, lease, purchase and/or
commitment, license, consensual obligation, promise or undertaking, but excluding this
-6-
Agreement and any Ancillary Agreement save as otherwise expressly provided in this Agreement
or in any Ancillary Agreement.
Contributions
means the Contribution, the First Contribution and the Second
Contribution.
Determination Request
means a written request made to the Contingent Claim
Committee, pursuant to
Section 6.5(b)
, for a determination as to whether a Third Party
Claim specified in such request constitutes a Shared Contingent Liability.
Distribution
shall have the meaning set forth in the recital of this Agreement.
Distributions
means the Distribution, the First Internal Distribution and the Second
Internal Distribution.
Distribution Date
means the date determined by the ECC Board as the date on which
the Distribution shall be effected.
Dispute
shall have the meaning set forth in
Section 8.2(a)
of this
Agreement.
Dispute Notice
shall have the meaning set forth in
Section 8.2(a)
of this
Agreement.
ECC
shall have the meaning set forth in the preamble of this Agreement.
ECC Board
shall have the meaning set forth in the recital of this Agreement.
ECC Class A Common Stock
shall have the meaning set forth in the recital of this
Agreement.
ECC Class B Common Stock
shall have the meaning set forth in the recital of this
Agreement.
ECC Common Stock
shall have the meaning set forth in the recital of this Agreement.
ECC
Group
means ECC and each Subsidiary of ECC and each other Person that is
controlled directly or indirectly by ECC immediately after the Distribution (other than any member
of the Company Group).
ECC
Indemnified Parties
shall have the meaning set forth in
Section 5.3
of
this Agreement.
Effective Time
shall have the meaning set forth in
Section 3.5(b)
of this
Agreement.
Employee Matters Agreement
means the Employee Matters Agreement substantially in the
form attached hereto as
Exhibit A
. From and after the Distribution Date, the Employee
Matters Agreement shall refer to the agreement executed and delivered pursuant to such section, as
amended and/or modified from time to time in accordance with its terms.
-7-
Encumbrance
means, with respect to any Asset, mortgages, liens, hypothecations,
pledges, chares, security interests or encumbrances of any kind in respect of such Asset, whether
or not filed, recorded or otherwise perfected under Applicable Law.
Environmental Law
means any federal, state, local, foreign or international statute,
ordinance, rule, regulation, code, license, permit, authorization, approval, consent, common law
(including tort and environmental nuisance law), legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any Governmental Authority, now or hereafter in effect
relating to health, safety, pollution or the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata) or to emissions, discharges, releases or threatened
releases of any substance currently or at any time hereafter listed, defined designated or
classified as hazardous, toxic, waste, radioactive or dangerous, or otherwise regulated, under any
of the foregoing, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of any such substances, including the
Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendments and
Reauthorization Act and the Resource Conservation and Recovery Act and comparable provisions in
state, local, foreign or international law.
Environmental Liabilities
means all Liabilities relating to, arising out of or
resulting from any Environmental Law or Contract relating to environmental, health or safety
matters (including all removal, remediation or cleanup costs, investigatory costs, governmental
response costs, natural resources damages, property damages, personal injury damages, costs of
compliance with any product take back requirements or with any settlement, judgment or other
determination of Liability and indemnity, contribution or similar obligations) and all costs and
expenses, interest, fines, penalties or other monetary sanctions in connection therewith.
Exchange Act
means the Securities Exchange Act of 1934, as amended, together with
the rules and regulations promulgated thereunder.
Excluded Assets
shall have the meaning set forth in
Section 2.4(b)
of this
Agreement.
Excluded Assumed Liabilities
shall have the meaning set forth in
Section
2.5(b)
of this Agreement.
Exclusive ECC Contingent Gain
means any Contingent Gain if such Contingent Gain
relates exclusively to the Consumer Business, including the matters listed or described on
Schedule 1.2
hereto, or if such Contingent Gain is expressly assigned to any member of the
ECC Group pursuant to this Agreement or any Ancillary Agreement.
Exclusive ECC Contingent Liability
means any Contingent Liability if such Contingent
Liability relates exclusively to the Consumer Business, including the matters listed or described
on
Schedule 1.3
hereto, or if such Contingent Liability is expressly assigned to any
member of the ECC Group pursuant to this Agreement or any Ancillary Agreement.
Exclusive Company Contingent Gain
means any Contingent Gain if such Contingent Gain
relates exclusively to the Company Business, including the matters listed or described on
Schedule 1.4
hereto, or if such Contingent Gain is expressly assigned to any member of the
Company Group pursuant to this Agreement or any Ancillary Agreement.
-8-
Exclusive Company Contingent Liability
means any Contingent Liability if such
Contingent Liability relates exclusively to the Company Business, including the matters listed or
described on
Schedule 1.5
hereto, or if such Contingent Liability is expressly assigned to
any member of the Company Group pursuant to this Agreement or any Ancillary Agreement.
FCC
means the Federal Communications Commission.
GAAP
shall have the meaning set forth in
Section 2.4(a)(v)
of this
Agreement.
Governmental Approvals
means any notices, reports or other filings to be made, or
any Consents, registrations, approvals, permits or authorizations to be obtained from, any
Governmental Authority.
Governmental Authority
shall mean any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency, official or other
regulatory, administrative or governmental authority.
Group
means the ECC Group or the Company Group, as the context requires.
Improvements
means, in respect of any Land, all buildings, structures, plants,
fixtures and improvements located on such Land, including those under construction.
Indemnified
Party
shall have the meaning set forth in
Section 5.5(a)
of this
Agreement.
Indemnifying
Party
shall have the meaning set forth in
Section 5.5(a)
of
this Agreement.
Indemnity
Payment
shall have the meaning set forth in
Section 5.5(a)
of this
Agreement.
Information
means information, whether or not patentable or copyrightable, in
written, oral, electronic or other tangible or intangible forms, stored in any medium, including
studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts,
know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes,
samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other
software, marketing plans, customer names, communications by or to attorneys (including
attorney-client privileged communications), memos and other materials prepared by attorneys or
under their direction (including attorney work product), and other technical, financial, employee
or business information or data, but in any case excluding back-up tapes.
Information Statement
means the information statement forming a part of the Form 10
Registration Statement.
Installation Services Agreement
means the Installation Services Agreement
substantially in the form attached hereto as
Exhibit B
. From and after the Distribution
Date, the Installation Services Agreement shall refer to the agreement executed and delivered
substantially in the form attached hereto as
Exhibit B
, as amended and/or modified from
time to time in accordance with its terms.
-9-
Insurance Proceeds
means those monies (in each case net of any costs or expenses
incurred in the collection thereof and net of any applicable premium adjustments (including
reserves and retrospectively rated premium adjustments)): (a) received by an insured from an
insurance carrier; or (b) paid by an insurance carrier on behalf of the insured.
Intellectual Property
means all domestic and foreign patents and patent
applications, together with any continuations, continuations-in-part or divisional applications
thereof, and all patents issuing thereon (including reissues, renewals and re-examinations of the
foregoing); design patents, invention disclosures; mask works; copyrights, and copyright
applications and registrations; Web addresses, all domestic and foreign trademarks, service marks,
trade names, and trade dress, in each case together with any applications and registrations
therefor and all appurtenant goodwill relating thereto; trade secrets, commercial and technical
information, know-how, proprietary or confidential information, including engineering, production
and other designs, notebooks, processes, drawings, specifications, formulae, and technology;
computer and electronic data processing programs and software (object and source code), data bases
and documentation thereof; inventions (whether patented or not); utility models; registered
designs, certificates of invention and all other intellectual property under the laws of any
country throughout the world.
Intellectual Property Matters Agreement
means the Intellectual Property Matters
Agreement substantially in the form attached hereto as
Exhibit C
. From and after the
Distribution Date, the Intellectual Property Matters Agreement shall refer to the agreement
executed and delivered substantially in the form attached hereto as
Exhibit C
, as amended
and/or modified from time to time in accordance with its terms.
IRS
means the Internal Revenue Service.
Land
means, in respect of any Person, all parcels and tracts of land in which the
Person has an ownership interest.
Lease Agreements
means the Inverness Lease Agreement, the Meridian Lease Agreement
and the Santa Fe Lease Agreement, each substantially in the forms attached hereto as
Exhibit
D-1,
Exhibit D-2
and
Exhibit D-3
, respectively. From and after the
Distribution Date, the Lease Agreements shall refer to the agreements executed and delivered
substantially in the form attached hereto as
Exhibit D-1
,
Exhibit D-2
and
Exhibit D-3
, respectively, as amended and/or modified from time to time in accordance with
its terms.
Liability
means, with respect to any Person, any and all losses, claims, charges,
debts, demands, actions, causes of action, suits, damages, obligations, payments, costs and
expenses, sums of money, accounts, reckonings, bonds, specialties, indemnities and similar
obligations, exoneration covenants, Contracts, controversies, doings, omissions, variances,
guarantees, make whole agreements and similar obligations, and other liabilities and requirements,
including all contractual obligations, whether absolute or contingent, matured or unmatured,
liquidated or unliquidated, accrued or unaccrued, known or unknown, joint or several, whenever
arising, and including those arising under any Applicable Law, Action, threatened or contemplated
Action (including the costs and expenses of demands, assessments, judgments, settlements and
compromises relating thereto and attorneys fees and any and all costs and expenses, whatsoever
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reasonably incurred in investigating, preparing or defending against any such Actions or
threatened or contemplated Actions) or order of any Governmental Authority or any award of any
arbitrator or mediator of any kind, and those arising under any Contract, in each case, whether or
not recorded or reflected or otherwise disclosed or required to be recorded or reflected or
otherwise disclosed, on the books and records or financial statements of any Person, including any
Liability for Taxes.
Management Services Agreement
means the Management Services Agreement substantially
in the form attached hereto as
Exhibit E
. From and after the Distribution Date, the
Management Agreement shall refer to the agreement executed and delivered substantially in the form
attached hereto as
Exhibit E
, as amended and/or modified from time to time in accordance
with its terms.
NASDAQ
shall have the meaning set forth in
Section 3.1(e)
of this Agreement.
Packout Services Agreement
means the Packout Services Agreement substantially in the
form attached hereto as
Exhibit F
. From and after the Distribution Date, the Packout
Services Agreement shall refer to the agreement executed and delivered substantially in the form
attached hereto as
Exhibit F
, as amended and/or modified from time to time in accordance
with its terms.
Person
means an individual, a partnership, a corporation, a limited liability
company, an association, a joint stock company, a trust, a joint venture, an unincorporated
organization or a Governmental Authority.
Prime Rate
means the rate which Bank of America (or any successor thereto or other
major money center commercial bank agreed to by the Parties hereto) announces from time to time as
its prime lending rate, as in effect from time to time.
Private Letter Ruling
means the private letter ruling from the IRS, in which the IRS
rules that, among other things: (i) no gain or loss will be recognized by, and no amount will be
included in the income of, (A) ECC or the Company upon the contribution of certain assets by ECC to
the Company (the
Contribution
) and (B) ECC or stockholders of ECC upon the distribution
of the all of the Company Common Stock held by ECC to the stockholders of ECC in the Distribution;
(ii) no gain or loss will be recognized by, and no amount will be included in the income of, (A)
EchoStar Orbital Corporation (
Orbital
) or the Company upon the contribution of certain
assets by Orbital to the Company (the
Second Contribution
) and (B) Orbital or ECC upon
the distribution of the all of the Company Common Stock held by Orbital to ECC (the
Second
Internal Distribution
); and (iii) no gain or loss will be recognized by, and
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no amount will be included in the income of, (A) EchoStar DBS Corporation (
EDBS
) or
EchoStar Technologies Corporation (
ETC
) upon the contribution of certain assets by EDBS
to ETC (the
First Contribution
) and (B) EDBS or Orbital upon the distribution of the all
of the common stock of ETC held by EDBS to Orbital (the
First Internal Distribution
).
Privileged Information
shall have the meaning set forth in
Section 4.6(a)
of
this Agreement.
Privileges
shall have the meaning set forth in
Section 4.6(a)
of this
Agreement.
Product Support Agreement
means the Product Support Agreement substantially in the
form attached hereto as
Exhibit G
. From and after the Distribution Date, the Product
Support Agreement shall refer to the agreement executed and delivered substantially in the form
attached hereto as
Exhibit G
, as amended and/or modified from time to time in accordance
with its terms.
Record Date
means the close of business on the date to be determined by ECCs Board
in its sole and absolute discretion as the record date for determining the stockholders of ECC
entitled to receive shares of the Company Common Stock in the Distribution.
Record Holders
mean the holders of record of ECC Common Stock as of the close of
business on the Record Date.
Receiver Agreement
means the Receiver Agreement substantially in the form attached
hereto as
Exhibit H
. From and after the Distribution Date, the Receiver Agreement shall
refer to the agreement executed and delivered substantially in the form attached hereto as
Exhibit H
, as amended and/or modified from time to time in accordance with its terms.
Receiver Business
means the business engaged in the design, development and
distribution of direct broadcast satellite receivers, antennae and other digital equipment for the
direct to home satellite television industry.
Registration Statement
means the registration statement on Form 10 (including any
and all exhibits filed thereto) to be filed under the Exchange Act, pursuant to which the shares of
Company Common Stock to be issued in the Company Distribution will be registered, together with all
amendments thereto.
Response
shall have the meaning set forth in
Section 8.2(a)
of this
Agreement.
Satellite Capacity Agreement
means the Satellite Capacity Agreement substantially in
the form attached hereto as
Exhibit I
. From and after the Distribution Date, the Satellite
Capacity Agreement shall refer to the agreement executed and delivered substantially in the form
attached hereto as
Exhibit I
, as amended and/or modified from time to time in accordance
with its terms.
Security Interest
means any mortgage, security interest, pledge, lien, charge,
claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition,
easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever.
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Senior Party Representative
shall have the meaning set forth in
Section
8.2(a)
of this Agreement.
Separated Assets
shall have the meaning set forth in
Section 2.4(a)
of this
Agreement.
Separation
means the multi-step process described in
Article II
, including
the Separation Transactions, by which the Company Business shall be transferred, directly or
indirectly, from ECC and members of the ECC Group to the Company and members of the Company Group.
Separation Transactions
means the transactions described on
Schedule 1.6
of
this Agreement and, in the singular, means any one of them.
Services Agreement
means the Services Agreement substantially in the form attached
hereto as
Exhibit J
. From and after the Distribution Date, the Services Agreement shall
refer to the agreement executed and delivered substantially in the form attached hereto as
Exhibit J
, as amended and/or modified from time to time in accordance with its terms.
Shared ECC Percentage
means the proportion of the Shared Contingent Gain or the
Shared Contingent Liability, as applicable, that relates to the Consumer Business.
Shared Company Percentage
means the proportion of the Shared Contingent Gain or the
Shared Contingent Liability, as applicable, that relates to the Company Business.
Shared
Contingent Gain
means, without duplication, any Contingent Gain that is not an Exclusive ECC
Contingent Gain or an Exclusive Company Contingent Gain and shared between the Groups, including
the matters listed or described on
Schedule 1.7
.
Shared
Contingent Liability
means, without duplication, any Contingent Liability
that is not an Exclusive ECC Contingent Liability or an Exclusive Company Contingent Liability and
shared between the Groups, including the matters listed or described on
Schedule 1.8
.
Shared Percentage
means the Shared ECC Percentage or the Shared Company Percentage,
as the case may be.
Subsidiary
of any Person means a corporation or other organization whether
incorporated or unincorporated of which at least a majority of the securities or interests having
by the terms thereof ordinary voting power to elect at least a majority of the board of directors
or others performing similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more of its
Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided
,
however
, that no Person that is not directly or indirectly wholly-owned by any other Person
shall be a Subsidiary of such other Person unless such other Person controls, or has the right,
power or ability to control, that Person.
-13-
Taxes
has the meaning set forth in the Tax Sharing Agreement.
Tax Sharing Agreement
means the Tax Sharing Agreement substantially in the form
attached hereto as
Exhibit K
. From and after the Distribution Date, the Tax Sharing
Agreement shall refer to the agreement executed and delivered substantially in the form attached
hereto as
Exhibit K
, as amended and/or modified from time to time in accordance with its
terms.
Telemetry, Tracking and Control Agreement
means the Telemetry, Tracking and Control
Agreement substantially in the form attached hereto as
Exhibit O
. From and after the
Distribution Date, the Telemetry, Tracking and Control Agreement shall refer to the agreement
executed and delivered substantially in the form attached hereto as
Exhibit O
, as amended
and/or modified from time to time in accordance with its terms.
Third-Party
Claim
shall have the meaning set forth in
Section 5.6
of this
Agreement.
Transition Services Agreement
means the Transition Services Agreement substantially
in the form attached hereto as
Exhibit L
. From and after the Distribution Date, the
Transition Services Agreement shall refer to the agreement executed and delivered substantially in
the form attached hereto as
Exhibit L
, as amended and/or modified from time to time in
accordance with its terms.
Uplink Agreement
means the Uplink Agreement substantially in the form attached
hereto as
Exhibit M
. From and after the Distribution Date, the Uplink Agreement shall
refer to the agreement executed and delivered substantially in the form attached hereto as
Exhibit M
, as amended and/or modified from time to time in accordance with its terms.
Used Receiver Agreement
means the Used Receiver Agreement substantially in the form
attached hereto as
Exhibit N
. From and after the Distribution Date, the Used Receiver
Agreement shall refer to the agreement executed and delivered substantially in the form attached
hereto as
Exhibit N
, as amended and/or modified from time to time in accordance with its
terms.
ARTICLE II
BUSINESS SEPARATION
Section 2.1
Separation
. Prior to the Distribution, ECC and the Company shall
implement the Separation on the terms and subject to the conditions set forth in this Agreement.
The parties hereto acknowledge that the Separation is intended to result in the Company, directly
or indirectly, operating the Company Business, owning the Separated Assets and assuming the Assumed
Liabilities as set forth in this
Article II
. As promptly as practicable after the
Separation is complete and subject to the conditions set forth in
Section 3.2
, the parties
hereto shall take, or cause to be taken, all actions that are necessary or appropriate to
effectuate the Distribution.
Section 2.2
Implementation
. The Separation shall be completed in accordance with the agreed general principles,
objectives and other provisions set forth in this
Article II
and shall be implemented in
the following manner:
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(a) through the completion of the Separation Transactions described on
Schedule 1.6
;
(b) through the allocation from time to time following the Effective Time of the Assets
and Liabilities as set forth in
Article II
;
(c) through the completion from time to time following the Effective Time of the
transactions, as described in
Section 4.2
; and
(d) through the performance by the parties hereto of all other provisions of this
Agreement.
Section 2.3
Transfer of Separated Assets; Assumption of Assumed Liabilities
. On the terms
and subject to the conditions set forth in this Agreement, and in furtherance of the Separation, on
or prior to the Distribution Date and in any event prior to the Distribution:
(a) ECC shall, and shall cause its applicable Subsidiaries to, cause the Separated
Assets to be contributed, assigned, transferred, conveyed and delivered, directly or
indirectly, to the Company and the Company shall, and shall cause its applicable
Subsidiaries to, accept from ECC and its Subsidiaries, all of ECCs and its Subsidiaries
rights, title and interest in and to all the Separated Assets, which will result in the
Company owning, directly or indirectly, the Company Business.
(b) The Company shall accept, assume and agree to faithfully perform, discharge and
fulfill all of the Assumed Liabilities in accordance with their respective terms. The
Company shall be responsible for all of the Assumed Liabilities, regardless of when or where
such Assumed Liabilities arose or arise, or whether the facts on which they are based
occurred prior to or subsequent to the Distribution Date, regardless of where or against
whom such Assumed Liabilities are asserted or determined or whether asserted or determined
prior to the Distribution Date.
Section 2.4
Separated Assets
. (a) For purposes of this Agreement, Separated Assets
shall mean, without duplication, those Assets used or contemplated to be used or held for use
exclusively or primarily in the ownership, operation or conduct of the Company Business or relating
exclusively or primarily to the Company Business, including the following:
(i) all Assets (including Company Contracts) expressly identified in this
Agreement, in any Ancillary Agreement or in any Schedule
hereto or thereto, including those listed on Schedule 1.6, as Assets to be
transferred to, or retained by, the Company or any other member of the Company
Group;
(ii) any Exclusive Company Contingent Gain or any Shared Company Percentage of
a Shared Contingent Gain;
(iii) the outstanding capital stock, units or other equity interests of the
entities listed on Schedule 2.4(a) and the Assets owned by such entities;
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(iv) all Assets properly reflected on the Company Group Balance Sheet,
excluding Assets disposed of by ECC or any other Subsidiary or entity controlled by
ECC subsequent to the date of the Company Group Balance Sheet;
(v) all Assets that have been written off, expensed or fully depreciated by ECC
or any Subsidiary or entity controlled by ECC that, had they not been written off,
expensed or fully depreciated, would have been reflected on the Company Group
Balance Sheet in accordance with accounting principles generally accepted in the
United States (
GAAP
);
(vi) all Assets acquired by ECC or any Subsidiary or entity controlled by ECC
after the date of the Company Group Balance Sheet and that would be reflected on the
balance sheet of Company as of the Distribution Date, if such balance sheet were
prepared in accordance with GAAP;
(vii) all Assets transferred to Company or any member of the Company Group
pursuant to
Section 4.2
;
provided
,
however
, that any such
transfer shall take effect under
Section 4.2
and not under this
Section 2.4
; and
(viii) any and all Assets owned or held immediately prior to the Distribution
Date by ECC or any other member of the ECC Group that are used in the Company
Business. The intention of this clause (i) is only to rectify any inadvertent
omission of transfer or conveyance of any Assets that, had the parties hereto given
specific consideration to such Asset as of the date hereof, would have otherwise
been classified as a Separated Asset. No Asset shall be deemed to be a Separated
Asset solely as a result of this clause (i) if such Asset is within the category or
type of Asset expressly covered by the subject matter of an Ancillary Agreement.
In addition, no Asset shall be deemed a Separated Asset solely as a result of this
clause (i) unless a claim with respect thereto is made by the Company on or prior to
the second anniversary of the Distribution Date.
Notwithstanding anything to the contrary contained in this
Section 2.4
or elsewhere in
this Agreement, the Separated Assets shall not in any event include the Excluded Assets referred to
in
Section 2.4(b)
below.
(b) The following Assets shall not form part of the Separated Assets and shall remain
the exclusive property of ECC or the relevant member of the ECC Group on and after the
Separation (the
Excluded Assets
):
(i) any Asset expressly identified on
Schedule 2.4(b)(i)
;
(ii) any Asset transferred to ECC or to any other relevant member of the ECC
Group pursuant to
Section 4.2
;
provided
,
however
, that any
such transfers shall take effect under
Section 4.2
and not under this
Section 2.4
.;
(iii) any Exclusive ECC Contingent Gain or any Shared ECC Percentage of a
Shared Contingent Gain; and
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(iv) any and all Assets that are expressly contemplated by this Agreement or
any Ancillary Agreement (or the Schedules hereto or thereto) as Assets to be
retained by ECC or any other member of the ECC Group.
Section 2.5
Liabilities
.
(a) For the purposes of this Agreement,
Assumed Liabilities
shall mean
(without duplication):
(i) any and all Liabilities that are expressly contemplated by this Agreement
or any Ancillary Agreement (or the Schedules hereto or
thereto) as Liabilities to be assumed by the Company or any member of the Company
Group, and all agreements, obligations and Liabilities of any member of the Company
Group under this Agreement or any of the Ancillary Agreements;
(ii) all Liabilities (other than Taxes, which are allocated as set forth in the
Tax Sharing Agreement), including any employee-related Liabilities and Environmental
Liabilities (other than the Environmental Liabilities under
Section
2.5(b)(v)
), in each case to the extent relating to, arising out of or resulting from:
(A) the operation of the Company Business, as conducted at any time
prior to, on or after the Distribution Date (including any Liability
relating to, arising out of or resulting from any act or failure to act by
any director, officer, employee, agent or representative (whether or not
such act or failure to act is or was within such Persons authority)); or
(B) any Separated Assets;
in any such case whether arising prior to, on or after the Distribution Date;
(iii) subject to the terms of
Article VI
, all Exclusive Company
Contingent Liabilities and the Shared Company Percentage of any Shared Contingent
Liabilities;
(iv) all Liabilities to the extent relating to, arising out of or resulting
from any of the terminated, divested or discontinued businesses and operations of
the Company Business;
(v) all Liabilities reflected as liabilities or obligations of the Company or
its Subsidiaries in the Company Group Balance Sheet, subject to any discharge of
such Liabilities subsequent to the date of the Company Group Balance Sheet;
(vi) all Liabilities arising out of claims made by the Companys respective
directors, officers, employees, agents, Subsidiaries or Affiliates against any
member of the Company Group; and
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(vii) any inadvertent omission of transfer or assumption of Liability that, had
the parties given specific consideration to such Liability as of the date hereof,
would have otherwise been classified as an Assumed Liability.
Notwithstanding the foregoing, the Assumed Liabilities shall not include the Excluded Assumed
Liabilities referred to in
Section 2.5(b)
below.
(b) For the purposes of this Agreement,
Excluded Assumed Liabilities
shall
mean:
(i) any and all Liabilities that are expressly contemplated by this Agreement
or any Ancillary Agreement (or the Schedules hereto or
thereto) as Liabilities to be retained or assumed by ECC or any other member of the
ECC Group, and all agreements and obligations of any member of the ECC Group under
this Agreement or any of the Ancillary Agreements;
(ii) any Liability which is expressly identified on
Schedule 2.5(b)(ii)
;
(iii) any and all liabilities relating to, arising out of or resulting from any
Excluded Assets;
(iv) subject to the terms of
Article VI
, all Exclusive ECC Contingent
Liabilities and the Shared ECC Percentage of any Shared Contingent Liabilities;
(v) all Environmental Liabilities accrued as of the date hereof relating to,
arising out of or resulting from the Consumer Business; and
(vi) any inadvertent transfer, conveyance or assumption of any Liability that,
had the parties given specific consideration to such Liability as of the date
hereof, would have otherwise been classified as an Excluded Assumed Liability.
Section 2.6
Excluded Assumed Liabilities
. ECC shall, or shall cause, as applicable,
its Subsidiaries, to be responsible for the Excluded Assumed Liabilities regardless of when or
where such Liabilities arose or arise, regardless of where such Liabilities are asserted or
determined or regardless of whether asserted or determined prior to the Distribution Date.
Section 2.7
Deferred Separation Transactions
.
(a)
Misallocated Assets
. In the event that at any time or from time to time
(whether prior to, on or after the Distribution Date), any member of the ECC Group or any
member of the Company Group shall receive or otherwise possess any Asset that is allocated
to a member of the other Group pursuant to this Agreement, any Ancillary Agreement or the
Separation (including any remittances from account debtors), ECC shall or shall cause such
member of the ECC Group or the Company shall or shall cause such member of the Company
Group, as the case may be, to promptly transfer, or cause to be transferred, such Asset to
the Person so entitled thereto. Prior to any such transfer,
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the Person receiving or
possessing such Asset shall hold such Asset in trust for any such other Person. Each party
hereto shall cooperate with the other party hereto and use its commercially reasonable
efforts to set up procedures and notifications as are reasonably necessary or advisable to
effectuate the transfers contemplated by this
Section 2.7
.
(b)
Mistaken Assignments and Assumptions
. If at anytime there exists
(i) Assets that either party hereto discovers were, contrary to the agreements between the
parties, by mistake or unintentional omission, transferred to the Company or retained by ECC
or (ii) Liabilities that either party hereto discovers were, contrary to the agreements
between the parties, by mistake or unintentional omission, assumed by the Company or not
assumed by the Company or retained by the ECC Group, then the parties hereto shall cooperate
in good faith to effect the transfer or retransfer of misallocated Assets, and/or the
assumption or reassumption of misallocated Liabilities, to or by the appropriate Person and
shall not use the determination that remedial actions need to be taken to alter the original
intent of the parties hereto with respect to the Assets to be transferred to or Liabilities
to be assumed by the Company or retained by ECC. Each party hereto shall reimburse the
other or make other financial adjustments or other adjustments to remedy any mistakes or
omissions relating to any of the Assets transferred hereby or any of the Liabilities assumed
or retained hereby.
(c)
No Additional Consideration
. For the avoidance of doubt, the transfer or
assumption of any Assets or Liabilities under this
Section 2.7
shall be effected
without any additional consideration by either party hereto.
Section 2.8
Termination of Agreements
.
(a) Except as set forth in
Section 2.8(b)
, in furtherance of the releases and
other provisions of
Section 5.1
, the Company and each member of the Company Group,
on the one hand, and ECC and each member of the ECC Group, on the other hand, effective as
of the Distribution Date, shall terminate, any and all Contracts (including any intercompany
accounts payable or accounts receivable accrued as of the Distribution Date that are
reflected in the books and records of the parties or otherwise documented in writing in
accordance with past practices), whether or not in writing, between or among the Company and/or any member of the Company Group, on the one hand, and ECC and/or any
member of the ECC Group, on the other hand, effective as of the Distribution Date. No such
terminated Contracts (including any provision thereof which purports to survive termination)
shall be of any further force or effect after the Distribution Date. Each party hereto
shall, at the reasonable request of any other party, take, or cause to be taken, such other
actions as may be necessary to effect the foregoing.
(b) The provisions of
Section 2.8(a)
shall not apply to any of the following
Contracts (or to any of the provisions thereof) in: (i) this
Agreement or the Ancillary
Agreements (and each other agreement or instrument expressly
contemplated by this Agreement or any Ancillary Agreement to be entered into by any of the
parties hereto or any of the members of their respective Groups); (ii) any Contracts to
which any Person other than the parties hereto and their respective Affiliates is a party
(it being understood that to the extent that the rights and obligations of the
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parties and the members of their respective Groups under any such Contracts constitute Separated Assets
or Assumed Liabilities, they shall be assigned pursuant to
Section 2.3
); (iii) any
Contracts to which any non-wholly owned Subsidiary of ECC or the Company, as the case may
be, is a party (it being understood that directors qualifying shares or similar interests
will be disregarded for purposes of determining whether a Subsidiary is wholly owned); or
(iv) any other Contracts that this Agreement or any Ancillary Agreement expressly contemplates will survive the Distribution Date.
Section 2.9
Consents and Governmental Approvals
.
(a)
Transfers not Consummated Prior to Separation Date
. If the transfer or
assignment of any Asset intended to be transferred or assigned hereunder is not consummated
prior to or on the Distribution Date, whether as a result of a requisite Consent or
Governmental Approvals or for any other reason, then the Person retaining such Asset shall
thereafter hold such Asset for the use and benefit, insofar as reasonably possible, of the
Person entitled thereto until the consummation of the transfer or assignment thereof (or as
otherwise determined by ECC and the Company, as applicable). In addition, the Person
retaining such Asset shall take such other actions as may be reasonably requested by the
Person to whom such Asset is to be transferred in order to place such Person, insofar as
reasonably possible, in the same position as if such Asset had been transferred as
contemplated hereby and so that all the benefits and burdens relating to such Asset,
including possession, use, risk of loss, potential for gain, and dominion, control and
command over such Asset, are to inure from and after the Distribution Date to the Person to
whom such Asset is to be transferred. Notwithstanding the foregoing, any such Asset shall
still be considered a Separated Asset or Excluded Asset, as applicable.
(b)
Expenses
. The Person retaining an Asset due to the deferral of the
transfer and assignment of such Asset shall not be obligated, in connection with the
foregoing, to expend any money in connection with the maintenance of the Asset or otherwise
unless the necessary funds are advanced by the Person to whom such Asset is to be transferred,
other than reasonable out-of-pocket expenses, attorneys fees and recording or similar fees,
all of which shall be promptly reimbursed by the Person to whom such Asset is to be
transferred;
provided
,
however
, that the Person retaining such Asset shall
provide prompt notice to the Person to whom such Asset is to be transferred of the amount of
all such expenses and fees.
(c)
No Additional Consideration
. For the avoidance of doubt, the transfer of
any Assets under this
Section 2.9
shall be effected without any additional
consideration by either party hereto.
Section 2.10
Novation of the Assumed Liabilities
.
(a)
Reasonable Best Efforts
. The Company, at the request of ECC, shall use its
reasonable best efforts to obtain, or to cause to be obtained, any agreement, instrument,
Consent, substitution or amendment required to novate or assign all rights
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and obligations under Contracts and other obligations or Liabilities of any nature whatsoever that
constitute the Assumed Liabilities or to obtain in writing the unconditional release of all
parties to such arrangements other than any member of the Company Group, so that, in any
such case, the Company and the other members of the Company Group will be solely responsible
for such Liabilities;
provided
,
however
, that neither the ECC Group nor the
Company Group shall be obligated to pay any consideration or assume any additional
obligation therefore to any third party from whom any such Consent, substitution or
amendment is requested.
(b)
Inability to Obtain Novation
. If ECC or the Company is unable to obtain,
or to cause to be obtained, any such required agreement, instrument, Consent, release,
substitution or amendment with respect to any such Assumed Liability, the applicable member
of the ECC Group shall continue to be bound by such Contracts and other obligations and
Liabilities and, unless not permitted by Applicable Law or the terms thereof (except to the
extent expressly set forth in this Agreement or any Ancillary Agreement), the Company shall,
as agent or subcontractor for ECC or such other Person, as the case may be, pay, perform and
discharge fully, or cause to be paid, transferred or discharged all the obligations or other
Liabilities of any member of the ECC Group thereunder from and after the Distribution Date.
Notwithstanding the foregoing, any such Liability shall still be considered an Assumed
Liability;
provided
,
however
, that ECC shall not (and shall not permit any
member of the ECC Group to) and the Company shall not (and shall not permit any member of
the Company Group to) amend, renew, change the term of, modify the obligations under, or
transfer to a third Person, any such Contract or other obligation or other Liability without
the written consent of the Company (in the case of any such action by the ECC Group) or ECC
(in the case of any such action by the Company Group). ECC and the Company shall each use
reasonable best efforts to provide prompt notice to the other of any request they receive
from the counterparty to any Contract for any such amendment, renewal, change, modification
or transfer. ECC shall, without further consideration, pay and remit, or cause to be paid
or remitted, to the Company or its appropriate Subsidiary promptly all money, rights and other
consideration received by it or any member of the Company Group in respect of such
performance (unless any such consideration is an Excluded Asset). If and when any such
agreement, instrument, Consent, release, substitution or amendment shall be obtained or such
Contract or other obligations and Liabilities shall otherwise become assignable or able to
be novated, ECC shall thereafter assign, or cause to be assigned, all its rights,
obligations and other Liabilities thereunder or any rights or obligations of any member of
the Company Group to the Company without payment of further consideration and the Company
shall, without the payment of any further consideration, assume such rights, obligations and
Liabilities.
Section 2.11
Documents Relating to Transfer of Real Property Interests and Tangible
Property Located Thereon
.
(a) In furtherance of the contribution, assignment, transfer and conveyance of the
Separated Assets and the acceptance and assumption of Assumed Liabilities set forth in this
Article II
, simultaneously with the execution of the Separation, ECC and the Company
shall, or the applicable member of their respective Groups shall, execute and
-21-
deliver
deeds, lease assignments and assumptions, leases, subleases and sub-subleases as agreed to among
the parties hereto (which in certain cases may include different forms for real property and
leasehold interests located outside of the United States, if any).
(b) Except as otherwise expressly provided in this Agreement or any Ancillary Agreement, all tenant improvements, fixtures, furniture, office equipment,
servers, private branch exchanges, artwork and other tangible property (other than
equipment subject to capital or operating equipment leases, which will be transferred or
retained based on whether the associated capital or operating equipment lease is or is not a
Separated Asset) located as of the Separation on any real property
that is covered by any Ancillary Agreement, shall, except to the extent expressly set forth
on
Schedule 2.11(b)
, be transferred or retained as follows:
(i) In the case of any real property or leasehold interests that is a deed or
lease assignment and assumption, all such tangible property will be transferred to
the transferee or assignee of the applicable real property or leasehold interest.
(ii) In the case of any real property or leasehold interests that is a lease,
all such tangible property will be retained by the lessor under the applicable
lease, except that any such tangible property (other than tenant improvements,
fixtures, furniture and artwork) used exclusively by the lessee shall be transferred
to, or retained by, the lessee.
(iii) In the case of any real property or leasehold interests that is a
sublease or sub-sublease, all such tangible property will be retained by the
sublessor or sub-sublessor, respectively, under the applicable sublease or sub-sublease, except that any such tangible property (other than tenant
improvements, fixtures and artwork) used exclusively by the sublessee or
sub-sublessee, respectively, shall be transferred to, or retained by, such sublessee
or sub-sublessee.
In the case of this
Section 2.11(b)
, all determinations as to exclusive use by
any member of a Group shall be made without regard to infrequent and immaterial use by the
members of any other Group, if the transfer of such Asset to, or the retention of such Asset
by, such first Group would not interfere in any material respect with either the business or
operations of any such other Group.
(c) In the case of any real property or leasehold interest that is covered by
Section 2.11(b)(i)
and either
Section 2.11(b)(ii)
or
(iii)
, all such
tangible property shall first be allocated pursuant to the provisions of Section
2.11(b)(i)
and thereafter pursuant to whichever of such other clauses is applicable.
Section 2.12
Documents Relating to Transfers of the Separated Assets and Assumption of the
Assumed Liabilities
. In furtherance of the Separation and the Distribution, (i) ECC shall
execute and deliver, and shall cause its Subsidiaries to execute and deliver, such bills of sale,
stock powers, certificates of title, assignments of contracts and other instruments of transfer,
-22-
conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and
assignment of all of ECCs and its Subsidiaries right, title and interest in and to the Separated
Assets to the Company or its Subsidiaries and (ii) the Company shall execute and deliver, and shall
cause its Subsidiaries to execute and deliver, to ECC and its Subsidiaries such assumptions of
contracts and other instruments of assumption as and to the extent necessary to evidence the valid
and effective assumption of the Assumed Liabilities by the Company. All conveyance and assumption
documents and instruments used to effectuate the Separation and the Distribution shall be in form
mutually satisfactory to ECC and the Company.
Section 2.13
Release of Security Interest
. Upon the Companys reasonable request, ECC
shall use its reasonable best efforts to obtain from third parties the release of any Security
Interest granted by ECC (or any member of its Group) on any Separated Asset.
Section 2.14
No Representation or Warranty
.
(a) No party to this Agreement, any Ancillary Agreement, or
any other agreement or document contemplated by this Agreement, any Ancillary Agreement or
otherwise, is making any representation as to, warranty of or covenant, express or implied,
with respect to: (a) any of the Separated Assets, the Company Business, the Excluded Assets
or the Assumed Liabilities, including any warranty of merchantability or fitness for a
particular purpose, or any representation or warranty regarding any Consents or Governmental
Approvals required in connection therewith or their transfer, (b) the value or freedom from Encumbrances of, or any
other matter concerning, any Separated Asset or Excluded Asset, or regarding the absence of
any defense or right of setoff or freedom from counterclaim with respect to any claim or
other Separated Asset or Excluded Asset, including any account receivable of either party
hereto, or (c) the legal sufficiency of any assignment, document or instrument delivered
hereunder to convey title to any Separated Asset or Excluded Asset upon the execution,
delivery and filing hereof or thereof.
(b) EXCEPT AS MAY EXPRESSLY BE SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, ALL ASSETS TO BE TRANSFERRED AS SET FORTH HEREIN OR IN ANY ANCILLARY
AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED BY THIS
AGREEMENT SHALL BE TRANSFERRED AS IS, WHERE IS (AND, IN THE CASE OF ANY REAL PROPERTY, BY
MEANS OF A QUITCLAIM OR SIMILAR FORM DEED OR CONVEYANCE) AND THE TRANSFEREE SHALL BEAR THE
ECONOMIC AND LEGAL RISK THAT ANY CONVEYANCE SHALL PROVE TO BE INSUFFICIENT TO VEST IN THE
TRANSFEREE GOOD AND MARKETABLE TITLE, AND CLEAR OF ANY SECURITY INTEREST OR ANY
NECESSARY CONSENTS OR GOVERNMENTAL APPROVALS ARE NOT OBTAINED OR THAT ANY REQUIREMENTS OF
LAWS OR JUDGMENTS ARE NOT COMPLIED WITH.
Section 2.15
Use of Cash
. From the date hereof until the Distribution Date, ECC
shall be entitled to use, retain or otherwise dispose of all cash generated by the Company Business
and the Separated Assets in accordance with the ordinary course of operation of ECC.
-23-
Section 2.16
Plan of Reorganization
. In respect of each of the Contribution and
Distribution, the Second Contribution and Second Internal Distribution, and the First Contribution
and First Internal Distribution, this Agreement shall constitute a plan of reorganization for
purposes of Section 368 of the Code.
ARTICLE III
THE DISTRIBUTION AND ACTIONS PENDING THE DISTRIBUTION
Section 3.1
Transactions Prior to the Distribution
. Subject to the conditions
specified in
Section 3.2
, ECC and the Company shall use their reasonable best efforts to
consummate the Distribution. Such efforts shall include, without limitation, those specified in
this
Section 3.1
.
(a)
Registration Statements
.
(i) ECC and the Company shall cooperate in preparing and filing the
Registration Statement on Form 10 with the Commission. Subsequent to filing such Registration Statement ECC and the Company shall cooperate in the
preparation and filing of any amendments as may be necessary in order to cause the
same to become and remain effective as required by Applicable Law, including,
without limitation, filing such amendments or supplements to the Registration
Statement as may be required by the Commission or federal, state or foreign
securities laws.
(ii) ECC and the Company shall cooperate in preparing, filing with the
Commission and causing to become effective any registration statements or amendments
thereof which are required to reflect the establishment of, or amendments or
supplements to, any employee benefit and other plans necessary or appropriate in
connection with the Separation, the Distribution, or the other transactions
contemplated by this Agreement and the Ancillary Agreements.
(b)
Other Securities Laws Matters
. ECC and the Company shall take all such
actions as may be necessary or appropriate under the securities or blue sky laws of any
state of the United States (and any comparable laws under any foreign jurisdiction) in
connection with the Distribution, including ECC filing a Schedule 14C information statement
in connection with amending its articles of incorporation to
(i) effectuate a name change, (ii) amend its treatment
of the doctrine of corporate opportunities to clarify the
duties of directors and officers and (iii) adopt provisions
clarifying the conversion procedures with respect to uncertificated
shares.
(c)
Information Statement
. ECC shall, as soon as practicable after the
Registration Statement on Form 10 is declared effective under the Exchange Act (or, after
consultation with counsel, prior to such effectiveness) and the ECC Board has approved the
Distribution, cause the Information Statement to be mailed to the Record Holders.
(d)
Other Materials
. ECC and the Company shall prepare and mail, on or prior
to the Distribution Date, to the holders of ECC Common Stock, such other information
concerning the Company, its business, operations and management, the
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Separation, the Distribution and such other matters as ECC in its sole and absolute discretion determines
are necessary or desirable and as may be required by Applicable Law. ECC and the Company
will prepare, and ECC or the Company (as applicable) will, to the extent required under
Applicable Law, file with the Commission any such documentation which ECC in its sole and
absolute discretion determines are necessary or desirable to effectuate the Distribution and
ECC and the Company shall each use its reasonable best efforts to obtain all necessary
approvals from the Commission with respect thereto as soon as practicable.
(e)
NASDAQ Listing
. The Company shall prepare, file and use its reasonable
best efforts to seek to make effective, an application for listing of the Company Class A
Common Stock on The Nasdaq Global Select Market (
NASDAQ
), subject to official notice of
distribution.
Section 3.2
Conditions Precedent to Consummation of the Distribution
. The obligation of ECC to effect the Distribution is subject to the satisfaction or the
waiver by ECC, in its sole and absolute discretion, of each of the following conditions:
(a)
Approval by ECCs Board
. This Agreement and the transactions contemplated
hereby, including establishing the Record Date and the declaration of the Distribution,
shall have been duly taken and approved by the ECC Board in accordance with Applicable Law
and the certificate of incorporation and bylaws of ECC.
(b)
Registration Statements
. The Registration Statement on Form 10 shall have
been declared effective by the Commission, and there shall be no stop-order in effect with
respect thereto, and no proceeding for that purpose shall have been instituted by the
Commission and a registration statement on Form S-8 shall have been declared effective by
the Commission, and there shall be no stop-order in effect with respect thereto, and no
proceeding for that purpose shall have been instituted by the Commission.
(c)
Dissemination of Information to ECCs Stockholders
. Prior to the
Distribution, ECC and the Company shall have prepared and mailed to the holders of record of
ECC Common Stock the Information Statement and such other Information concerning the
Company, its business, operations and management, the Distribution as ECC shall determine in
its sole and absolute discretion and as may otherwise be required by Applicable Law.
(d)
NASDAQ Listing
. The Company Class A Common Stock to be distributed
pursuant to the Distribution shall have been accepted for listing on NASDAQ, subject to
official notice of the Distribution.
(e)
No Legal Restraints
. No Governmental Authority of competent jurisdiction
shall have, after the date of this Agreement, enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent), which is in effect and prohibits or materially
restricts or materially adversely affects the consummation of the Separation or
-25-
the Distribution or any of the other transactions contemplated by this Agreement and the
Ancillary Agreements.
(f)
Separation
. The Separation shall have become effective in accordance with
the terms of this Agreement and the Separation Transactions.
(g)
Tax Opinion of Counsel
. An opinion of White & Case LLP shall have been
obtained in form and substance satisfactory to ECC in its sole and absolute discretion to the effect that, among other things, the Contribution and
Distribution, the Second Contribution and Second Internal Distribution, and the First Contribution and First Internal Distribution will each qualify as
tax-free reorganizations for United States federal income tax purposes under Section
368(a)(1)(D) of the Code and distributions under Section 355 of the Code.
(h)
Consents and Approvals
. Any Consent and Governmental Approval necessary to
consummate the Separation and the Distribution shall have been obtained and be in full force
and effect, including the Consents and Governmental Approvals set forth on
Schedule
3.2(h)
.
(i)
No Other Events
. No other events or developments shall have occurred that,
in the judgment of the ECC Board, in its sole and absolute discretion, would result in the
Separation or the Distribution having a material adverse effect on ECC, its stockholders,
the Consumer Business or the Company Business.
The foregoing conditions are for the sole benefit of ECC and shall not give rise to or create
any duty on the part of ECC or the ECC Board to waive or not to waive any such conditions or in any
way limit ECCs right to terminate this Agreement as set forth in
Section 3.5(d)
or alter
the consequences of any such termination from those specified in
Section 3.5(d)
. Any
determination made by ECC prior to the Distribution concerning the satisfaction or waiver of any or
all of the conditions set forth in this
Section 3.2
shall be conclusive.
Section 3.3
Documents to be Delivered by ECC
. On or prior to the Distribution Date,
ECC will deliver, or will cause its appropriate Subsidiaries to deliver, to the Company all of the
following:
(a) In each case where ECC or any other member of the ECC Group is a party to any
Ancillary Agreement, a duly executed counterpart of such Ancillary Agreement;
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(b) Resignations of each individual listed on
Schedule 3.3(b)
, who is a
director and/or officer of any member of the Company Group;
(c) The agreements, documents and instruments necessary to effectuate the Separation; and
(d) Such other agreements, documents or instruments as the parties may agree are
necessary or desirable in order to achieve the purposes hereof.
Section 3.4
Documents to be Delivered by the Company
. On or prior to the Distribution
Date, the Company will deliver, or will cause its appropriate Subsidiaries to deliver, to ECC all
of the following:
(a) In each case where the Company or any other member of the Company Group is a party
to any Ancillary Agreement, a duly executed counterpart of such Ancillary Agreement;
(b) Resignations of each individual listed on
Schedule 3.4(b)
who is a director
and/or officer of any member of the ECC Group; and
(c) The agreements, documents and instruments necessary to effectuate the Separation; and
(d) Such other agreements, documents or instruments as the parties may agree are
necessary or desirable in order to achieve the purposes hereof.
Section 3.5
Distribution
.
(a)
Sole Discretion
. ECC shall, in its sole and absolute discretion, determine
whether or not to proceed with all or part of the Distribution, determine the Distribution
Date and determine all terms of the Distribution, including, without limitation, the form,
structure and terms of any transaction(s) to effect the Distribution (including the
Separation) and the timing of and conditions to the consummation of the Distribution. In
addition, ECC may at any time and from time to time until the completion of the
Distribution, modify or change the terms of the Distribution, including, without limitation,
by accelerating or delaying the timing of the consummation of all or part of the
Distribution. The Company shall cooperate with ECC in all respects to accomplish the
Distribution and shall, at ECCs direction, promptly take any and all actions reasonably
necessary or desirable in ECCs sole and absolute discretion to effect the Distribution.
(b)
Effective Time
. The Distribution shall be effective at
12:01 a.m., Mountain Time, on the Distribution Date (the
Effective Time
).
(c) Actions in Connection with Distribution.
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(i) Subject to
Section 3.2
, on or prior to the Distribution Date, (i)
ECC will deliver to the Agent for the benefit of the Record Holders of ECC Class A
Common Stock, a single stock certificate, endorsed by ECC in blank, representing all
of the outstanding shares of the Company Class A Common Stock then owned by ECC, and
shall cause the transfer agent for the shares of ECC Common Stock to instruct the
Agent to distribute on the Distribution Date the appropriate number of such shares
of the Company Class A Common Stock to each such Record Holder, and (ii) ECC will
deliver to the Agent for the benefit of the Record Holders of ECC Class B Common
Stock, a single stock certificate, endorsed by ECC in blank, representing all of the
outstanding shares of the Company Class B Common Stock then owned by ECC, and shall
cause the transfer agent for the shares of ECC Common Stock to instruct the Agent to
distribute on the Distribution Date the appropriate number of such shares of the Company Class B
Common Stock to each such Record Holder.
(ii) Subject to
Section 3.2
, (i) each Record Holder of ECC Class A
Common Stock will be entitled to receive in the Distribution a number of shares of
the Company Class A Common Stock equal to the number of shares of ECC Class A Common
Stock held by such Record Holder on the Record Date multiplied by the distribution
ratio to be determined by the ECC Board when it declares the Distribution (the
Class A Distribution Ratio
), and (ii) each Record Holder of ECC Class B
Common Stock will be entitled to receive in the Distribution a number of shares of
the Company Class B Common Stock equal to the number of shares of ECC Class B Common
Stock held by such Record Holder on the Record Date multiplied by the distribution
ratio to be determined by the ECC Board when it declares the Distribution (the
Class B Distribution Ratio
). The ECC Board shall have the right to adjust
the Class A Distribution Ratio and/or the Class B Distribution Ratio at any time
prior to the Distribution.
(iii) ECC and the Company, as the case may be, will provide to the Agent all
share certificates and any information required in order to complete the
Distribution on the basis set forth in this
Section 3.5
. No action will be
necessary for any Record Holder of ECC to receive Company Class A Common Stock
and/or Company Class B Common Stock, as applicable, in the Distribution.
(d)
Termination
. Without limiting the generality of
Section 3.5(a)
,
(i) this Agreement and the Ancillary Agreements may be terminated, (ii) the Separation may
be abandoned and (iii) the Distribution may be abandoned, in each case at any time prior to the
Effective Time by and in the sole and absolute discretion of ECC without the approval of the
Company. In the event of such termination, neither party hereto shall have any Liability of
any kind to the other party.
(e) Fractional Shares.
(i) ECC shall direct the Agent to (i) determine the number of whole shares and
fractional shares of the Company Class A Common Stock allocable to each Record
Holder of ECC Class A Common Stock, (ii) aggregate all such
-28-
fractional shares and
sell the whole shares obtained thereby in open market transactions as soon as
practicable on or after the Distribution Date at then prevailing trading prices and
(iii) cause to be distributed to each such Record Holder or for the benefit of each
such beneficial owner, in lieu of any fractional share, such Record Holders or
owners ratable share of the proceeds of such sale. Solely for purposes of computing fractional share
interests pursuant to this
Section 3.5(e)
, the beneficial owner of ECC Class
A Common Stock held of record in the name of a nominee in any nominee account shall
be treated as the Record Holder with respect to such shares.
(ii) ECC shall not be required to issue certificates representing fractions of
shares of Company Class B Common Stock, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties hereto
that all fractional interests with respect to Company Class B Common Stock as a
result of the Distribution shall be eliminated by rounding any fraction down to the
nearest whole number of shares of Company Class B Common Stock allocable to each
Record Holder of ECC Class B Common Stock.
(f)
Unclaimed Shares or Cash
. Any Company Class A Common Stock or cash in lieu
of fractional shares with respect to Company Class A Common Stock that remain unclaimed by
any Record Holder of Class A Common Stock one hundred eighty (180) days after the
Distribution Date shall be delivered to the Company. The Company shall hold all such
Company Class A Common Stock and cash for the account of such Record Holder and any such
Record Holder shall look only to the Company for such Company Class A Common Stock and cash,
if any, in lieu of fractional share interests, subject in each case to applicable escheat or
other abandoned property laws.
ARTICLE IV
ADDITIONAL COVENANTS, FURTHER ASSURANCES AND OTHER MATTERS
Section 4.1
Provision of Corporate Records
. Prior to or as promptly as practicable
after the Distribution Date, ECC shall deliver or make available to the Company all corporate books
and records of the Company Group in its possession and complete and accurate copies of all relevant
portions of all corporate books and records of the ECC Group relating directly and primarily to the
Separated Assets, the Company Business, or the Assumed Liabilities,
including, in each case, all active agreements, active litigation files, government filings and returns or reports relating to
Taxes for all open periods. Subject to
Section 4.5
and
Section 4.6
, ECC may retain
complete and accurate copies of such books and records. From and after the Distribution Date, all
such books, records and copies shall be the property of the Company. Prior to or as promptly as
practicable after the Distribution Date, the Company shall deliver or make available to ECC, all
corporate books and records of the Company Group in its possession and complete and accurate copies
of all relevant portions of all corporate books and records of the Company Group relating directly
and primarily to the Consumer Business, including, in each case, all
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active agreements, active
litigation files, government filings and returns or reports relating to Taxes for all open periods.
Subject to
Section 4.5
and
Section 4.6
, the Company may retain complete and
accurate copies of such books and records. From and after the Distribution Date, all such books,
records and copies shall be the property of ECC. The costs and expenses incurred in the provision
of records or other information to a party shall be paid for by the receiving party.
Section 4.2
Further Assurance
.
(a) In addition to the actions specifically provided for elsewhere in this Agreement
(such as
Section 2.7
,
Section 2.9(a)
, and
Section 2.11(b)
), ECC and
the Company agree to execute or cause to be executed by the appropriate parties and deliver,
as appropriate, such other agreements, instruments and other documents as may be necessary
or desirable in order to effect the purposes of this Agreement and the Ancillary Agreements.
(b) Without limiting the generality of the foregoing, at the request of the Company,
and without further consideration, ECC will execute and deliver, and will cause the
applicable members of the ECC Group to execute and deliver, to the Company and the
applicable members of the Company Group such other instruments of transfer, conveyance,
assignment, substitution, confirmation or other documents and take such action as the
Company may reasonably deem necessary or desirable in order to more effectively transfer,
convey and assign to the Company and the applicable members of the Company Group and confirm
the Companys and the applicable members of the Company Group title to all of the assets,
rights and other things of value contemplated to be transferred to the Company and the
applicable members of the Company Group pursuant to this Agreement, the Ancillary
Agreements, and any documents referred to therein, to put the Company and the applicable
members of the Company Group in actual possession and operating control thereof and to
permit the Company and the applicable members of the Company Group to exercise all rights
with respect thereto (including, without limitation, rights under Contracts and other
arrangements as to which the consent of any third party to the transfer thereof shall not
have previously been obtained). Without limiting the generality of the foregoing, at the
request of ECC and without further consideration, the Company will execute and deliver, and
will cause the applicable members of the Company Group to execute and deliver, to ECC and
the applicable members of the ECC Group all instruments, assumptions, novations,
undertakings, substitutions or other documents and take such other action as ECC may
reasonably deem necessary or desirable in order to have the Company and the applicable
members of the Company Group fully and unconditionally assume and discharge the liabilities
contemplated to be assumed by the Company and the applicable members of the Company Group
under this Agreement or any document in connection herewith and to relieve the ECC and the
applicable members of the ECC Group of any liability or obligation with respect thereto and
evidence the same to third parties.
(c) Neither ECC nor the Company shall be obligated, in connection with this
Section 4.2
, to expend money other than reasonable out-of-pocket expenses,
attorneys fees and recording or similar fees, unless reimbursed by the other party hereto.
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(d) Furthermore, each party hereto, at the request of the other party, shall execute
and deliver such other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of the transactions
contemplated hereby.
Section 4.3
Agreement For Exchange Of Information
.
(a)
Generally
. Except as provided in the Transition Services Agreement or the
Tax Sharing Agreement, in which event such agreement shall control, each of ECC and the
Company, on behalf of its respective Group, agrees to provide, or cause to be provided, to
the other partys Group and their authorized accountants, counsel and other designated
representatives, at any time after the Distribution Date, reasonable access during normal
business hours and as soon as reasonably practicable after written request therefor, (i) all
Information regularly provided by such respective Group to the other Group prior to the
Distribution Date, and (ii) any Information in the possession or under the control of such
respective Group that the requesting party reasonably needs (A) to comply with reporting,
disclosure, filing or other requirements imposed on the requesting party (including under
applicable securities and tax laws) by a Governmental Authority having jurisdiction over the
requesting party, (B) for use in any other judicial, regulatory, administrative or other
proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation or other
similar requirements, in each case, other than claims or allegations that one party to this
Agreement has against the other, (C) subject to the foregoing clause (B) above, to comply
with its obligations under this Agreement or any Ancillary Agreement, (D) to the extent such
Information and cooperation is necessary to comply with such reporting, filing and
disclosure obligations, for the preparation of financial statements or completing an audit,
and as reasonably necessary to conduct the ongoing businesses of ECC or the Company, as the
case may be or (E) for use in compensation, benefit or welfare plan administration or other
bona fide business purposes;
provided
,
however
, that in the event that
either ECC or the Company determines that any such provision of or access to Information
would be commercially detrimental in any material respect, violate any Applicable Law or
agreement or waive any Privilege, the parties hereto shall take all reasonable measures to
permit the compliance with such obligations in a manner that avoids any such harm or
consequence and shall comply with the applicable provisions of this Agreement. Each of ECC
and the Company agree to make their respective personnel available during normal business
hours to discuss the Information exchanged pursuant to this
Section 4.3
provided
, that such access does not interfere with the day-to-day operations of the
applicable party.
(b)
Financial Information
. Without limiting the generality of
Section
4.3(a)
, until the end of the first full Company fiscal year occurring after the
Distribution Date (and for a reasonable period of time afterwards as required for each party
hereto to prepare consolidated financial statements or complete a financial statement audits
for the fiscal year during which the Distribution Date occurs), each party hereto shall use
its commercially reasonable efforts, to cooperate with the
other partys Information
requests to enable the other party hereto to meet is timetable for dissemination (in
accordance with applicable securities laws) of its earnings releases, financial statements
and enable such
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other partys auditors to timely complete their audit of the annual
financial statements and review of the quarterly financial statements of such party.
(c)
Ownership of Information
. Any Information owned by a party hereto that is
provided to the other party pursuant to this
Section 4.3
shall be deemed to remain
the property of the party that owned and provided such Information. Unless specifically set
forth herein, nothing contained in this Agreement shall be construed as granting or
conferring rights of license or ownership in any Information owned by one party
hereunder to the other party hereunder.
(d)
Record Retention
. Except with respect to Information for which a different
retention policy is specified in an Ancillary Agreement, to facilitate the possible exchange
of Information pursuant to this
Section 4.3
and other provisions of this Agreement
after the Distribution Date, each party hereto agrees to use its reasonable best efforts to
retain and cause the members of its Group to retain all Information in their respective
possession or control on the Distribution Date in accordance with the record retention and
destruction policies of ECC as in effect on the Distribution Date or such other policies and
procedures as may reasonably be adopted by the applicable party hereto after the
Distribution Date as provided herein. No party hereto will destroy, or permit any member of
its Group to destroy, any Information which the other party may have the right to obtain
pursuant to this Agreement without first notifying the other party of the proposed
destruction and giving the other party the opportunity to take possession of such
Information prior to such destruction;
provided
,
however
, that no party
hereto will destroy, or permit any member of its Group to destroy, any Information required
to be retained by Applicable Law.
(e)
Limitation of Liability
. Each party hereto will use its reasonable best
efforts to ensure that Information provided to the other party hereto is accurate and
complete;
provided
,
however
, except as otherwise provided in any Ancillary
Agreement, no party hereto shall have any liability to any other party in the event that any
Information exchanged or provided pursuant to this
Section 4.3
is found to be
inaccurate, in the absence of gross negligence or willful misconduct by the party providing
such Information. No party hereto shall have any liability to the other party if any
Information is destroyed after commercially reasonable efforts by such party to comply with
the provision of this
Section 4.3
.
(f)
Other Agreements Providing for Exchange of Information
. The rights and
obligations granted under this
Section 4.3
are subject to any specific limitations,
qualifications or additional provisions on the sharing, exchange or confidential treatment
of Information set forth in this Agreement and any Ancillary Agreement.
(g)
Compensation for Providing Information
. The party hereto requesting
Information agrees to reimburse the other party for the reasonable out-of-pocket costs, if
any, of creating, gathering and copying such Information, to the extent that such costs are
incurred for the benefit of the requesting party.
Section 4.4
Production of Witnesses; Records; Cooperation
.
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(a) Subject to
Section 4.6
, after the Distribution Date, except in the case of
any Action by one or more members of one Group against one or more members of the other
Group, each party hereto shall use its reasonable best efforts to make available to the
other party, upon written request, the former, current and future directors, officers,
employees, other personnel and agents of the members of its respective Group as
witnesses and any books, records or other documents within its control or which it otherwise
has the ability to make available, to the extent that any such person (giving consideration
to business demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with any Action
in which the requesting party may from time to time be involved, regardless of whether such
Action is a matter with respect to which indemnification may be sought hereunder.
Notwithstanding
Section 4.3(g)
, the requesting party shall reimburse the other party
for its reasonable out-of-pocket cost and expenses in connection with requests made under
this
Section 4.4
.
(b) Without limiting the forgoing but subject to
Section 4.6
, the parties
hereto shall cooperate and consult to the extent reasonably necessary with respect to any
Action, except in the case of an adversarial Action by one or more members of one Group
against one or more members of the other Group.
Section 4.5
Confidentiality
.
(a) Subject to
Section 4.6
, which shall govern Privileged Information, from and
after the Distribution Date, ECC and the Company shall hold and shall cause each member of
their respective Groups to hold, and shall each cause their respective directors, officers,
employees, agents, consultants, advisors and other representatives to hold, in strict
confidence and not to disclose or release without the prior written consent of the other
party, any and all Confidential Information of the other partys Group;
provided
,
that each party hereto may disclose, or may permit disclosure of, Confidential Information
(w) to its respective auditors, attorneys, financial advisors, bankers and other appropriate
consultants and advisors who have a need to know such Confidential Information and are
informed of such partys obligation to hold such information confidential to the same extent
as is applicable to the parties hereto and in respect of whose failure to comply with such
obligations, the Company or ECC, as the case may be, will be responsible, (x) if such party
or any of the members of such partys respective Group is compelled to disclose any such
information by judicial or administrative process or, in the opinion of independent legal
counsel, by other requirements of Applicable Law, (y) if any such information is or becomes
generally available to the public other than as a result of a disclosure in violation of
this Agreement or (z) if such information was or becomes available to either the Company or
ECC or any member of their respective Group on a non-confidential basis and from a source
(other than a party to this Agreement or any Affiliate, director, officer, employee, agent,
consultant, advisor and other representative of such party hereto) that is not known after
actual inquiry to be bound by a confidentiality obligation. Notwithstanding the foregoing,
in the event that any demand or request for disclosure of Confidential Information is made
pursuant to clause (x) above, ECC or the Company, as the case may be, shall promptly notify
the other of the existence of such request or demand and shall provide the other a
reasonable
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opportunity to seek an appropriate confidentiality agreement, protective order or
other remedy at the reasonable cost and expense of the disclosing party and which both
parties
hereto will cooperate in obtaining. In the event that such appropriate protective
order or other remedy is not obtained, the party whose Confidential Information is required
to be disclosed shall or shall cause the other party to furnish, or cause to be furnished,
only that portion of the Confidential Information that is legally required to be disclosed.
(b) Notwithstanding anything herein to the contrary, ECC and the members of its Group,
on the one hand, and the Company and the members of its Group, on the other hand, shall be
deemed to have satisfied their obligations hereunder with respect to Confidential
Information if they exercise the same degree of care (but no less than a reasonable degree
of care) as they take to preserve confidentiality for their own similar Information.
Section 4.6
Privileged Matters
.
(a) ECC and the Company agree that their respective rights and obligations to maintain,
preserve, assert or waive any or all privileges belonging to either party hereto or the
respective members of their respective Group with respect to the Consumer Business or the
Company Business, including but not limited to the attorney-client, work product privileges
or any other applicable privileges (collectively,
Privileges
), shall be governed
by the provisions of this
Section 4.6
. With respect to Privileged Information of
ECC, ECC shall have sole authority in perpetuity to determine whether to assert or waive any
or all Privileges, and the Company shall take no action (nor permit any member of its Group
to take action) without the prior written consent of ECC that could result in any waiver of
any Privilege that could be asserted by ECC or any member of its Group under Applicable Law
and this Agreement. With respect to Privileged Information of the Company arising after the
Distribution Date, the Company shall have sole authority in perpetuity to determine whether
to assert or waive any or all Privileges, and ECC shall take no action (nor permit any
member of its Group to take action) without the prior written consent of the Company that
could result in any waiver of any Privilege that could be asserted by the Company or any
member of its Group under Applicable Law and this Agreement. The rights and obligations
created by this
Section 4.6
shall apply to all Information as to which ECC or the
Company or their respective Groups would be entitled to assert or have asserted a Privilege
without regard to the effect, if any, of the Separation and the Distribution
(
Privileged Information
). Privileged Information of ECC and its Group includes
but is not limited to (i) any and all Information regarding the Consumer Business and its
Group (other than Information relating to the Company Business (
Company
Information
)), whether or not such Information (other than Company Information) is in
the possession of the Company or any member of its Group; (ii) all communications subject to
a Privilege between counsel for ECC (including any person who, at the time of the
communication, was an employee of ECC or its Group in the capacity of in-house counsel,
regardless of whether such employee is or becomes an employee of the Company or any member
of its Group) and any person who, at the time of the communication, was an employee of ECC,
regardless of whether such employee is or becomes an employee of the Company or any member
of its Group and (iii) all Information generated, received or arising after the Distribution
Date that refers or relates
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to Privileged Information of ECC or its Group generated, received or arising prior to
the Distribution Date. Privileged Information of the Company and its Group includes but is
not limited to (x) any and all Company Information, whether or not it is in the possession
of ECC or any member of its Group; (y) all communications subject to a Privilege occurring
after the Distribution between counsel for the Company Business (including in-house counsel
and former in-house counsel who are employees of ECC) and any person who, at the time of the
communication, was an employee of the Company, any member of its Group or the Company
Business regardless of whether such employee was, is or becomes an employee of ECC or any
member of its Group and (z) all Information generated, received or arising after the
Distribution Date that refers or relates to Privileged Information of the Company or its
Group generated, received or arising after the Distribution Date.
(b) Upon receipt by ECC or the Company, or any of the members of the respective Groups,
as the case may be, of any subpoena, discovery or other request from any third party that
actually or arguably calls for the production or disclosure of Privileged Information of the
other or if ECC or the Company, or any of members of their respective Groups, as the case
may be, obtains knowledge that any current or former employee of ECC or the Company, as the
case may be, receives any subpoena, discovery or other request from any third party that
actually or arguably calls for the production or disclosure of Privileged Information of the
other, ECC or the Company, as the case may be, shall promptly notify the other of the
existence of the request and shall provide the other a reasonable opportunity to review the
Information and to assert any rights it may have under this
Section 4.6
or otherwise
to prevent the production or disclosure of Privileged Information. ECC or the Company, as
the case may be, will not, and will cause the members of their respective Groups to not,
produce or disclose to any third party any of the others Privileged Information under this
Section 4.6
unless (i) the non-disclosing party has provided its express written
consent to such production or disclosure or (ii) a court of competent jurisdiction has
entered an order not subject to interlocutory appeal or review finding that the Information
is not entitled to protection from disclosure under any applicable privilege, doctrine or
rule, in which case, such Information shall be subject to
Section 4.5
.
(c) ECCs transfer of books and records pertaining to the Company Business and other
Information to the Company, ECCs agreement to permit the Company to obtain Information
existing prior to the Distribution, the Companys transfer of books and records pertaining
to the Consumer Business, if any, and other Information to ECC and the Companys agreement to permit ECC to obtain
Information existing prior to the Distribution are made in reliance on ECCs and the
Companys respective agreements, as set forth in
Section 4.5
and this
Section
4.6
, to maintain the confidentiality of such Information and to take the steps provided
herein for the preservation of all Privileges that may belong to or be asserted by ECC or
the Company, as the case may be. The access to Information, witnesses and individuals being
granted pursuant to
Sections 4.3
and the disclosure to the Company and ECC of
Privileged Information relating to the Company Business or the Consumer Business pursuant to
this Agreement in connection with the Separation and Distribution shall not be asserted by
ECC or the Company to constitute, or otherwise deemed, a waiver of any Privilege that has
been or may be asserted under this
Section 4.6
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or otherwise. Nothing in this Agreement shall operate to reduce, minimize or condition
the rights granted to ECC and the Company in, or the obligations imposed upon ECC and the
Company by, this
Section 4.6
.
Section 4.7
Tax Sharing Agreement
. None of the provisions of this
Article IV
are intended to supersede any provision in the Tax Sharing Agreement with respect to matters
related to Taxes. In the event of any conflict between this Agreement and the Tax Sharing
Agreement, the Tax Sharing Agreement shall control with respect to matters related to Taxes.
ARTICLE V
SURVIVAL AND INDEMNIFICATION
Section 5.1
Mutual Release
.
(a) Effective as of the Distribution Date and except as otherwise specifically set
forth in the Ancillary Agreements or on
Schedule 5.1
, each of ECC, on behalf of
itself and each member of the ECC Group, on the one hand, and the Company, on behalf of
itself and each member of the Company Group, on the other hand, hereby unequivocally,
unconditionally and irrevocably releases and forever discharges the other party and the
members of such partys Group, and its and their respective directors, officers, managers or
other persons acting in a similar capacity, agents, record and beneficial security holders
(including trustees and beneficiaries of trusts holding such securities), advisors,
accountants, attorneys and other representatives (in each case, in their respective
capacities as such) and their respective heirs, executors, administrators, successors and
assigns, of and from, all Liabilities whatsoever of every name and nature, whether at law or
in equity (including any right of contribution), whether arising under any Contract, by
operation of law or otherwise, existing or arising from any acts or events occurring or
failing to occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Distribution Date, whether or not know
on the Distribution Date, whether fixed or contingent, and whether or not concealed or
hidden, including in connection with the transactions and all other activities to implement
the Separation and the Distributions.
(b)
Nothing contained in
Section 5.1(a)
shall impair any right of any party
hereto (or any of the respective members of such partys Group) to enforce this Agreement,
any Ancillary Agreement or any other Contracts
that are contemplated by
Section 2.8(b)
or the applicable Schedules thereto,
nor shall anything contained in those sections be interpreted as terminating as of the
Distribution Date any rights under any such Contracts. For purposes of clarification,
nothing contained in
Section 5.1(a)
shall release any Person from:
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(i) any Liability provided in or resulting from any agreement among any member
of the ECC Group or the Company Group that is specified in
Section 2.8(b)
or
the applicable Schedules thereto as not to terminate as of the Distribution Date, or
any other Liability specified in such
Section 2.8(b)
as not to terminate as
of the Distribution Date;
(ii) any Liability, contingent or otherwise, assumed, transferred, assigned or
allocated to the Group of which such Person is a member in accordance with, or any
other Liability of any member of any Group under, this Agreement or any Ancillary
Agreement;
(iii) any Liability for the sale, lease, construction or receipt of goods,
property or services purchased, obtained or used in the ordinary course of business
by a member of one Group from a member of any other Group prior to the Distribution
Date;
(iv) any Liability for unpaid amounts for products or services or refunds owing
on products or services due on a value-received basis for work done by a member of
one Group at the request or on behalf of a member of another Group;
(v) any Liability that the parties may have with respect to indemnification or
contribution pursuant to this Agreement for claims brought against the parties by
third Persons, which Liability shall be governed by the provisions of this
Article V
and
Article VI
and, if applicable, the appropriate
provisions of the Ancillary Agreements; or
(vi) any Liability the release of which would result in the release of any
Person other than a Person released pursuant to this
Section 5.1
.
In
addition, nothing contained in
Section 5.1(a)
shall release any party hereto from
honoring its existing obligations to indemnify any director, officer or employee of either Group
who was a director, officer or employee of such party on or prior to the Distribution Date, to the
extent that such director, officer or employee becomes a named defendant in any litigation
involving such party and was entitled to such indemnification pursuant to then existing
obligations.
(c) ECC shall not make, and shall not permit any other member of the ECC Group to make,
any claim or demand, or commence any Action asserting any claim or demand, including any
claim of contribution or any indemnification, against the Company or any member of the
Company Group or any other Person released pursuant to
Section 5.1(a)
, with respect
to any Liabilities released pursuant to
Section 5.1(a)
. The Company shall not make,
and shall not permit any other member of the Company Group to make, any claim or demand, or
commence any Action asserting any claim or demand,
including any claim of contribution or any indemnification, against Company or any
other member of Company Group or any other Person released pursuant to
Section
5.1(a)
, with respect to any Liabilities released pursuant to
Section 5.1(a)
.
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(d) It is the intent of ECC and the Company by virtue of the provisions of this
Section 5.1
to provide for a full and complete release and discharge of all
Liabilities existing or arising from all acts and events occurring or failing to occur or
alleged to have occurred or to have failed to occur and all conditions existing or alleged
to have existed on or before the Distribution Date, between or among ECC or any member of
the ECC Group, on the one hand, and the Company or any member of the Company Group, on the
other hand (including any contractual agreements or arrangements existing or alleged to
exist between or among any such members on or before the Distribution Date), except as
expressly set forth in
Section 5.1(b)
. At any time, at the request of any other
party, each party shall cause each member of its respective Group to execute and deliver
releases reflecting the provisions hereof.
Section 5.2
Indemnification by ECC
. Except as provided in
Section 5.6
and
Section 5.7
and subject to
Section 9.1
, ECC shall indemnify, defend and hold
harmless the Company, each member of the Company Group and each of their respective current and
former directors, officers and employees, and each of the heirs, executors, successors and assigns
of any of the foregoing (collectively, the
Company Indemnified Parties
), from and against
any and all Liabilities of the Company Indemnified Parties relating to, arising out of or resulting
from any of the following items (without duplication):
(a) the failure of ECC or any other member of the ECC Group or any other Person to pay,
perform or otherwise promptly discharge any Liabilities of the ECC Group other than the
Assumed Liabilities whether prior to or after the date hereof;
(b) the Consumer Business or any Liability of the ECC Group (including the Excluded
Assumed Liabilities) other than the Assumed Liabilities, except as set forth in clause (c)
below;
(c) any Assumed Liability that relates to, arises out of or results from Intellectual
Property Liabilities, existing or arising from acts or events occurring or failing to occur
or alleged to have occurred or to have failed to occur or any conditions existing or alleged
to have existed on or before the Distribution Date or after the Distribution Date if
relating to, arising out of or resulting from acts or omissions by ECC or any member of the
ECC Group;
(d) any breach of, or failure to perform or comply with, any covenant, undertaking or
obligation of, this Agreement or any Ancillary Agreements, by ECC or any member of the ECC
Group; and
(e) any untrue statement or alleged untrue statement of material fact or omission or
alleged omission to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent
relating to ECC Group contained in the Registration Statement, the Information
Statement, the Schedule 14C information statement or any other registration statements filed
by the Company or ECC in connection with the Distribution.
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Section 5.3
Indemnification by the Company
. Except as provided in
Section 5.6
and
Section 5.7
and subject to
Section 9.1
, the Company shall indemnify defend and
hold harmless ECC, each member of the ECC Group and each of their respective current and former
directors, officers and employees, and each of the heirs, executors, successors and assigns of any
of the foregoing (collectively, the
ECC Indemnified Parties
) from and against any and all
Liabilities of the ECC Indemnified Parties relating to, arising out of or resulting from any of the
following items (without duplication):
(a) the failure of the Company or any other member of the Company Group or any other
Person to pay, perform or otherwise promptly discharge any Assumed Liabilities in accordance
with their respective terms, whether prior to or after the date hereof;
(b) the Company Business or any Assumed Liability, except as set forth in clause (c)
below;
(c) any Assumed Liability that relates to, arises out of or results from Intellectual
Property Liabilities, existing or arising from acts or events occurring or failing to occur
or alleged to have occurred or to have failed to occur or any conditions existing or alleged
to have existed after the Distribution Date if relating to, arising out of or resulting from
acts or omissions by the Company or any member of the Company Group;
(d) any breach of, or failure to perform or comply with, any covenant, undertaking or
obligation of, this Agreement or any Ancillary Agreements, by the
Company or any member of the Company Group;
(e) any untrue statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent relating to the Company
Group contained in the Registration Statement, the Information Statement or any other
registration statements filed by the Company in connection with the Distribution.
Section 5.4
Tax Indemnification
. Notwithstanding anything herein to the contrary,
indemnification for matters subject to the Tax Sharing Agreement is governed by the terms,
provisions and procedures of the Tax Sharing Agreement and not by this
Article V
.
Section 5.5
Indemnification Obligations Net of Insurance Proceeds and Other Amounts
.
(a) The parties hereto intend that any Liability subject to indemnification or
reimbursement pursuant to this
Article V
or
Article VI
will be net of
Insurance Proceeds that actually reduce the amount of the Liability. Accordingly, the
amount which any party hereto (an
Indemnifying Party
) is required to pay to any
Person entitled to indemnification hereunder (an
Indemnified Party
) will be
reduced by any Insurance Proceeds theretofore actually received, realized or recovered by or
on behalf of the Indemnified Party in reduction of the related Liability. If an Indemnified
Party receives a
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payment (an
Indemnity Payment
) required by this Agreement from an
Indemnifying Party in respect of any Liability and subsequently receives Insurance Proceeds
that actually reduce the amount of the Liability, then the Indemnified Party will pay to the
Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the
amount of the Indemnity Payment that would have been due if the Insurance Proceeds had been
received, realized or recovered before the Indemnity Payment was made.
(b) In the case of any Shared Contingent Liability, any Insurance Proceeds actually
received, realized or recovered by any party hereto in respect of the Shared Contingent
Liability will be shared among the parties hereto in such manner as may be necessary so that
the obligations of the parties hereto for such Shared Contingent Liability, net of such
Insurance Proceeds, will remain in proportion to their respective Shared Percentages,
regardless of which party or parties hereto may actually receive, realize or recover such
Insurance Proceeds.
(c) An insurer who would otherwise be obligated to pay any claim shall not be relieved
of the responsibility with respect thereto or, solely by virtue of the indemnification
provisions hereof, have any subrogation rights with respect thereto, it being expressly
understood and agreed that no insurer or any other third party shall be entitled to a
wind-fall (
i.e.
, a benefit they would not be entitled to receive in the absence of
the indemnification provisions) by virtue of the indemnification provisions hereof. Nothing
contained in this Agreement or in any Ancillary Agreement shall obligate any member of any
Group to seek to collect or recover any Insurance Proceeds;
provided
, that such
member is capable of fulfilling and meeting any of its obligations as an Indemnifying Party
under this Agreement (including, but not limited to the ability to make a full payment on
any indemnification obligation).
Section 5.6
Procedures for Indemnification of Third Party Claims
.
(a) If an Indemnified Party shall receive notice or otherwise learn of the assertion by
a Person (including any Governmental Authority) who is not a member of the ECC Group or the
Company Group of any claim or of the commencement by any such Person of any Action
(collectively, a
Third Party Claim
) with respect to which an Indemnifying Party
may be obligated to provide indemnification to such Indemnified Party pursuant to
Section 5.2
or
Section 5.3
or any other section of this Agreement or any
Ancillary Agreement, such Indemnified Party shall give such Indemnifying Party written
notice thereof within twenty (20) days after becoming aware of such Third Party Claim. Any
such notice shall describe the Third Party Claim in reasonable detail. If any Person shall
receive notice or otherwise learn of the assertion of a Third Party Claim which may
reasonably be determined to be a Shared Contingent Liability, such Person shall give the
other party to this Agreement written notice thereof within twenty (20) days after becoming
aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in
reasonable detail. Notwithstanding the foregoing, the failure of any Indemnified Party or
other Person to give notice as provided in this
Section 5.6(a)
shall not relieve the
related Indemnifying Party of its obligations under this
Article V
, except
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to the
extent that such Indemnifying Party is actually prejudiced by such failure to give notice.
(b)
If the Indemnifying Party receiving any notice pursuant to
Section 5.6(a)
or the Indemnified Party believes that the Third Party Claim is or may be a Shared
Contingent Liability, such Indemnified Party or other party may make a Determination Request
at any time following any notice given by the Indemnified Party to the Indemnifying Party.
ECC shall be entitled (but not obligated) to assume the defense of such Third Party Claim as
if it were the Indemnifying Party hereunder until a determination on whether such Third
Party Claim is a Shared Contingent Liability. In any such event, ECC shall be entitled to
reimbursement of all the costs and expenses of such defense once a final determination or
acknowledgment is made as to the status of the Third Party Claim;
provided
, that, if
such Third Party Claim is determined to be a Shared Contingent Liability, such costs and
expenses shall be shared as provided in
Section 5.6(c)
. If it is determined by the
parties hereto or the Contingent Claim Committee that the Third Party Claim is a Shared
Contingent Liability, the Indemnifying Party determined to have a majority of the Shared
Percentage of such Shared Contingent Liability shall assume the defense of such Third Party
Claim;
provided
, that such Indemnifying Party is solvent. If the Indemnifying Party
with a majority of the Shared Contingent Liability is insolvent, the Indemnifying Party with
less than a majority of the Shared Contingent Liability shall be entitled (but not
obligated) to assume the defense of such Third Party Claim.
(c) The costs and expenses of assuming the defense of any Third Party Claim that is a
Shared Contingent Liability (subject to
Section 5.6(b)
), and/or seeking to settle or
compromise (subject to
Section 5.6(g)
) shall be included in the calculation of the
amount of the applicable Shared Contingent Liability in determining the reimbursement
obligations of the other parties with respect thereto pursuant to
Section 6.3
. Any
Indemnified Party in respect of a Shared Contingent Liability shall have the right to employ
separate counsel and to participate in (but not control) the defense, compromise, or
settlement thereof, but all fees and expenses of such counsel shall be the expense of such
Indemnified Party.
(d) Other than in the case of a Shared Contingent Liability, an Indemnifying Party may
elect to defend (and, unless the Indemnifying Party has specified any reservations or
exceptions, to seek to settle or compromise), at such Indemnifying Partys own expense and
by such Indemnifying Partys own counsel, any Third Party Claim.
Within thirty (30) days after the receipt of notice from an Indemnified Party in
accordance with
Section 5.6(a)
(or sooner, if the nature of such Third Party Claim
so requires), the Indemnifying Party shall notify the Indemnified Party of its election
whether the Indemnifying Party will assume responsibility for defending such Third Party
Claim, which election shall specify any reservations or exceptions. After notice from an
Indemnifying Party to an Indemnified Party of its election to assume the defense of a Third
Party Claim, such Indemnified Party shall have the right to employ separate counsel and to
participate in (but not control) the defense, compromise, or settlement thereof, but the
fees and expenses of such counsel shall be the expense of such Indemnified Party.
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(e) Other than in the case of a Shared Contingent Liability, if an Indemnifying Party
elects not to assume responsibility for defending a Third Party Claim, or fails to notify an
Indemnified Party of its election as provided in
Section 5.6(d)
, such Indemnified
Party may defend such Third Party Claim at the cost and expense of the Indemnifying Party.
(f) Unless the Indemnifying Party has failed to assume the defense of the Third Party
Claim in accordance with the terms of this Agreement, no Indemnified Party may settle or
compromise any Third Party Claim that is not a Shared Contingent Liability without the
consent of the Indemnifying Party. No Indemnified Party may settle or compromise any Third
Party Claim that is a Shared Contingent Liability without the consent of the Indemnifying
Party that is entitled to or has assumed the defense of such Third Party Claim.
(g) In the case of a Third Party Claim that is not a Shared Contingent Liability, no
Indemnifying Party shall consent to entry of any judgment or enter into any settlement of
the Third Party Claim without the consent of the Indemnified Party if the effect thereof is
to permit any injunction, declaratory judgment, other order or other nonmonetary relief to
be entered, directly or indirectly against any Indemnified Party. In the case of a Third
Party Claim that is a Shared Contingent Liability, the Indemnifying Party that has assumed
the defense of such Third Party Claim shall not consent to entry of any judgment or enter
into any settlement of the Third Party Claim without the consent of the Indemnified Party if
the effect thereof is to permit any injunction, declaratory judgment, other order or other
nonmonetary relief to be entered, directly or indirectly, against any Indemnified Party;
provided
,
however
, the Indemnifying Party shall not need to obtain the
consent of the Indemnified Party if the Indemnified Party is insolvent.
Section 5.7
Procedures for Indemnification of Direct Claims
. Any claim for
indemnification made directly by the Indemnified Party against the Indemnifying Party that does not
result from a Third Party Claim shall be asserted by written notice from the Indemnified Party to
the Indemnifying Party specifically claiming indemnification hereunder. Such Indemnifying Party
shall have a period of forty five (45) days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such forty-five (45)-day
period, such Indemnifying Party shall be deemed to have accepted responsibility to make payment and
shall have no further right to contest the
validity of such claim. If such Indemnifying Party does respond within such forty (45)-day
period and rejects such claim in whole or in part, such Indemnified Party shall be free to pursue
resolution as provided in
Article VIII
.
Section 5.8
Payments
. The Indemnifying Party shall pay all amounts payable pursuant
to this
Article V
by wire transfer of immediately available funds, promptly following
receipt from an Indemnified Party of a bill, together with all accompanying reasonably detailed
backup documentation, for a Liability that is the subject of indemnification hereunder, unless the
Indemnifying Party in good faith disputes the Liability, in which event it shall so notify the
Indemnified Party. In any event, the Indemnifying Party shall pay to the Indemnified Party, by
wire transfer of immediately available funds, the amount of any Liability for which it is liable
hereunder no later than three (3) days following any final determination of such Liability and the
-42-
Indemnifying Partys liability therefor. A
final determination
shall exist when (a) the
parties to the dispute have reached an agreement in writing, (b) a court of competent jurisdiction
shall have entered a final and non-appealable order or judgment or (c) an arbitration or like panel
shall have rendered a final non-appealable determination with respect to disputes the parties have
agreed to submit thereto.
Section 5.9
Contribution
. If the indemnification provided for in this
Article V
shall, for any reason, be unavailable or insufficient to hold harmless the
Indemnified Party hereunder in respect of any Liability, then each Indemnifying Party shall, in
lieu of indemnifying such Indemnified Party, contribute to the amount paid or payable by such
Indemnified Party as a result of such Liability, in such proportion as shall be sufficient to place
the Indemnified Party in the same position as if such Indemnified Party were indemnified hereunder,
the parties hereto intending that their respective contributions hereunder be as close as possible
to the indemnification under
Section 5.2
and
Section 5.3
. If the contribution
provided for in the previous sentence shall, for any reason, be unavailable or insufficient to put
the Indemnified Party in the same position as if it were indemnified
under
Section 5.2
or
Section 5.3
, as the case may be, then the Indemnifying Party shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Liability, in such proportion as
shall be appropriate to reflect the relative benefits received by and the relative fault of the
Indemnifying Party on the one hand and the Indemnified Party on the other hand with respect to the
matter giving rise to the Liability.
Section 5.10
Remedies Cumulative
. The remedies provided in this
Article V
shall be cumulative and, subject to the provisions of
Article VIII
, shall not preclude
assertion by any Indemnified Party of any other rights or the seeking of any and all other remedies
against any Indemnifying Party.
Section 5.11
Survival of Indemnities
. The rights and obligations of each of ECC and
the Company and their respective Indemnified Parties under this
Article V
shall survive the
distribution, sale or other transfer by any party hereto of any Assets or the delegation or
assignment by it of any Liabilities.
ARTICLE VI
CONTINGENT GAINS AND CONTINGENT LIABILITIES
Section 6.1
Contingent Gains
.
(a) ECC shall have the sole and exclusive right to any benefit received with respect to
any Exclusive ECC Contingent Gain. ECC shall have the sole and exclusive authority to
commence, prosecute, settle, manage, control, conduct, waive, forego, release, discharge,
forgive and otherwise determine all matters whatsoever with respect to any Exclusive ECC
Contingent Gain.
(b) The Company shall have the sole and exclusive right to any benefit received with
respect to any Exclusive Company Contingent Gain. The Company shall have the sole and
exclusive authority to commence, prosecute, settle, manage, control,
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conduct, waive, forego,
release, discharge, forgive and otherwise determine all matters whatsoever with respect to
any Exclusive Company Contingent Gain.
(c) Any benefit that may be received from any Shared Contingent Gain shall be shared
between ECC and the Company in proportion to the Shared ECC Percentage and the Shared
Company Percentage, respectively, and shall be paid in accordance with
Section 6.4
.
If it is determined by the parties hereto or the Contingent Claim Committee that a
Contingent Gain is a Shared Contingent Gain, the party hereto determined to have a majority
of the Shared Percentage of such Shared Contingent Gain shall have the sole and exclusive
authority to commence, prosecute, settle, manage, control, conduct, waive, forgo, release,
discharge, forgive and otherwise determine all matters whatsoever with respect to such
Shared Contingent Gain. The party hereto with a minority interest in such Shared Contingent
Gain shall not take, or permit any member of its Group to take, any action (including
commencing any claim) that would interfere with such rights and powers of the other party.
The party with a majority of the Shared Percentage of such Shared Contingent Gain shall use
its reasonable best efforts to notify the other party in the event that it commences an Action with
respect to a Shared Contingent Gain;
provided
, that the failure to provide such
notice shall not give rise to any rights on the part of the other party against such party
or affect any other provision of this
Section 6.1
. The party with a majority of the
Shared Percentage of such Shared Contingent Gain may elect not to pursue any Shared
Contingent Gain for any reason whatsoever (including a different assessment of the merits of
any Action, claim or right than the other party or any business reasons that are in the best
interests of such party or a member of such partys Group, without regard to the best
interests of any member of the other Group) and no member of the Group with a majority
interest in such Shared Contingent Gain shall have any liability to any Person (including
any member of the other Group) as a result of any such determination.
(d) In the event of any dispute as to whether any claim or right is a Contingent Gain
or whether any Contingent Gain is a Shared Contingent Gain, an Exclusive ECC
Contingent Gain or an Exclusive Company Contingent Gain, ECC may, but shall not be
obligated to, commence prosecution or other assertion of such claim or right pending
resolution of such dispute. In the event that ECC commences any such prosecution or
assertion and, upon resolution of the dispute, it is determined hereunder that the Company
has the exclusive right to such claim or right, ECC shall, promptly upon the request of the
Company, discontinue the prosecution or assertion of such right or claim and transfer the
control thereof to the Company. In such event, the Company will reimburse ECC for all costs
and expenses, reasonably incurred prior to resolution of such dispute in the prosecution or
assertion of such claim or right.
Section 6.2
Exclusive Contingent Liabilities
. Each Exclusive Contingent Liability
shall constitute a Liability for which indemnification is provided by ECC or the Company, as the
case may be, pursuant to
Article V
and shall be subject to the procedures set forth in
Article V
with respect thereto.
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Section 6.3
Shared Contingent Liabilities
.
(a)
As set forth in
Section 5.6(c)
and subject to
Section 5.6(g)
, any
Third Party Claim that is a Shared Contingent Liability, and the costs and expenses thereof,
shall be included in the calculation of the amount of the applicable Shared Contingent
Liability in determining the reimbursement obligations of the other parties with respect
thereto pursuant to this
Section 6.3
.
(b) Each of ECC and the Company shall be responsible for its Shared Percentage of any
Shared Contingent Liability. It shall not be a defense to any obligation by any party to
pay any amount in respect of any Shared Contingent Liability that such party was not
consulted in the defense thereof, that such partys views or opinions as to the conduct of
such defense were not accepted or adopted, that such party does not approve of the quality
or manner of the defense thereof or that such Shared Contingent Liability was incurred by
reason of a settlement rather than by a judgment or other determination of liability (even
if, subject to
Section 5.6(g)
, such settlement was effected without the consent or
over the objection of such party).
Section 6.4
Payments
. Any amount owed in respect of (i) any Shared Contingent Liabilities
(including reimbursement for the cost or expense of defense of any Third Party Claim that is a
Shared Contingent Liability), or (ii) any Shared Contingent Gains (including reimbursement for the
costs or expenses to commence, prosecute or settle matters with respect to a Shared Contingent
Gain), pursuant to this
Article VI
shall be remitted promptly after the party entitled to
such amount provides an invoice (including reasonable supporting information with respect thereto)
to the party owing such amount.
Section 6.5
Procedures to Determine Status of Contingent Liability or Contingent Gain
.
(a) With respect to the Actions set forth on
Schedule 6.5
, and with respect to
any other matters not set forth on
Schedules 1.2
,
1.3
,
1.4
,
1.5
,
1.7
or
1.8
(regardless of whether such matters are currently
pending but not set forth on such Schedules or are asserted or filed hereafter), ECC and the
Company will form the Contingent Claim Committee for (x) the purpose of resolving whether:
(i) any claim or right is a Contingent Gain;
(ii) any Contingent Gain is a Shared Contingent Gain, an Exclusive ECC
Contingent Gain or an Exclusive Company Contingent Gain;
(iii) any Liability is a Contingent Liability; or
(iv) any Contingent Liability is a Shared Contingent Liability, an Exclusive
ECC Contingent Liability or an Exclusive Company Contingent Liability.
and (y) for the purpose of determining the Shared Company Percentage and the Shared ECC Percentage
in connection with Shared Contingent Gains and Shared Contingent Liabilities.
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(b) (i) the parties hereto shall refer any Shared Contingent Gain or Shared Contingent
Liability to the Contingent Claim Committee to determine the Shared Company Percentage and
the Shared ECC Percentage in connection with such Shared Contingent Gain or Shared
Contingent Liability and (ii) any of the parties hereto may refer any potential Contingent
Gains or Contingent Liabilities to the Contingent Claim Committee for resolution as
described in Section 6.5(a). If the Contingent Claim Committee reaches a determination
(which shall be made within thirty (30) days of such referral on a matter submitted to the
Contingent Claim Committee by any of the parties hereto), then that determination shall be
binding on all of the parties hereto and their respective successors and assigns. In the
event that the Contingent Claim Committee cannot reach a determination as to (i) the
appropriate allocation of Contingent Gains or Contingent Liabilities between the parties
hereto in connection with Shared Contingent Gains or Shared Contingent Liabilities,
respectively, or (ii) as to the nature or status of any such Contingent Liabilities or
Contingent Gains, within thirty (30) days after such referral, then the issue will be
submitted to the respective Senior Party Representative of ECC and the Company for
determination. If the Senior Party Representatives cannot reach a determination, then the
procedures set forth in Article VIII of this Agreement shall govern.
Section 6.6
Certain Case Allocation Matters
. The parties hereto agree that if any
Action not set forth on
Schedules 1.2
,
1.3
,
1.4
,
1.5
,
1.7
or
1.8
involves separate and distinct claims that, if not joined in a single Action, would
constitute separate Exclusive Contingent Liabilities of two or more parties, they will use their
reasonable best efforts to segregate such separate and distinct claims so that the Liabilities
associated with each such claim (including all costs and expenses) shall be treated as Exclusive
Contingent Liabilities of the appropriate party and so that each party shall have the rights
and obligations with respect to each such claim (including pursuant to
Article V
) as would
have been applicable had such claims been commenced as separate Actions. Notwithstanding the
foregoing provisions, this
Section 6.6
shall not apply to any separate and distinct claim
that is de minimis or frivolous in nature.
Section 6.7
Termination of Certain Article VI Provisions
. The provisions set forth in
this
Article VI
related to the sharing of Contingent Gains and Contingent Liabilities shall
terminate on the second anniversary of the Distribution Date except for (i) any claim or action
pending or asserted by either party hereto on or prior to such termination, or (ii) any claim or
action related to any matter that has a statute of limitations that extends beyond such termination
date. Any claim or action referred to in (i) and (ii) above shall survive until the later of the
final determination applicable to any such claim or action or for the applicable statute of
limitations covering such claim or action as applicable.
ARTICLE VII
INSURANCE
Section 7.1
Insurance Matters
.
(a) The Company does hereby, for itself and each other member of the Company Group,
agree that no member of the ECC Group or any ECC Indemnified Party
-46-
shall have any liability
whatsoever as a result of the insurance policies and practices of ECC and its Affiliates as
in effect at any time prior to the Effective Time, including as a result of the level or
scope of any such insurance, the creditworthiness of any insurance carrier, the terms and
conditions of any policy, the adequacy or timeliness of any notice to any insurance carrier
with respect to any claim or potential claim or otherwise.
(b) ECC agrees to use its reasonable best efforts to cause the interest and rights of
the Company and the other members of the Company Group as of the Effective Time as insureds,
additional named insureds or beneficiaries or in any other capacity under occurrence-based
insurance policies and programs (and under claims-made policies and programs to the extent a
claim has been submitted prior to the Effective Time) of ECC or any other member of the ECC
Group in respect of periods prior to the Effective Time to survive the Effective Time for
the period for which such interests and rights would have survived without regard to the
transactions contemplated hereby to the extent permitted by such policies, and ECC shall
continue to administer such policies and programs on behalf of the Company and the other
members of the Company Group, subject to the Companys reimbursement to ECC and the other
relevant members of the ECC Group for the actual out-of-pocket costs of such ongoing
administration and the internal costs (based on the proportion of the amount of time
actually spent on such matter to such employees normal working time) of any employee or
agent of ECC of any other relevant member of the ECC Group who will be required to spend at
least [ten
percent (10%) of his or her normal working time over any ten (10) Business Days working
with respect to any such matter]. Any proceeds received by ECC or any other member of the
ECC Group after the Effective Time under such policies and programs in respect of the
Company and the other members of the Company Group shall be for the benefit of the Company
and the other members of the Company Group.
(c) This Agreement is not intended as an attempted assignment of any policy of
insurance or as a contract of insurance and shall not be construed to waive any right or
remedy of any member of the ECC Group in respect of any insurance policy or any other
contract or policy of insurance.
(d) Nothing in this Agreement shall be deemed to restrict any member of the Company
Group from acquiring at its own expense any other insurance policy in respect of any
Liabilities or covering any period.
ARTICLE VIII
DISPUTE RESOLUTION
Section 8.1
Agreement to Resolve Disputes
. Except as otherwise specifically provided
in any Ancillary Agreement, the procedures for discussion, negotiation and dispute resolution set
forth in this
Article VIII
shall apply to all disputes, controversies or claims (whether
sounding in contract, tort or otherwise) that may arise out of or relate to, or arise under or in
connection with this Agreement or any Ancillary Agreement, or the
transactions contemplated hereby or thereby (including all actions taken in furtherance of the
transactions contemplated hereby or thereby on or prior to the date hereof), or the commercial or
-47-
economic relationship of the parties hereto relating hereto or thereto, between or among any member
of the ECC Group on the one hand and the Company Group on the other hand. Each party hereto agrees
on behalf of itself and each member of its respective Group that the procedures set forth in this
Article VIII
shall be the sole and exclusive remedy in connection with any dispute,
controversy or claim relating to any of the foregoing matters and irrevocably waives any right to
commence any Action in or before any Governmental Authority, except as otherwise required by
Applicable Law.
Section 8.2
Dispute Resolution; Mediation
.
(a) Either party hereto may commence the dispute resolution process of this
Section
8.2
by giving the other party hereto written notice (a
Dispute Notice
) of any
controversy, claim or dispute of whatever nature arising out of or relating to this
Agreement or the breach, termination, enforceability or validity thereof (a
Dispute
) which has not been resolved in the normal course of business. The parties
hereto shall attempt in good faith to resolve any Dispute by negotiation between executives
of each party hereto (
Senior Party Representatives
) who have authority to settle
the Dispute and who are at a higher level of management than the persons who have direct
responsibility for the administration of this Agreement. Within fifteen (15) days after
delivery of the Dispute Notice, the receiving party shall submit to the other a written
response (the
Response
). The Dispute Notice and the Response shall include (i) a
statement setting forth the position of the party giving such notice and a summary of
arguments supporting such position and (ii) the name and title of such partys Senior Party
Representative and any other persons who will accompany the Senior Party Representative at
the meeting at which the parties hereto will attempt to settle the Dispute. Within thirty
(30) days after the delivery of the Dispute Notice, the Senior Party Representatives of both
parties hereto shall meet at a mutually acceptable time and place, and thereafter as often
as they reasonably deem necessary, to attempt to resolve the Dispute. The parties hereto
shall cooperate in good faith with respect to any reasonable requests for exchanges of
information regarding the Dispute or a Response thereto.
(b) If the Dispute has not been resolved within sixty (60) days after delivery of the
Dispute Notice, or if the parties hereto fail to meet within thirty (30) days after delivery
of the Dispute Notice as hereinabove provided, the parties hereto shall make a good faith
attempt to settle the Dispute by mediation pursuant to the provisions of this
Section 8.2
before resorting to arbitration contemplated by
Section 8.3
or any other dispute resolution procedure that may be agreed by the
parties hereto.
(c) All negotiations, conferences and discussions pursuant to this
Section 8.2
shall be confidential and shall be treated as compromise and settlement negotiations.
Nothing said or disclosed, nor any document produced, in the course of such negotiations,
conferences and discussions that is not otherwise independently discoverable shall be
offered or received as evidence or used for impeachment or for any other purpose in any
current or future arbitration.
(d) Unless the parties hereto agree otherwise, the mediation shall be conducted in
accordance with the CPR Institute for Dispute Resolution Model Procedure
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for Mediation of
Business Disputes in effect on the date of this Agreement by a mediator mutually selected by
the parties hereto.
(e) Within thirty (30) days after the mediator has been selected as provided above,
both parties hereto and their respective attorneys shall meet with the mediator for one (1)
mediation session, it being agreed that each party representative attending such mediation
session shall be a Senior Party Representative with authority to settle the Dispute. If the
Dispute cannot be settled at such mediation session or at any mutually agreed continuation
thereof, either party hereto may give the other and the mediator a written notice declaring
the mediation process at an end.
(f) Costs of the mediation shall be borne equally by the parties involved in the
matter, except that each party hereto shall be responsible for its own expenses.
Section 8.3
Arbitration
.
(a) Subject to
Section 8.3(b)
, if the Dispute has not been resolved by the
dispute resolution process described in
Section 8.2
, the parties hereto agree that
any such
Dispute shall be settled by binding arbitration before the American Arbitration
Association (
AAA
) in Denver, Colorado pursuant to the Commercial Rules of the AAA.
Any arbitrator(s) selected to resolve the Dispute shall be bound exclusively by the laws of
the State of New York without regard to its choice of law rules. Any decisions of award of
the arbitrator(s) will be final and binding upon the parties hereto and may be entered as a
judgment by the parties hereto. Any rights to appeal or review such award by any court or
tribunal are hereby waived to the extent permitted by Applicable Law.
(b) Any Dispute regarding the following is not required to be negotiated or mediated
prior to seeking relief from an arbitrator: (i) breach
of any obligation of confidentiality; and (ii) any other claim where interim relief from the
arbitrator is sought to prevent serious and irreparable injury to one of the
parties hereto. However, the parties hereto to the Dispute shall make a good faith effort
to negotiate and mediate such Dispute, according to the above procedures, while such
arbitration is pending.
(c) Costs of the arbitration shall be borne equally by the parties involved in the
matter, except that each party hereto shall be responsible for its own expenses.
Section 8.4
Continuity of Service and Performance
. Unless otherwise agreed in
writing, the parties hereto will continue to provide service and honor all other commitments under
this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the
provisions of this
Article VIII
with respect to all matters not subject to such Dispute.
-49-
ARTICLE IX
MISCELLANEOUS
Section 9.1
Limitation of Liability
. In no event shall any member of the ECC Group or
the Company Group be liable to any member of the other Group for any special, consequential,
indirect, collateral, incidental or punitive damages or lost profits or failure to realize expected
savings or other commercial or economic loss of any kind, however caused and on any theory of
liability (including negligence) arising in any way out of this Agreement, whether or not such
Person has been advised of the possibility of any such damages;
provided
,
however
,
that the foregoing limitations shall not limit either partys hereto indemnification obligations
for Liabilities with respect to Third Party Claims as set forth in
Article V
. The
provisions of
Article V
and
Article VIII
shall be the parties hereto sole recourse for any breach hereof
or any breach of the Ancillary Agreements.
Section 9.2
Counterparts
. This Agreement and each Ancillary Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the parties thereto and
delivered to the other party or parties.
Section 9.3
Entire Agreement
. This Agreement, the Ancillary Agreements,
and the Schedules and Exhibits hereto and thereto constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof and thereof and supersede all previous agreements, negotiations,
discussions, understandings, writings, commitments and conversations between the parties hereto
with respect to such subject matter. No agreements or understandings exist between the parties
hereto other than those set forth or referred to herein or therein.
Section 9.4
Construction
. In this Agreement and each of the Ancillary
Agreements, unless a clear contrary intention appears:
(a) the singular number includes the plural number and vice versa;
(b) reference to any Person includes such Persons successors and assigns but, if
applicable, only if such successors and assigns are not prohibited by this Agreement or the
relevant Ancillary Agreement, and reference to a Person in a
particular capacity excludes such Person in any other capacity or individually;
(c) reference to any gender includes each other gender;
(d) reference to any agreement, document or instrument means such agreement, document
or instrument as amended, modified, supplemented or restated, and in effect from time to
time in accordance with the terms thereof subject to compliance with the requirements set
forth herein or in the relevant Ancillary Agreement;
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(e) reference to any Applicable Law means such Applicable Law as amended, modified,
codified, replaced or reenacted, in whole or in part, and in effect from time to time,
including rules and regulations promulgated thereunder, and reference to any section or
other provision of any Applicable Law means that provision of such Applicable Law from time
to time in effect and constituting the substantive amendment, modification, codification,
replacement or reenactment of such section or other provision;
(f) herein, hereby, hereunder, hereof, hereto and words of similar import
shall be deemed references to this Agreement or to the relevant Ancillary Agreement as a whole and not to any particular article, section or other
provision hereof or thereof;
(g) including (and with correlative meaning include) means including without
limiting the generality of any description preceding such term;
(h) the Table of Contents and headings are for convenience of reference only and shall
not affect the construction or interpretation hereof or thereof;
(i) with respect to the determination of any period of time, from means from and
including and to means to but excluding; and
(j) references to documents, instruments or agreements shall be deemed to refer as well
to all addenda, exhibits, schedules or amendments thereto.
Section 9.5
Signatures
. Each party hereto acknowledges that it and the other party
hereto (and the other members of their respective Groups) may execute
this Agreement and each of the Ancillary
Agreements by facsimile, stamp or pdf signature. Each party hereto
expressly adopts and confirms each such facsimile, stamp or pdf signature made in its respective
name (or that of the applicable member of its Group) as if it were a manual signature, agrees that
it will not assert that any such signature is not adequate to bind such party to the same extent as
if it were signed manually and agrees that at the reasonable request of the other party hereto at
any time it will as promptly as reasonably practicable cause each
such Agreement and Ancillary
Agreement to be manually executed (any such execution to be as of the date
of the initial date thereof).
Section 9.6
Assignability
. Except as set forth in any Ancillary Agreement, this Agreement and each Ancillary Agreement shall be
binding upon and inure to the benefit of the parties hereto and thereto, respectively, and their
respective successors and permitted assigns;
provided
,
however
, that except as specifically
provided in any Ancillary Agreement, no party
hereto or thereto may assign (by merger, operation of law or
otherwise) its respective rights or delegate its respective obligations under this Agreement or any Ancillary
Agreement without the express prior written consent of the other parties
hereto or thereto.
Section 9.7
Third Party Beneficiaries
. Except for the indemnification rights under
this Agreement of any ECC Indemnified Party or any Company Indemnified Party in their respective
capacities as such and for the release under
Section 5.2
of any Person provided therein and
except as specifically provided in any Ancillary Agreement, (a) the provisions of this Agreement
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and each Ancillary Agreement are solely for the benefit of the parties
hereto and thereto and their respective successors and permitted assigns and are not intended to
confer upon any Person, except the parties hereto and thereto and their respective successors and
permitted assigns, any rights or remedies hereunder and (b) there are no third party beneficiaries
of this Agreement or any Ancillary Agreement; and neither this Agreement
nor any Ancillary Agreement shall provide any third party with any remedy,
claim, liability, reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement or any Ancillary Agreement.
Section 9.8
Payment Terms
.
(a) Other than with respect to amounts payable pursuant to
Article V
(which are
covered by
Section 5.9
), any amount to be paid or reimbursed by one party to the
other under this Agreement shall be paid or reimbursed hereunder
within sixty (60) days
after presentation of an invoice or a written demand therefor and setting forth, or
accompanied by, reasonable documentation or other reasonable explanation supporting such
amount.
(b) Except as expressly provided to the contrary in this Agreement or in any Ancillary
Agreement, any amount not paid when due pursuant to this Agreement (and any amount billed or
otherwise invoiced or demanded and properly payable that is not paid within thirty (30) days
of such bill, invoice or other demand) shall bear interest at a rate per annum equal to the
Prime Rate plus 2% (or the maximum legal rate, whichever is lower),
calculated for the actual number of days elapsed, accrued from the date on which such
payment was due up to the date of the actual receipt of payment.
Section 9.9
Governing Law
. This
Agreement and each Ancillary Agreement and the legal relations between the parties hereto shall be
governed by and construed in accordance with the laws of the State of New York, without regard to
the conflict of laws rules thereof to the extent such rules would require the application of the
law of another jurisdiction.
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Section 9.10
Notices
. All notices or other communications required or permitted to be
given hereunder shall be in writing, shall be delivered by hand or sent by facsimile or sent,
postage prepaid, by registered, certified or express mail or overnight courier service and shall be
deemed given when so delivered by hand or facsimile (upon receipt of confirmation), or if mailed,
one day after mailing, as follows:
If to ECC, to:
EchoStar Communications Corporation
9601 S. Meridian Blvd., Englewood, CO 80112
Attention: General Counsel
Fax: (303) 723-1699
with a copy to:
White & Case LLP
1155 Avenues of the Americas
New York, NY 10036
Attention: Daniel G. Dufner
Fax: (212) 403-2000
If to Company, to:
EchoStar Holding Corporation
90 Inverness Circle East, Englewood, CO 80112
Attention: General Counsel
Fax: (303) 723-1699
with a copy to:
White & Case LLP
1155 Avenues of the Americas
New York, NY 10036
Attention: Daniel G. Dufner
Fax: (212) 403-2000
Section 9.11
Severability
. If any provision of this Agreement or any Ancillary
Agreement or the application thereof to any Person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or
thereof, or the application of such provision to Persons or circumstances or in jurisdictions other
than those as to which it has been held invalid or unenforceable, shall remain in full force and
effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or
legal substance of the
transactions contemplated hereby or thereby, as the case may be, is not affected in any manner
adverse to any party hereto or thereto. Upon such determination, the parties hereto shall negotiate
in good faith in an effort to agree upon such a suitable and equitable provision to effect the
original intent of the parties hereto.
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Section 9.12
Nonrecurring Costs and Expenses
. Notwithstanding anything herein to the
contrary, any nonrecurring costs and expenses incurred by the parties hereto to effect the
transactions contemplated hereby which are not allocated pursuant to the terms of this Agreement or
any Ancillary Agreement shall be the responsibility of the party which incurs such costs and
expenses.
Section 9.13
Publicity
. Prior to the Distribution Date, ECC shall be responsible for
issuing any press releases or otherwise making public statements with respect to this Agreement,
the Separation, the Distribution or any of the other transactions contemplated hereby and thereby,
and the Company shall not make such statements without the prior written consent of ECC. Prior to
the Distribution Date, ECC and the Company shall each consult with the other prior to making any
filings with any Governmental Authority with respect thereto.
Section 9.14
Survival of Covenants
. Except as expressly set forth in this Agreement
or any Ancillary Agreement, any covenants, representations or warranties contained in this
Agreement or any Ancillary Agreement shall survive the Separation and Distribution and shall
remain in full force and effect.
Section 9.15
Waiver of Default; Conflicts
.
(a) Any term or provision of this Agreement may be waived, or the time for its
performance may be extended, by the party or the parties hereto entitled to the benefit
thereof. Any such waiver shall be validly and sufficiently given for the purposes of this
Agreement if, as to any party hereto, it is in writing signed by an authorized
representative of such party.
(b) Waiver by any party hereto of any default by the other party hereto of any
provision of this Agreement or any Ancillary Agreement shall not be construed to be a waiver
by the waiving party of any subsequent or other default, nor shall it in any way affect the
validity of this Agreement or any party hereof or prejudice the rights of the other party
thereafter to enforce each and ever such provision. No failure or delay by any party hereto
in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further exercise thereof
or the exercise of any other right, power or privilege.
(c) Each party hereto acknowledges that each of the parties hereto and each member of
their respective Group are all currently represented by members of ECCs
legal department and ECCs outside counsel. Each of ECC (on behalf of itself and every
member of its Group), on the one hand, and Company (on behalf of itself and every member of
its Group), on the other hand, waives any conflict with respect to such common
representation that may arise before, at or after the Distribution Date.
Section 9.16
Amendments
. This Agreement may be amended, supplemented, modified or
abandoned at any time prior to the Distribution Date by and in the sole and absolute discretion of
ECC without the approval of Company or of the stockholders of ECC. After the Effective Time, no
provisions of this Agreement or any Ancillary Agreement shall be deemed amended, modified
or supplemented by any party hereto, unless such amendment,
-54-
supplement or modification is
in writing and signed by the authorized representative of the party against whom it is sought to
enforce such amendment, supplement or modification.
Section 9.19
Controlling Documents
. To the extent that the provisions of the Employee
Matters Agreement, the Intellectual Property Matters Agreement, the
Management Services Agreement, the Tax
Sharing Agreement or the Transition Services Agreement conflict with the provisions of this
Agreement, the provisions of such other agreement or agreements shall govern.
Section 9.20
Specific Performance
. The parties hereto agree that the remedy at law
for any breach of this Agreement may be inadequate, and that, as between ECC and the Company, any
party hereto by whom this Agreement is enforceable shall be entitled to specific performance in
addition to any other appropriate relief or remedy. Such party may, in its sole discretion, apply
to a court of competent jurisdiction for specific performance or injunctive or such other relief as
such court may deem just and proper in order to enforce this Agreement as between ECC and the
Company, or prevent any violation hereof, and, to the extent permitted by Applicable Law, as
between ECC and the Company, each party hereto waives any objection to the imposition of such
relief.
[SIGNATURE PAGE FOLLOWS]
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WHEREFORE
, the parties have signed this Separation Agreement effective as of the date first
set forth above.
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ECHOSTAR COMMUNICATIONS CORPORATION
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Name:
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Title:
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ECHOSTAR HOLDING CORPORATION
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Name:
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Title:
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EXHIBIT 99.1
EchoStar
Communications Corporation
9601 S. Meridian Blvd.
Englewood, Colorado 80112
Dear EchoStar Communications Corporation Shareholder:
We are pleased to inform you that on December 11, 2007, the
Board of Directors of EchoStar Communications Corporation
approved the spin-off of EchoStar Holding Corporation, a
wholly-owned subsidiary of EchoStar Communications Corporation.
EchoStar Holding Corporation will hold the technology and
certain infrastructure assets of EchoStar Communications
Corporation. EchoStar Communications Corporation will retain its
consumer pay-TV business, DISH Network. We believe that our
separation into two independent publicly-traded companies is in
the best interests of each of the businesses. Immediately
following the completion of the spin-off, EchoStar
Communications Corporation intends to change its name to
DISH Network Corporation.
The spin-off of EchoStar Holding Corporation is anticipated to
occur on or about January 1, 2008 by way of a pro rata
dividend to EchoStar Communications Corporation shareholders.
For each share of EchoStar Communications Corporation
Class A common stock or Class B common stock you hold
as of 5:00 p.m., New York City time, on December 27,
2007, which is the record date of the spin-off, you will be
entitled to receive a dividend of 0.20 of a share of the
same class of EchoStar Holding Corporation common stock. Please
note that if you sell your shares of Class A common stock
of EchoStar Communications Corporation after the record date but
before the distribution date, the buyer of those shares will be
entitled to receive the shares of our Class A common stock
issuable in respect of the shares sold. The distribution of
shares of our Class A common stock will be made in
book-entry form, which means that no physical Class A stock
certificates will be issued in the distribution. No fractional
shares of EchoStar Holding Corporation Class A or
Class B common stock will be issued. If you would have been
entitled to a fractional share of EchoStar Holding Corporation
Class A common stock in the distribution, you will receive
cash in lieu of a fractional share interest.
Shareholder approval of the spin-off is not required, and you
are not required to take any action to receive shares of
EchoStar Holding Corporation common stock.
Immediately following the spin-off, you will own shares of
common stock of both EchoStar Communications Corporation and
EchoStar Holding Corporation. EchoStar Communications
Corporation Class A common stock will continue to trade on
the Nasdaq Global Select Market under the symbol
DISH. We have applied to list our Class A
common stock on the Nasdaq Global Select Market under the symbol
[ ].
We expect the spin-off to be tax-free for all shareholders of
EchoStar Communications Corporation, except for any cash
received in lieu of fractional shares. To that end, we have
requested a ruling from the Internal Revenue Service confirming
that the spin-off will be tax free to shareholders of EchoStar
Communications Corporation for U.S. federal income tax
purposes. The spin-off is subject to certain customary
conditions, including the receipt of any necessary regulatory
approvals.
The enclosed information statement, which is being mailed to all
EchoStar Communications Corporation shareholders, describes the
spin-off and contains important information about EchoStar
Holding Corporation, including its historical and pro forma
combined financial statements.
We look forward to your continued support as a shareholder in
both EchoStar Communications Corporation and EchoStar Holding
Corporation.
Sincerely,
Charles W. Ergen
Chairman and Chief Executive Officer
EchoStar
Holding Corporation
90
Inverness Circle East
Englewood, Colorado 80112
Dear EchoStar Holding Corporation Shareholder:
It is my pleasure to welcome you as a shareholder of our new
company, EchoStar Holding Corporation. As an independent,
publicly-traded company, we believe we can more effectively
focus on our objectives and satisfy the strategic needs of our
company. In addition, we will have the opportunity to offer our
employees incentive opportunities linked to our performance as
an independent, publicly-traded company, which we believe will
enhance employee performance.
EchoStar Holding Corporation intends to operate two primary
businesses, a digital set-top box business and a fixed satellite
services business:
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Digital Set-Top Boxes.
Our set-top box
business designs, develops and distributes award-winning digital
set-top boxes and related products for direct-to-home satellite
service providers. In 2006, our set-top box business shipped
over nine million set-top boxes. Most of these set-top boxes
were sold to EchoStar Communications Corporation, but we also
sold set-top boxes to Bell ExpressVu and other international
customers.
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Fixed Satellite Services.
Our fixed satellite
services business will be developed using the nine owned or
leased in-orbit satellites and related FCC licenses, a network
of seven full service digital broadcast centers, and leased
fiber optic capacity with points of presence in approximately
150 cities that will be contributed to us by EchoStar
Communications Corporation. We expect that our primary customer
will initially be EchoStar Communications Corporation. However,
we will also lease capacity in the spot market and to government
and enterprise customers.
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We have applied to list our Class A common stock on the
Nasdaq Global Select Market under the symbol
[ ].
We currently expect that our Class A common stock will
begin trading on January 2, 2008.
I invite you to learn more about EchoStar Holding Corporation by
reviewing the enclosed information statement. We thank you in
advance for your support as a shareholder in EchoStar Holding
Corporation.
Sincerely,
Charles W. Ergen
Chairman and Chief Executive Officer
Information contained herein is subject to completion or
amendment. A registration statement on Form 10 relating to
these securities has been filed with the Securities and Exchange
Commission.
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SUBJECT TO COMPLETION, DATED
DECEMBER 12, 2007
INFORMATION STATEMENT
ECHOSTAR HOLDING
CORPORATION
90 Inverness Circle E.
Englewood, Colorado 80112
Class A Common Stock
Class B Common Stock
(par value $0.001 per share)
We are sending this information statement to you to describe the
spin-off of EchoStar Holding Corporation. Prior to the spin-off
described in this information statement, we were a wholly-owned
subsidiary of EchoStar Communications Corporation, which we
refer to as ECC. We are engaged in the design, development and
distribution of set-top boxes, antennae and other equipment for
the direct to home satellite television industry.
Following the spin-off, we will also be engaged in the provision
of fixed satellite transmission services. We expect that the
spin-off will be tax-free to ECC shareholders for
U.S. federal income tax purposes, except for any cash
received in lieu of fractional shares. We have requested a
ruling from the Internal Revenue Service confirming that the
spin-off will be tax free to shareholders of EchoStar
Communications Corporation for U.S. federal income tax purposes.
Immediately following the spin-off, ECC intends to change its
name to DISH Network Corporation.
For each share of ECC Class A common stock or ECC
Class B common stock held by you as of 5:00 p.m.,
New York City time, on December 27, 2007, the record
date for the spin-off, you will receive 0.20 of a share of the
same class of our common stock. The distribution of shares of
our Class A common stock will be made in book-entry form,
which means that no physical Class A stock certificates
will be issued in the distribution. No fractional shares of
EchoStar Holding Corporation Class A or Class B common
stock will be issued. If as a result of the foregoing ratio you
would be entitled to receive a fraction of a share of our
Class A common stock, you will receive cash in lieu of such
fractional share interest. We expect the shares of our
Class A common stock and Class B common stock to be
distributed by ECC to you on or about January 1, 2008,
which we refer to as the distribution date.
No vote of ECCs shareholders is required in connection
with the spin-off. We are not asking you for a proxy and you are
requested not to send us a proxy. No action is required of you
to receive shares of our common stock, which means that:
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you will not be required to pay for the shares of any class of
our common stock that you receive in the spin-off, and
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you do not need to surrender or exchange shares of any class of
ECC common stock in order to receive shares of our common stock,
or to take any other action in connection with the spin-off.
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There is no current trading market for any class of our common
stock. We expect, however, that a limited trading market for our
Class A common stock, commonly known as a when
issued trading market, will develop shortly after the
record date for the spin-off, and we expect regular
way trading of our Class A common stock will begin
the first trading day after the distribution date. We have
applied to list our Class A common stock on the Nasdaq
Global Select Market under the symbol
[ ].
We expect that our Class A common stock will begin trading
on January 2, 2008. Charles W. Ergen, our Chairman and Chief
Executive Officer, will immediately after the distribution date
beneficially own approximately 50.0% of our outstanding equity
and possess approximately 80.0% of the total voting power
represented by all of our common stock, which is equivalent to
his ownership and voting interests in ECC.
In reviewing this information statement, you should carefully
consider the matters described under the caption Risk
Factors beginning on page 16.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities or determined if this information statement is
truthful or complete. Any representation to the contrary is a
criminal offense.
This information statement is not an offer to sell, or a
solicitation of an offer to buy, any securities.
The date of this information statement is
December [ ], 2007.
TABLE OF
CONTENTS
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F-1
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F-30
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F-41
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i
This summary highlights information contained elsewhere in
this information statement and provides an overview of our
company and the material aspects of our spin-off from ECC. It is
intended for convenience only and should not be considered
complete. You should read the entire information statement
carefully, particularly the risk factors discussed beginning on
page 16, and our combined audited and unaudited historical
and unaudited pro forma financial statements and notes to those
statements appearing elsewhere in this information statement.
References in this information statement to
(i) EHC, Spinco, we,
our and us refer to EchoStar Holding
Corporation and its consolidated subsidiaries, after giving
effect to the spin-off and (ii) EchoStar
Communications Corporation, ECC and DISH
Network refer to EchoStar Communications Corporation and
its consolidated subsidiaries, other than us, unless the context
otherwise requires. The transaction in which we will be
separated from ECC is sometimes referred to in this information
statement as the separation, the
distribution or the spin-off.
We describe in this information statement the businesses to
be transferred to us by ECC in connection with the spin-off as
if the transferred businesses were our businesses. However, we
are a newly formed entity and we have not conducted any
operations prior to the spin-off. Our historical and pro forma
financial data included in this information statement may not be
indicative of our future performance and does not necessarily
reflect what our financial condition and results of operations
would have been had we operated as a separate, stand-alone
entity during the periods presented, particularly since changes
will occur in our operations and capitalization as a result of
our spin-off from ECC.
Our historical combined financial statements reflect the
historical financial position and results of operations of
entities included in the consolidated financial statements of
ECC, representing almost exclusively ECCs set-top box
business, using the historical results of operations and
historical bases of assets and liabilities of this business. Our
historical combined financial statements included herein reflect
sales to ECC at cost and do not include certain satellites,
uplink and satellite transmission assets, real estate and other
assets and related liabilities that will be contributed to us by
ECC in the spin-off. These assets and liabilities, which will
primarily comprise our fixed satellite services business, have
been separately audited and are included in the Statement of Net
Assets to be Contributed by ECC and Unaudited Pro Forma Combined
and Adjusted Financial Information included herein. The
financial condition and results of operations of our fixed
satellite services business have not been included in our
historical combined financial statements because our fixed
satellite services business was operated as an integral part of
ECCs subscription television business and did not
constitute a business in the historical financial
statements of ECC. Our historical financial data also does not
include financial information of Sling Media, Inc., which was
recently acquired by ECC and will be contributed to us in the
spin-off. Sling Medias audited consolidated financial
statements are included elsewhere in this information statement,
and its historical financial information also has been included
in our Unaudited Pro Forma Combined and Adjusted Financial
Information.
ECHOSTAR
HOLDING CORPORATION
Our
Business
We intend to operate two primary businesses, a digital set-top
box business and a fixed satellite services business. We expect
that the primary customer for each of these businesses initially
will be ECC.
Digital
Set-Top
Boxes
Our set-top box business designs, develops and distributes
award-winning digital set-top boxes and related products for
direct-to-home satellite service providers. In 2006, our set-top
box business shipped over nine million set-top boxes. Most of
these set-top boxes were sold to ECC, but we also sold set-top
boxes to Bell ExpressVu and other international customers. We
currently employ over 700 engineers in our set-top box business.
Fixed
Satellite Services
Our fixed satellite services business will be developed using
nine owned or leased in-orbit satellites and related FCC
licenses, a network of seven full service digital broadcast
centers, and leased fiber optic capacity
1
with points of presence in approximately 150 cities. All of
these assets and related contracted liabilities will be
contributed to us in the spin-off. We expect that our primary
customer initially will be ECC. However, we will also lease
capacity in the spot market and to government and enterprise
customers.
Other
Business Opportunities
ECC has entered into agreements to construct and launch an
S-band satellite and to lease its transponder capacity to a Hong
Kong joint venture, which in turn will sublease a portion of the
transponder capacity to an affiliate of a Chinese governmental
entity to support the development of satellite-delivered mobile
video services in China. ECC has also recently completed several
strategic investments and we intend to evaluate strategic
development and investment opportunities both in the
United States and in international markets. These
investments of ECC will be transferred to us as part of the
spin-off, and are part of our strategy to expand our business
and support the development of new satellite-delivered services,
such as mobile video services. The expertise we develop through
these investments may also help us to improve and expand the
services that we provide to our existing customers. However,
these investments involve a high degree of risk and are
concentrated in a few companies. The risks of these investments
include, among other things, the risks that required regulatory
approvals and other conditions may not be obtained or satisfied,
that these companies may not be able to enter into distribution
and other relationships, and that the companies in which we
invest or with whom we partner may not be able to compete
effectively in their markets or that there may be insufficient
demand for the new services planned by these companies.
Sling
Media, Inc.
Sling Media, Inc. was acquired in October 2007 by ECC and will
be transferred to us as part of the spin-off. Sling Media is the
maker of the Slingbox, which allows consumers to watch and
control their television programming at any time, from any
location, using personal computers, personal digital assistants,
smartphones and other digital media devices. This information
statement includes historical financial statements and other
information regarding Sling Media.
Our
Strategy
We intend to pursue the following key strategies:
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Expand set-top box business to additional
customers.
We believe our separation from ECC may
enhance our opportunities to sell set-top boxes to a broader
group of multi-channel video distributors. Historically, certain
multi-channel video distributors have perceived us as a
competitor due to our affiliation with ECC. After the spin-off,
we believe we could have opportunities to enter into commercial
relationships with these multi-channel video distributors. There
can be no assurance, however, that we will be successful in
entering into any of these commercial relationships,
particularly if we continue to be perceived as affiliated with
ECC as a result of common ownership and related management.
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Leverage satellite capacity and related
infrastructure.
Our fixed satellite services
business has excess satellite and leased fiber capacity that we
believe was in large part created through innovation and
operational efficiencies at ECC. While we expect that ECC will
initially be our primary customer for fixed satellite services,
we believe market opportunities exist to utilize our capacity to
provide digital video distribution, satellite-delivered IP,
corporate communications and government services to a broader
customer base.
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Offer comprehensive network infrastructure
solutions.
We intend to leverage our over 700
engineers to customize infrastructure solutions for a broader
base of customers. For example, we could offer a customer the
ability to deliver a fully integrated video programming delivery
solution, incorporating our satellite and backhaul capacity,
customized set-top boxes and network design and management
services.
|
|
|
Capitalize on change in regulations.
Changes
in federal law and regulations applicable to the set-box
industry may create opportunities for us to expand our business.
|
|
|
|
|
|
Digital transition.
Congress has mandated that
by February 2009 all network broadcasts be transmitted
digitally, which will require households that receive
over-the-air broadcast signals with an analog television to
obtain a digital converter device. This digital converter device
is a new product
|
2
and we believe that we are in a position to develop and market
devices that could allow us to effectively compete in this new
market.
|
|
|
|
|
Removable security systems.
The Federal
Communications Commission, or FCC, mandated that by July 2007
cable providers use removable security modules to provide
conditional access security for television content. The FCC
intends for this regulation to spur competition in the retail
cable set-top box market, providing an even playing field
between leased cable set-top boxes and retail-bought,
cable-ready TVs and cable set-top box equipment. We believe this
new regulation may create an opportunity for us to compete on a
more level field in the domestic market for cable set-top boxes.
|
|
|
|
Exploit international opportunities.
We
believe that direct-to-home satellite service is particularly
well-suited for countries without extensive cable
infrastructure, and we intend to continue to try to secure new
customer relationships from international direct-to-home
satellite service providers.
|
|
|
Pursue strategic partnerships, joint ventures and
acquisitions.
We intend to selectively pursue
partnerships, joint ventures and strategic acquisition
opportunities that we believe may allow us to expand into new
markets, broaden our portfolio of products or intellectual
property, and strengthen our relationships with our customers.
|
|
|
Act on the set-top box replacement cycle.
The
broader adoption of high definition television by consumers will
require more advanced compression and security technologies
within set-top boxes. This may launch a replacement cycle,
particularly among subscription television providers with
substantial bases of legacy equipment, which may create
additional market opportunities for us.
|
Summary
Risk Factors
An investment in our common stock involves risks associated
with our business, the spin-off and ownership of our common
stock. The following list of risk factors is not exhaustive.
Please review and consider carefully the risks relating to these
and other matters summarized below and described in greater
detail under the section entitled Risk Factors
beginning on page 16 of this information statement.
General
Risks Affecting Our Business
|
|
|
We may not realize the potential benefits that we expect from
the spin-off. Certain of these benefits depend upon market
acceptance of our separation from ECC which we cannot predict
and which may be affected by significant common stock ownership
by our Chairman and Chief Executive Officer as well as
interlocks between our management and board of directors. In
addition, we will incur significant costs as a separate company,
which may exceed our estimates. We will also incur some negative
effects from our separation from ECC, including loss of access
to ECCs financial resources.
|
|
|
|
We currently depend on ECC and Bell Express Vu for substantially
all of our revenue, and the loss of, or a significant reduction
in orders from, either of these two customers would
significantly reduce our revenue and adversely impact our
operating results. ECC accounted for over 80% of our revenue in
each of the last three years and the nine months ended
September 30, 2007 and it is under no obligation to remain
our customer in the future.
|
|
|
|
We currently have substantial unused satellite capacity. Future
costs associated with this excess capacity will negatively
impact our margins if we do not generate revenue to offset these
costs. In addition, because a substantial portion of the
capacity of each of our AMC-15, AMC-16 and EchoStar IX
satellites remains unused, there is a significant risk that in
the future, in addition to reporting lower than expected
revenues and profitability, we will be required to record a
substantial impairment charge relating to one or more of these
satellites. We currently estimate that these potential charges
could aggregate up to $250 million, which, if incurred
would have a material adverse effect on our reported operating
results and financial position. Furthermore, it is possible that
in 2008 ECC will discontinue the use of some or all of the
capacity on one or more other satellites that it will initially
lease from us. To the extent that this occurs and we are unable
to find other customers to lease this additional anticipated
excess capacity, we may be required to record substantial
impairment charges that we currently estimate could aggregate up
to $100 million.
|
3
|
|
|
Our historical combined and pro forma financial information
included in this information statement are not indicative of our
future financial position, future results of operations or
future cash flows, nor do they reflect what our financial
position, results of operations or cash flows would have been as
a stand-alone company during the periods presented. We were not
profitable in the nine months ended September 30, 2007 and
each of 2006, 2005 and 2004, as our operations have historically
been dedicated primarily to support ECC and we provided our
products and services to ECC at cost.
|
|
|
|
Our ability to decrease our losses or to generate revenues will
depend in part on our ability to grow our business. This may
require significant additional capital that may not be available
to us. We may also use a significant portion of our existing
cash and marketable securities to fund stock buyback programs.
Our board of directors has approved a program in which we may
repurchase up to $1.0 billion of our Class A common
stock during 2008.
|
|
|
|
If ECC enters into a business combination transaction, or
Mr. Ergen no longer controls a majority of the voting power
of ECC or of us, our relationship with ECC could be terminated
or substantially curtailed with little or no advance notice. Any
material reduction in our sales to ECC as a result of a change
in control of ECC would have a significant material adverse
effect on our business and financial position.
|
|
|
|
Our future success may depend on our ability to identify and
successfully exploit opportunities to acquire other businesses
or technologies to complement, enhance or expand our current
business or products or otherwise offer us growth opportunities.
We may not be able to pursue these growth opportunities
successfully.
|
|
|
We have entered into certain strategic transactions and
investments in Asia and elsewhere, and we may increase our
strategic investment activity in the United States and in
international markets. These investments, which we believe could
become substantial over time, involve a high degree of risk, are
concentrated in a few companies and could expose us to
significant financial losses if the underlying ventures are not
successful. These investments may also cause us to defer or
suspend share repurchases.
|
|
|
Our business relies on intellectual property, some of which is
owned by third parties, and we may inadvertently infringe their
patents and proprietary rights. We may be required to cease
developing or marketing infringing products, to obtain licenses
from the holders of the intellectual property at a material
cost, or to redesign those products in such a way as to avoid
infringing the patent claims of others.
|
|
|
Our businesses change rapidly as new technologies are developed.
These new technologies may cause our services and products to
become obsolete. Changes in existing technologies could also
cause demand for our products and services to decline.
|
Risks
Affecting Our Set-Top Box Business
|
|
|
We depend on sales of set-top boxes for nearly all of our
revenue, and if sales of our set-top boxes decline, our business
and financial position will suffer. The set-top box business is
highly competitive and our ability to compete in this industry
will depend substantially on our ability to develop and
manufacture products and services at competitive costs,
successfully bring new technologies to market and penetrate new
markets for set-top boxes, including among customers such as
cable television operators that are competitors of DISH Network
and have historically been and may continue to be reluctant to
deal with us. These potential customers also have well
established relationships with other set-top box providers, such
as Motorola and Cisco Systems, which acquired Scientific Atlanta
in 2006.
|
|
|
Our commercial success in selling our set-top boxes to cable
television operators depends significantly on our ability to
obtain licenses to use the conditional access systems deployed
by these operators in our set-top boxes. The owners of these
conditional access systems are also in many cases competitors of
ours. There can be no assurance we will be able to obtain such
licenses on acceptable terms or at all.
|
|
|
In order to grow our revenue and business and to build a large
customer base, we believe we will be required to increase our
sales of set-top boxes in international markets. We have limited
experience selling our set-top boxes internationally. To succeed
in expanding these sales efforts, we believe we must hire
additional sales personnel and develop and manage new
relationships with cable operators and other providers of
digital television in international markets.
|
4
|
|
|
Our set-top boxes are extremely complex and can have defects in
design, manufacture or associated software. We could incur
significant expenses, lost revenue, and reputational harm if we
fail to detect or effectively address such issues through
design, testing or warranty repairs.
|
|
|
We obtain many components for our set-top boxes from a single
supplier or a limited group of suppliers. Our reliance on a
single or limited group of suppliers, particularly foreign
suppliers, and our increasing reliance on subcontractors,
involves several risks. These risks include a potential
inability to obtain an adequate supply of required components,
and reduced control over pricing, quality, and timely delivery
of these components.
|
|
|
Future demand for our set-top boxes will depend significantly on
the growing market acceptance of high definition television, or
HDTV. The effective delivery of HDTV will depend on digital
television operators developing and building infrastructure to
provide wide-spread HDTV programming.
|
|
|
|
During April 2006, a jury concluded that certain of our digital
video recorders, or DVRs, infringed a patent held by Tivo. If
the Tivo jury verdict is upheld on appeal, to the extent that
ECC does not indemnify us, we will be required to pay
substantial damages
and/or
license fees, and if we were not able to successfully implement
alternative technology (including the successful defense of any
challenge that such technology infringes Tivos patent), we
could also be prohibited from distributing DVRs, or be required
to modify or eliminate certain user-friendly DVR features that
we currently offer to consumers.
|
Risks
Affecting Our Fixed Satellite Services Business
|
|
|
The fixed satellite services industry is highly competitive and
is characterized by long-term leases and high switching costs.
Therefore, it will be difficult to displace customers from their
current relationships with our well-established competitors and
we may face competition from others in the future.
|
|
|
Satellites are subject to significant operational risks while in
orbit. While we believe that our satellite fleet is generally in
good condition, certain satellites in our fleet have experienced
malfunctions or anomalies, some of which have had a significant
adverse impact on their commercial operation. There can be no
assurance that we can recover critical transmission capacity in
the event one or more of our in-orbit satellites were to fail.
Therefore, the loss of a satellite or other satellite
malfunctions or anomalies could have a material adverse effect
on us.
|
|
|
|
We are subject to comprehensive governmental regulation by the
FCC for our domestic satellite operations. We are also regulated
by other federal agencies, state and local authorities and the
International Telecommunication Union. Domestic and
international regulations regarding the licensing, authorization
and operations of satellite communications providers may
restrict our fixed satellite services operations.
|
|
|
|
ECC has not historically carried and we do not anticipate
carrying insurance for any of the in-orbit satellites that we
will own.
|
Risks
Relating to the Spin-Off
|
|
|
The allocation of assets, liabilities, rights, indemnifications
and other obligations between ECC and us under the separation
agreement and the related commercial and other agreements we
will enter into with ECC may not reflect what two unaffiliated
parties might have agreed to.
|
|
|
|
ECC has requested a private letter ruling from the Internal
Revenue Service, or IRS, to the effect that, among other things,
the spin-off, together with certain related transactions, will
qualify for tax-free treatment under Sections 355 and
368(a)(1)(D) of the Code. Although a private letter ruling
relating to the qualification of the spin-off under
Sections 355 and 368(a)(l)(D) of the Internal Revenue Code
of 1986, as amended, generally will be binding on the IRS, the
validity of such ruling, if obtained, will be subject to the
accuracy of factual representations and assumptions made in the
ruling request. If the spin-off does not qualify for tax-free
treatment for U.S. federal income tax purposes, then, in
general, ECC would be subject to tax as if it had sold the
common stock of our company in a taxable sale for its fair
market value. ECCs shareholders would be subject to tax as
if they had received a distribution equal to the fair market
value of our common stock that was distributed to them, which
would be treated as a taxable dividend to the extent of
ECCs earnings and profits. It is expected that the amount
of any such taxes to ECC and its shareholders would be
substantial.
|
5
|
|
|
Actual or perceived conflicts of interest may arise between ECC
and us in a number of areas relating to our past and ongoing
relationships, including: (i) cross officerships,
directorships and stock ownership, (ii) intercompany
transactions, (iii) intercompany agreements and
(iv) business opportunities. In particular, Charles W.
Ergen will be the Chief Executive Officer and Chairman of the
Board and will beneficially own approximately 50.0% of the total
equity and control 80.0% of the total voting power, of each of
ECC and us. Thus, Mr. Ergen will have the ability to elect
a majority of ECCs and our directors and to control all
other matters requiring the approval of ECCs and our
shareholders.
|
Risks
Relating to our Common Stock and the Securities Market
|
|
|
An active trading market may not develop or be sustained for our
Class A common stock after the spin-off. In addition, the
prices at which our Class A common stock may trade after
the spin-off may decline or be subject to volatility.
|
|
|
|
We expect that some of our shareholders, including possibly some
of our larger shareholders, will sell the Class A common
stock that they receive in the spin-off because, among other
reasons, our business profile or market capitalization as an
independent, publicly-traded company do not fit their investment
objectives. These sales may adversely affect the market price
for our Class A common stock as well as the market
perception of our business.
|
|
|
|
We have never declared or paid any dividends on our common
stock. We intend to retain any earnings to finance the operation
and expansion of our business, and we do not anticipate paying
any cash dividends in the future.
|
Other
Information
We are a Nevada corporation. Our principal executive offices are
located at 90 Inverness Circle E., Englewood, Colorado 80112.
Our telephone number is
(303) 723-1000.
Our web site is
[ ].
Information contained on our web site does not and will not
constitute a part of this information statement or the
registration statement on Form 10 of which it is a part.
6
Summary
Historical and Unaudited Pro Forma Combined and Adjusted
Financial Data
The following tables set forth our summary historical and
unaudited pro forma combined and adjusted financial data. The
summary historical combined financial data relating to our
combined financial condition and results of operations for each
of the fiscal years in the three-year period ended
December 31, 2006 and the nine months ended
September 30, 2007 and 2006 are derived from our historical
combined financial statements for the corresponding periods
included elsewhere in this information statement. The historical
combined financial data for the nine months ended
September 30, 2007 and 2006 reflects, in our opinion, all
adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the data for such interim periods.
The data should be read in conjunction with our historical
combined financial statements and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this information
statement.
Our historical combined financial data included in this
information statement may not be indicative of our future
performance and does not necessarily reflect what our financial
condition and results of operations would have been had we
operated as a separate, stand-alone entity during the periods
presented, particularly since changes will occur in our
operations and capitalization as a result of our spin-off from
ECC.
Our historical combined financial statements reflect the
historical financial position and results of operations of
entities included in the consolidated financial statements of
ECC, representing almost exclusively ECCs set-top box
business, using the historical results of operations and
historical bases of assets and liabilities of this business. Our
historical combined financial statements included herein reflect
sales to ECC at cost and do not include certain satellites,
uplink and satellite transmission assets, real estate and other
assets and related liabilities that will be contributed to us by
ECC in the spin-off. These assets and liabilities, which will
primarily comprise our fixed satellite services business, have
been separately audited and are included in the Statement
of Net Assets to be Contributed by ECC and Unaudited
Pro Forma Combined and Adjusted Financial Information
included herein. The financial condition and results of
operations of our fixed satellite services business have not
been included in our historical combined financial statements
because our fixed satellite services business was operated as an
integral part of ECCs subscription television business and
did not constitute a business in the historical
financial statements of ECC. Our historical financial data also
does not include financial information of Sling Media, Inc.,
which was recently acquired by ECC and will be contributed to us
in the spin-off. Sling Medias audited consolidated
financial statements are included elsewhere in this information
statement, and its historical financial information also has
been included in our Unaudited Pro Forma Combined and
Adjusted Financial Information.
The unaudited pro forma combined financial data included herein
has been adjusted to give effect to, among other things, the
contribution of certain net assets to us, the distribution of
our common stock by ECC to its shareholders and the contribution
to us of Sling Media. The assumptions used and pro forma
adjustments derived from such assumptions are based on currently
available information and we believe such assumptions are
reasonable under the circumstances. Further information
regarding the pro forma adjustments can be found under the
caption Unaudited Pro Forma Combined and Adjusted
Financial Information in this information statement.
The unaudited pro forma combined financial data presented for
the year ended December 31, 2006 and as of and for the nine
months ended September 30, 2007 are derived from our
unaudited pro forma combined and adjusted financial information.
The data should be read in conjunction with our Selected
Combined Financial Data, Unaudited Pro Forma
Combined and Adjusted Financial Information, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this information statement. The unaudited pro forma combined
financial statements are not indicative of our future
performance and do not necessarily reflect what our financial
condition and results of operations would have been had the
spin-off been completed on the dates assumed. Also, they may not
reflect the results of operations or financial condition which
would have resulted had we operated as a separate, stand-alone
entity during the periods presented.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations Data:
|
|
Pro Forma
|
|
|
2007
|
|
|
2006
|
|
|
Pro Forma
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
1,592,381
|
|
|
$
|
1,182,768
|
|
|
$
|
1,132,899
|
|
|
$
|
2,080,259
|
|
|
$
|
1,525,320
|
|
|
$
|
1,513,691
|
|
|
$
|
1,720,091
|
|
Operating expenses
|
|
|
1,606,709
|
|
|
|
1,222,936
|
|
|
|
1,152,875
|
|
|
|
2,058,924
|
|
|
|
1,562,767
|
|
|
|
1,546,755
|
|
|
|
1,760,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(14,328
|
)
|
|
$
|
(40,168
|
)
|
|
$
|
(19,976
|
)
|
|
$
|
21,335
|
|
|
$
|
(37,447
|
)
|
|
$
|
(33,064
|
)
|
|
$
|
(40,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,296
|
)
|
|
$
|
(39,943
|
)
|
|
$
|
(20,486
|
)
|
|
$
|
104,835
|
|
|
$
|
(34,162
|
)
|
|
$
|
(44,940
|
)
|
|
$
|
(43,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
89,699
|
|
|
|
|
|
|
|
|
|
|
|
89,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
90,056
|
|
|
|
|
|
|
|
|
|
|
|
90,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For the Years Ended December 31,
|
|
Cash Flow Data:
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Net cash flows from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(34,276
|
)
|
|
$
|
(3,780
|
)
|
|
$
|
(36,374
|
)
|
|
$
|
(14,193
|
)
|
|
$
|
(78,916
|
)
|
Investing activities
|
|
$
|
(160,236
|
)
|
|
$
|
(75,953
|
)
|
|
$
|
(54,781
|
)
|
|
$
|
(16,700
|
)
|
|
$
|
(5,619
|
)
|
Financing activities
|
|
$
|
198,625
|
|
|
$
|
91,176
|
|
|
$
|
104,534
|
|
|
$
|
39,782
|
|
|
$
|
69,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
As of December 31,
|
|
Balance Sheet Data:
|
|
Pro Forma
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
1,538,516
|
|
|
$
|
530,753
|
|
|
$
|
323,576
|
|
|
$
|
106,109
|
|
|
$
|
143,437
|
|
Total assets
|
|
$
|
3,837,454
|
|
|
$
|
919,624
|
|
|
$
|
517,821
|
|
|
$
|
229,392
|
|
|
$
|
277,843
|
|
Long-term debt (including current portion)
|
|
$
|
389,137
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
495
|
|
|
$
|
647
|
|
Net investment in EHC
|
|
$
|
3,242,225
|
|
|
$
|
863,768
|
|
|
$
|
502,283
|
|
|
$
|
217,132
|
|
|
$
|
258,452
|
|
8
Summary
of the Spin-Off
The following is a brief summary of the terms of the spin-off.
|
|
|
Distributing Company
|
|
EchoStar Communications Corporation, a Nevada corporation. After
the distribution, EchoStar Communications Corporation will not
own any shares of common stock of EchoStar Holding Corporation.
|
|
|
|
Separated Company
|
|
EchoStar Holding Corporation, a Nevada corporation and a
wholly-owned subsidiary of ECC. After the distribution, EchoStar
Holding Corporation will be an independent, publicly-traded
company. However, all of ECCs directors after the
distribution, except James DeFranco, Cantey Ergen and Gary S.
Howard, will also be directors of EHC. Charles W. Ergen, our
Chairman and Chief Executive Officer, will continue to be the
Chairman and Chief Executive Officer of ECC. In addition,
certain executive officers of ECC will also serve as our
executive officers. Based on Mr. Ergens ownership as
of November 30, 2007, Mr. Ergen will beneficially own
approximately 50.0% of the total equity and approximately 80.0%
of the total voting power of each of ECC and us.
|
|
|
|
Primary purposes of the spin-off
|
|
The board of directors of ECC believes that creating
independent, focused companies is the best way to realize the
full value of ECCs businesses. The board of directors of
ECC considered the following potential benefits, among others,
in making its determination to consummate the spin-off:
|
|
|
|
|
|
creating effective management incentives tied to
each of EHC and ECCs performance and increasing the
ability to attract and retain personnel;
|
|
|
|
|
|
creating opportunities to effectively develop and
finance expansion plans;
|
|
|
|
|
|
creating separate companies that have different
financial characteristics, which may appeal to different
investor bases; and
|
|
|
|
|
|
allowing each company to separately pursue the
business strategies that best suit its long-term interest.
|
|
|
|
|
|
The board of directors of ECC also considered the costs and
risks associated with the spin-off. The board of directors of
ECC considered, among other factors:
|
|
|
|
|
|
the potential negative impact on ECCs credit
ratings as a result of the divestiture of assets that will be
contributed to us;
|
|
|
|
|
|
the possibility that either we or ECC may experience
disruptions in our respective businesses as a result of the
spin-off;
|
|
|
|
|
|
the risk that the combined trading prices of our
Class A common stock and ECCs Class A common
stock after the spin-off may be lower than the trading price of
ECCs Class A common stock before the spin-off;
|
|
|
|
|
|
actual or perceived conflicts of interest that may
arise between ECC and us in a number of areas relating to our
past and ongoing relationships, including: (i) cross
officerships, directorships and stock ownership,
(ii) intercompany transactions, (iii) intercompany
agreements and (iv) business opportunities;
|
|
|
|
|
|
the loss of synergies from operating as one company;
and
|
|
|
|
|
|
the additional legal, accounting, administrative and
other costs that we would incur as a separate, publicly-traded
company.
|
9
|
|
|
|
|
In view of the variety of factors considered by the ECC board of
directors in connection with the evaluation of the spin-off and
the complexity of these matters, the ECC board of directors did
not find it useful to, and did not attempt to, quantify, rank or
otherwise assign relative weights to the factors considered. The
board of directors of ECC concluded that considered in the
aggregate the potential benefits of the spin-off outweigh the
potential negative factors, and that separating the non-core
business of ECC from ECC in the form of a tax-free distribution
to ECC shareholders is appropriate, advisable and in the best
interests of ECC and its shareholders.
|
|
|
|
Conditions to the spin-off
|
|
The spin-off is subject to the satisfaction or waiver by ECC
under the separation agreement of the following conditions:
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|
|
|
|
|
the Securities and Exchange Commission shall have
declared effective our registration statement on Form 10
and no stop order shall be in effect;
|
|
|
|
all permits, registrations and consents required
under the securities or blue sky laws in connection with the
spin-off shall have been received;
|
|
|
|
|
|
ECC shall have received the opinion of
White & Case LLP confirming the tax-free status of the
spin-off and certain related transactions for U.S. federal
income tax purposes on the distribution date;
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|
|
|
|
|
the listing of our Class A common stock on the
Nasdaq Global Select Market shall have been approved;
|
|
|
|
|
|
all material governmental approvals and other
consents necessary to consummate the distribution shall have
been received; and
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|
|
|
no order, injunction or decree issued by any court
of competent jurisdiction or other legal restraint or
prohibition preventing consummation of the distribution or any
of the transactions related thereto shall be in effect.
|
|
|
|
The fulfillment of the foregoing conditions will not create any
obligation on ECCs part to effect the spin-off. ECC has
the right not to complete the spin-off if, at any time,
ECCs board of directors determines, in its sole
discretion, that the spin-off is not in the best interests of
ECC or its shareholders, or that market conditions are such that
it is not advisable to separate EHC from ECC.
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|
|
|
Securities to be Distributed
|
|
Shares of EHC Class A common stock and Class B common
stock will constitute all of the outstanding shares of our
common stock immediately after the distribution. We expect the
shares of our Class A common stock and Class B common
stock to be distributed by ECC to you, based on the same class
of ECC common stock that you own, on or about January 1,
2008, which we refer to as the distribution date.
Charles Ergen, our Chairman and Chief Executive Officer,
will, immediately after the distribution date, beneficially own
approximately 50.0% of our equity and possess approximately
80.0% of the total voting power represented by our common stock.
|
|
|
|
Distribution Ratio
|
|
For each share of ECC Class A common stock or ECC
Class B common stock held by you as of 5:00 p.m., New
York City time, on December 27, 2007, the record date for
the spin-off, you will
|
10
|
|
|
|
|
receive 0.20 of a share of the same class of our common stock.
Please note that if you sell your shares of Class A common
stock of ECC after the record date but before the distribution
date, the buyer of those shares will be entitled to receive the
shares of our Class A common stock issuable in respect of
the shares sold. If as a result of the foregoing ratio you would
be entitled to receive a fraction of a share of our Class A
common stock, you will receive cash in lieu of such fractional
share interest. The distribution of shares will be made in
book-entry form.
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|
|
|
Record Date
|
|
The record date is December 27, 2007.
|
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|
Distribution Date
|
|
The distribution date is expected to be January 1, 2008.
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|
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Trading Market and Symbol
|
|
We have applied to list our Class A common stock on the
Nasdaq Global Select Market under the ticker symbol
[ ].
We anticipate that, on or prior to the distribution date, a
limited market for our Class A common stock, commonly known
as a when issued trading market, will develop, and
we expect regular way trading of our Class A
common stock will begin the first trading day after the
distribution date.
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Tax Consequences to Shareholders
|
|
ECC shareholders are not expected to recognize any gain or loss
for U.S. federal income tax purposes as a result of the
spin-off, except for any gain or loss attributable to the
receipt of cash in lieu of a fractional share of our
Class A common stock. See The Spin-Off
Material U.S. Federal Income Tax Consequences of the
Spin-Off for a more detailed description of the U.S.
federal income tax consequences of the spin-off.
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|
|
|
Each shareholder is urged to consult his, her or its tax
advisor as to the specific tax consequences of the spin-off to
that shareholder, including the effect of any state, local or
U.S. tax laws and of changes in applicable tax laws.
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|
Relationship with ECC after the Separation
|
|
We will enter into a separation agreement and other agreements
with ECC to effect the spin-off and provide a framework for our
relationship with ECC after the distribution. These agreements
generally expire after two years and will govern our
relationship with ECC subsequent to the completion of the
spin-off and provide for the allocation between us and ECC of
certain of ECCs assets, liabilities and obligations
attributable to the period prior to our separation from ECC. The
separation agreement, in particular, establishes the amount of
cash and indebtedness that each company initially will retain
and incur. For a discussion of these arrangements, see
Certain Intercompany Agreements Agreements
with ECC, included elsewhere in this information statement.
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Dividend Policy
|
|
We presently intend to retain future earnings, if any, to
finance the expansion of our businesses and to conduct a
possible stock-buyback of up to $1.0 billion. As a result,
we do not expect to pay any cash dividends for the foreseeable
future. All decisions regarding the payment of dividends by our
company will be made by our board of directors from time to time
in accordance with applicable law.
|
11
Questions
and Answers about the Spin-Off
The following is a brief summary of the terms of the spin-off.
Please see The Spin-Off for a more detailed
description of the matters described below.
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|
Q:
|
|
What is the spin-off?
|
|
A:
|
|
The spin-off is the method by which ECC will separate its
existing business segments into two independent, publicly-traded
companies. In the spin-off, ECC will distribute to its
shareholders as of the distribution date all of the shares of
our Class A common stock and Class B common stock that
it owns. Following the spin-off, we will be a separate company
from ECC, and ECC will not retain any ownership interest in us.
The number of shares of ECC common stock you own will not change
as a result of the spin-off.
|
|
Q:
|
|
What is being distributed in the spin-off?
|
|
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|
A:
|
|
Approximately 42.0 million shares of our Class A
common stock and 47.7 million shares of our Class B
common stock will be distributed in the spin-off, based upon the
number of shares of ECC Class A common stock and ECC
Class B common stock outstanding on the record date. The
shares of our Class A common stock and Class B common
stock to be distributed by ECC will constitute all of the issued
and outstanding shares of our Class A common stock and
Class B common stock immediately after the distribution.
For more information on the shares being distributed in the
spin-off, see Description of Our Capital Stock
Our Class A Common Stock and Description of Our
Capital Stock Our Class B Common Stock
beginning on page 116 of this information statement.
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|
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|
Q:
|
|
What will I receive in the spin-off?
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|
A:
|
|
Holders of ECC Class A common stock will receive a dividend
of 0.20 of a share of our Class A common stock for each
share of ECC Class A common stock held by them on the
record date, and holders of ECC Class B common stock will
receive a dividend of 0.20 of a share of our Class B common
stock for every share of ECC Class B common stock held by
them on the record date. As a result of the spin-off, your
proportionate interest in ECC will not change and you will own
the same percentage of equity securities and voting power in EHC
as you previously did in ECC. For a more detailed description,
see The Spin-Off.
|
|
|
|
Q:
|
|
What is the record date for the distribution?
|
|
|
|
A:
|
|
Record ownership will be determined as of 5:00 p.m., New
York City time on December 27, 2007 which we refer to as
the record date.
|
|
|
|
Q:
|
|
When will the distribution occur?
|
|
|
|
A:
|
|
We expect that shares of our Class A common stock and
Class B common stock will be distributed by the
distribution agent, on behalf of ECC, on or about
January 1, 2008, which we refer to as the distribution date.
|
|
|
|
Q:
|
|
What will the relationship between EchoStar Communications
Corporation and EchoStar Holding Corporation be following the
spin-off?
|
|
|
|
A:
|
|
After the spin-off, ECC will not own any shares of our common
stock and we will not own any shares of ECC common stock. Five
of our directors after the distribution will also be directors
of ECC, and our Chairman and Chief Executive Officer will
continue to serve as the Chairman and Chief Executive Officer of
ECC. In addition, in connection with the spin-off, we and ECC
are entering into a number of agreements that will govern our
spin-off from ECC and our future relationship. We cannot assure
you that these agreements will be on terms as favorable to us as
agreements with unaffiliated parties. See Certain
Intercompany Agreements. In addition, if we acquire
knowledge of a potential transaction or matter which may be a
corporate opportunity for both us and ECC, our mutual officers
and directors are only required to first present the opportunity
to us if (A) we have expressed an interest in such
corporate opportunity as evidenced by resolutions appearing in
the minutes of our board of directors; (B) such
|
12
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|
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|
|
potential corporate opportunity was expressly offered to one of
our directors or officers solely in his or her capacity as a
director or officer of us or as a director or officer of any
subsidiary of us; and (C) such opportunity relates to a
line of business in which we or any subsidiary of us is then
directly engaged. See Description of Our Capital
Stock Provisions of Our Articles of Incorporation
Relating to Related-Party Transactions and Corporate
Opportunities.
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|
|
|
Q:
|
|
What do I have to do to participate in the
spin-off?
|
|
A:
|
|
No action is required on your part. Shareholders of ECC on the
record date for the distribution are not required to pay any
cash or deliver any other consideration, including any shares of
ECC common stock, for the shares of our common stock
distributable to them in the spin-off.
|
|
|
|
Q:
|
|
If I sell, on or before the distribution date, shares of
ECC Class A common stock that I held on the record date, am
I still entitled to receive shares of EHC Class A common
stock distributable with respect to the shares of ECC
Class A common stock I sold?
|
|
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|
A:
|
|
No. No ex-dividend market will be established for our
Class A common stock until the first trading day following
the distribution date. Therefore, if you own shares of ECC
Class A common stock on the record date and thereafter sell
those shares on or prior to the distribution date, you will also
be selling the shares of our Class A common stock that
would have been distributed to you in the spin-off with respect
to the shares of ECC Class A common stock you sell.
|
|
|
|
Q:
|
|
How will fractional shares be treated in the
spin-off?
|
|
A:
|
|
If you would be entitled to receive a fractional share of
Class A common stock in the spin-off, you will instead
receive a cash payment. See The Spin-Off
Treatment of Fractional Shares for an explanation of how
the cash payments will be determined.
|
|
Q:
|
|
How will ECC distribute shares of EHC common stock to
me?
|
|
|
|
A:
|
|
Holders of shares of ECCs Class A or Class B
common stock on the record date will receive shares of the same
class of our common stock, in book-entry form. See The
Spin-Off Manner of Effecting the Spin-Off for
a more detailed explanation.
|
|
|
|
Q:
|
|
What is the reason for the spin-off?
|
|
A:
|
|
The potential benefits considered by ECCs board of
directors in making the determination to consummate the spin-off
included the following:
|
|
|
|
|
|
The spin-off is expected to allow the creation of effective
management incentives tied to each of EHCs and ECCs
respective performance, increasing the ability to attract and
retain personnel.
|
|
|
|
The spin-off is expected to create opportunities to effectively
develop and finance expansion plans of each independent company.
|
|
|
|
|
|
The spin-off is expected to allow the creation of separate
companies that have different financial characteristics, which
may appeal to different investor bases, which could enhance the
ability of each company to raise capital to fund its growth
plans and initiatives.
|
|
|
|
|
|
The spin-off is expected to allow each company to separately
pursue the business strategies that best suit its long-term
interests.
|
|
|
|
|
|
The board of directors of ECC also considered the costs and
risks associated with the spin-off. The board of directors of
ECC considered, among other factors, the following:
|
|
|
|
|
|
The potential negative impact on ECCs credit ratings as a
result of the divestiture of assets that will be contributed to
us.
|
|
|
|
|
|
The possibility that either we or ECC may experience disruptions
in our respective businesses as a result of the spin-off.
|
13
|
|
|
|
|
The risk that the combined trading prices of our Class A
common stock and ECCs Class A common stock after the
spin-off may be lower than the trading price of ECCs
Class A common stock before the spin-off.
|
|
|
|
|
|
Actual or perceived conflicts of interest that may arise between
ECC and us in a number of areas relating to our past and ongoing
relationships, including: (i) cross officerships,
directorships and stock ownership, (ii) intercompany
transactions, (iii) intercompany agreements and
(iv) business opportunities.
|
|
|
|
|
|
The loss of synergies from operating as one company.
|
|
|
|
|
|
The additional legal, accounting, administrative and other costs
that would be incurred by us as a separate, publicly-traded
company.
|
|
|
|
|
|
In view of the variety of factors considered by the ECC board of
directors in connection with the evaluation of the spin-off and
the complexity of these matters, the ECC board of directors did
not find it useful to, and did not attempt to, quantify, rank or
otherwise assign relative weights to the factors considered. The
board of directors of ECC concluded that considered in the
aggregate, the potential benefits of the spin-off outweigh the
potential negative factors, and that separating the non-core
business of ECC from ECC in the form of a tax-free distribution
to ECC shareholders is appropriate, advisable and in the best
interests of ECC and its shareholders.
|
|
|
|
Q:
|
|
What are the federal income tax consequences to me of the
spin-off?
|
|
|
|
A:
|
|
ECC has requested a private letter ruling from the IRS, and the
spin-off is conditioned upon the receipt by ECC of the opinion
of White & Case LLP on the distribution date (which
condition ECC may waive), in each case, substantially to the
effect that the spin-off, together with certain related
transactions, will qualify as reorganizations under
Sections 355 and 368(a)(l)(D) of the Code and that,
accordingly, for U.S. federal income tax purposes, no gain or
loss will be recognized by, and no amount will be included in
the income of, a holder of ECC common stock upon the receipt of
shares of our common stock pursuant to the spin-off. A holder of
ECC common stock will generally recognize gain or loss with
respect to cash received in lieu of a fractional share of our
common stock.
|
Please see The Spin-Off Material U.S. Federal
Income Tax Consequences of the Spin-Off and
Risk Factors Risks Relating to the
Spin-Off The spin-off could result in significant
tax liability for more information regarding the private
letter ruling and the tax opinion and the potential tax
consequences to you of the spin-off.
|
|
|
Q:
|
|
Does EHC intend to pay cash dividends?
|
|
A:
|
|
No. We currently intend to retain future earnings, if any,
to finance the expansion of our businesses. As a result, we do
not expect to pay any cash dividends for the foreseeable future.
All decisions regarding the payment of dividends by our company
will be made by our board of directors from time to time in
accordance with applicable law.
|
|
Q:
|
|
How will EHC common stock trade?
|
|
|
|
A:
|
|
Currently, there is no public market for our common stock. We
have applied to list our Class A common stock on the Nasdaq
Global Select Market under the symbol
.
|
We anticipate that trading will commence on a when-issued basis
shortly before the record date. When-issued trading in the
context of a spin-off refers to a transaction effected on or
before the distribution date and made conditionally because the
securities of the spun off entity have not yet been distributed.
When-issued trades generally settle within three days after the
distribution date. On the first trading day following the
distribution date, any when-issued trading in respect of our
Class A common stock will end and regular way trading will
begin. Regular way trading refers to trading after the security
has been distributed and typically involves a trade that settles
on the third full trading day following the date of the sale
transaction. We cannot predict the trading prices for our common
stock before or after the distribution date.
|
|
|
Q:
|
|
Will the spin-off and distribution affect the trading
price of my ECC Class A common stock?
|
14
|
|
|
A:
|
|
Yes. After the distribution of EHC Class A common stock,
the trading price of ECC Class A common stock may be lower
than the trading price of the ECC Class A common stock
immediately prior to the distribution. Moreover, until the
market has evaluated the operations of ECC without the
operations of EHC, the trading price of ECC Class A common
stock may fluctuate significantly. ECC believes the separation
of EHC from ECC offers its shareholders the greatest long-term
value. However, the combined trading prices of ECC Class A
common stock and EHC Class A common stock after the
spin-off may be lower than the trading price of ECC Class A
common stock prior to the spin-off. See Risk Factors
beginning on page 16.
|
|
|
|
Q:
|
|
Do I have appraisal rights?
|
|
A:
|
|
No. Holders of ECC common stock are not entitled to
appraisal rights in connection with the spin-off.
|
|
Q:
|
|
Who is the transfer agent for your common stock?
|
|
|
|
A:
|
|
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
|
|
|
|
Q:
|
|
Where can I get more information?
|
|
|
|
A:
|
|
If you have questions relating to the mechanics of the
distribution of shares of EHC common stock, you should contact
the distribution agent:
|
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Tel:
781-575-2879
Before the spin-off, if you have questions relating to the
spin-off, you should contact:
EchoStar Communications Corporation
Attn: Corporate Communications
9601 S. Meridian Boulevard
Englewood, Colorado 80112
Tel:
720-514-5351
After the spin-off, if you have questions relating to EHC, you
should contact:
EchoStar Holding Corporation
Attn: Corporate Communications
90 Inverness Circle E.
Englewood, Colorado 80112
Tel:
303-723-1000
15
The risks and uncertainties described below are not the only
ones facing us. Additional risks and uncertainties that we are
unaware of or that we currently believe to be immaterial also
may become important factors that affect us.
This
information statement also contains forward-looking statements
that involve risks and uncertainties. See Cautionary
Statement Concerning Forward-Looking Statements.
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 may
not realize the potential benefits from the
spin-off.
We may not realize the potential benefits that we expect from
the spin-off which are described elsewhere in this information
statement. Certain of these benefits depend upon market
acceptance of our separation from ECC which we cannot predict
and which may be affected by the significant common stock
ownership by our Chairman and Chief Executive Officer, as well
as interlocks between our management and board of directors. In
addition, we will incur significant costs, including those
described elsewhere in this information statement, which may
exceed our estimates. We will also incur some negative effects
from our separation from ECC, including loss of access to
ECCs financial resources.
We
currently depend on ECC and Bell ExpressVu for substantially all
of our revenue and ECC accounted for over 80% of our revenue in
the nine months ended September 30, 2007 and each of 2006,
2005 and 2004; the loss of, or a significant reduction in orders
from, either of ECC or Bell ExpressVu would significantly reduce
our revenue and adversely impact our operating
results.
ECC accounted for approximately 86.2%, 84.5%, 85.6% and 89.7% of
our revenue in the nine months ended September 30, 2007 and
in 2006, 2005 and 2004, respectively. In addition, Bell
ExpressVu accounted for approximately 10.0%, 12.2%, 11.4% and
7.3% of our revenue in the nine months ended September 30,
2007 and in 2006, 2005 and 2004, respectively. Any reduction in
sales to ECC or Bell ExpressVu would have a significant negative
impact on our business. Moreover, because our sales to these
customers are made pursuant to standard purchase orders, these
customers have no future obligation to purchase set-top boxes
from us and existing orders may be cancelled or reduced on short
notice. Cancellations or reductions may be more frequent once we
are separated from ECC. Cancellations or reductions of customer
orders could result in the loss of anticipated sales without
allowing us sufficient time to reduce our inventory and
operating expenses. In addition, the timing of orders from these
two customers could vary significantly depending on equipment
promotions these customers offer to their subscribers, changes
in technology, and their use of remanufactured set-top boxes,
which may cause our revenue to vary significantly quarter over
quarter and could expose us to the risks of inventory shortages
or excess inventory. These inventory risks are particularly
acute during end product transitions in which a new generation
of set-top boxes is being deployed and inventory of older
generation set-top boxes is at a higher risk of obsolescence.
This in turn could cause our operating results to fluctuate
significantly.
In addition, because substantially all of our revenue is tied to
ECC and Bell ExpressVu, our success also depends to a
significant degree on the continued success of ECC and Bell
ExpressVu in attracting new subscribers or in marketing
programming packages to subscribers that will require the
purchase of new set-top boxes.
There is a relatively small number of potential new customers
for our set-top boxes and fixed satellite services, and we
expect this customer concentration to continue for the
foreseeable future. Therefore, our operating results will likely
continue to depend on sales to a relatively small number of
customers, as well as the continued success of these customers.
In addition, we may from time to time enter into customer
agreements providing for exclusivity periods during which we may
sell a specified product only to that customer. If we do not
develop relationships with new customers, we may not be able to
expand our customer base or maintain or increase our revenue.
16
We
currently have substantial unused satellite capacity; our
results of operations could be materially adversely affected if
we are not able to utilize all of this capacity.
While we are currently evaluating various opportunities to make
profitable use of our satellite capacity (including, but not
limited to, supplying satellite capacity for new international
ventures), we do not have firm plans to utilize all of our
satellite capacity. In addition, there can be no assurance that
we can successfully develop the business opportunities we
currently plan to pursue with this capacity. Future costs
associated with our excess satellite capacity will negatively
impact our margins if we do not generate revenue to offset the
costs of this capacity.
In addition, we currently have leased minimal capacity on our
two leased satellites, AMC-15 and AMC-16, and have substantial
unleased capacity on one of our owned satellites,
EchoStar IX. Each of our satellites, must be reviewed for
possible impairment whenever events or changes in circumstances
indicate that their carrying value may not be recoverable. In
the event that we are unsuccessful in marketing capacity on
these satellite assets and do not achieve sufficient utilization
and prices, in addition to reporting lower than expected
revenues and profitability, we will be required to record a
substantial impairment charge relating to one or more of these
satellites. We currently estimate that these potential charges
could aggregate up to $250 million, which, if incurred
would have a material adverse effect on our reported operating
results and financial position. Furthermore, it is possible that
in 2008 ECC will discontinue the use of some or all of the
capacity on one or more other satellites that it will initially
lease from us. To the extent that this occurs and we are unable
to lease this additional anticipated excess capacity, we may be
required to record additional substantial impairment charges
that we currently estimate could aggregate up to
$100 million.
Our
historical combined and pro forma financial information included
in this information statement are not necessarily indicative of
our future financial position, future results of operations or
future cash flows nor do they reflect what our financial
position, results of operations or cash flows would have been as
a stand-alone company during the periods
presented.
The historical and pro forma combined financial information
included in this information statement do not reflect the
financial condition, results of operations or cash flows we
would have achieved as an independent publicly-traded company
during the periods presented or those results we will achieve in
the future. This is primarily a result of the following factors:
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We have never been profitable as the majority of our operations
have historically been in support of ECC and we provided our
products and services to ECC at cost. We cannot assure you that
we can achieve or sustain profitability, or that we can grow our
business profitably or at all.
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The financial condition and results of operations of our fixed
satellite services business are reflected only in our pro forma
combined financial information included herein, and not in our
historical combined financial information included herein,
because our fixed satellite services business was operated as an
integral part of ECCs subscription television business and
did not constitute a business in the historical
financial statements of ECC.
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Our plans with respect to the fixed satellite services business
are being developed.
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Sling Media is a recent acquisition and we have never operated
that business.
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Our historical and pro forma combined financial results reflect
allocations of corporate expenses from ECC. Those allocations
may be different from the comparable expenses we would have
incurred had we operated as an independent publicly-traded
company.
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Our working capital requirements and capital required for our
general corporate purposes historically have been satisfied as
part of the corporate-wide cash management policies of ECC.
Subsequent to the spin-off, ECC will not be required to provide
us with funds to finance our working capital or other cash
requirements. Without the opportunity to obtain financing from
ECC, we may in the future need to obtain additional financing
from banks, or through public offerings or private placements of
debt or equity securities, strategic relationships or other
arrangements. Such financing may not be available to us on
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acceptable terms, or at all. We may have a credit rating that is
lower than ECCs credit rating and may incur debt on terms
and at interest rates that will not be as favorable as those
historically enjoyed by ECC.
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Significant changes may occur in our cost structure, management,
financing and business operations as a result of our operating
as an independent public company.
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The
acquisition of EchoStar Communication Corporation by a third
party could have a material adverse effect on our business and
financial position.
Our sales to ECC accounted for approximately 86.2%, 84.5%, 85.6%
and 89.7% of our revenue in the nine months ended
September 30, 2007 and in 2006, 2005 and 2004,
respectively. Because sales to ECC following the spin-off will
primarily be made pursuant to short-term contracts, ECC will
have no obligation to continue to purchase our principal
products and services following the spin-off. Therefore, if ECC
enters into a business combination transaction, or
Mr. Ergen no longer controls a majority of the voting power
of ECC or of us, our relationship with ECC could be terminated
or substantially curtailed with little or no advance notice. Any
material reduction in our sales to ECC 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
ECC as a customer, it will be difficult for us to obtain
alternative customer relationships that would replace our
historical revenues from ECC.
We may
not be able to obtain additional capital on acceptable terms or
at all in order to grow and to increase earnings.
Our ability to increase earnings will depend in part on our
ability to grow our business. While we expect to satisfy our
need for funds to meet our growth plans to be satisfied from
cash and marketable investment securities to be contributed to
us in connection with the spin-off, cash we generate from
operations and future financings, we cannot assure you that we
will generate sufficient cash from operations or that additional
financing will be available on acceptable terms, or at all, if
needed in the future.
In addition, we currently have contracts to construct, and
conditional licenses and pending FCC applications for, a number
of Ku-band,
Ka-band
and
extended Ku-band satellites. We may need to raise additional
capital to construct, launch, and insure these satellites.
Depending on market conditions and our results of operations and
financial condition we may not be able to raise such additional
capital on acceptable terms or at all. We also periodically
evaluate various strategic initiatives, the pursuit of which
also could require us to raise significant additional capital.
We may also use a significant portion of our existing cash to
fund a potential stock buyback program during 2008 of up to
$1 billion of our Class A common stock.
We also have substantial satellite-related payment obligations
under our various satellite service agreements.
We
could be exposed to significant financial losses if our
investments are unsuccessful.
We have entered into certain strategic transactions and
investments in Asia and elsewhere, and we may increase our
strategic investment activity in the United States and in
international markets. These investments, which we expect 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. In particular, the laws,
regulations and practices of certain countries may make it
harder for our investments to be successful.
In addition, the companies in which we invest or with whom we
partner may not be able to compete effectively or there may be
insufficient demand for the services and products offered by
these companies.
We may
pursue new acquisitions, joint ventures and other transactions
to complement or expand our business which may not be
successful.
We may not be able to complete such transactions and such
transactions, if executed, pose significant risks and could have
a negative effect on our operations. Our future success may
depend on opportunities to buy
18
other businesses or technologies that could complement, enhance
or expand our current business or products or that might
otherwise offer us growth opportunities. Any transactions that
we are able to identify and complete may involve a number of
risks, including:
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the diversion of our managements attention from our
existing business to integrate the operations and personnel of
the acquired or combined business or joint venture;
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possible adverse effects on our operating results during the
integration process; and
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our possible inability to achieve the intended objectives of the
transaction.
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In addition, we may not be able to successfully or profitably
integrate, operate, maintain and manage our newly acquired
operations or employees. We may not be able to maintain uniform
standards, controls, procedures and policies, and this may lead
to operational inefficiencies.
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 that we
otherwise may have made.
Our
business relies on intellectual property, some of which is owned
by third parties, and we may inadvertently infringe their
patents and proprietary rights.
Many entities, including some of our competitors, have or may in
the future obtain patents and other intellectual property rights
that cover or affect products or services related to those that
we offer. In general, if a court determines that one or more of
our products infringes on intellectual property held by others,
we may be required to cease developing or marketing those
products, to obtain licenses from the holders of intellectual
property or to redesign those products in such a way as to avoid
infringing the patent claims, each of which may require material
expenditures by us. If those intellectual property rights are
held by a competitor, we may be unable to obtain the
intellectual property at any price, which could adversely affect
our competitive position.
If we
fail to protect our intellectual property rights, it could harm
our business and competitive position.
Our business relies on intellectual property rights to stay
competitive in the market place. We rely on a combination of
patent, trademark and copyright laws, trade secrets,
confidentiality procedures and contractual provisions to protect
our intellectual property rights and the obligations we have to
third parties from whom we license intellectual property rights.
Nevertheless, these afford only limited protection and policing
unauthorized use of proprietary technology can be difficult and
expensive. We may not be able to take appropriate steps to
enforce our intellectual property rights and this could have a
material adverse effect on our business, operating results and
financial condition.
Our
accounting and other management systems and resources may not be
adequately prepared to meet the financial reporting and other
requirements to which we will be subject following the spin-off.
If we are unable to achieve and maintain effective internal
controls, our business, financial position and results of
operations could be adversely affected.
Our financial results previously were included within the
consolidated results of ECC, and our reporting and control
systems were appropriate for those of subsidiaries of a public
company. However, we were not directly subject to reporting and
other requirements of the Securities Exchange Act of 1934, as
amended, which we refer to as the Exchange Act. As a result of
the spin-off, we will be directly subject to these requirements,
including the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which will require annual management
assessments of the effectiveness of our internal controls over
financial reporting and a report by our independent registered
public accounting firm addressing these controls. These
reporting and other obligations will place significant demands
on our management and administrative and operational resources,
including accounting resources. To comply with these
requirements, we anticipate that we will need to upgrade our
systems, including information technology, implement additional
financial and management controls, reporting systems and
procedures and hire additional accounting and finance staff. If
we are unable
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to upgrade our financial and management controls, reporting
systems, information technology and procedures in a timely and
effective fashion, our ability to comply with our financial
reporting requirements and other rules that apply to reporting
companies could be impaired.
Prior
to the spin-off, we will not have been an independent company
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 the spin-off, our business was operated by ECC as part
of its broader corporate organization, rather than as an
independent company. ECCs senior management oversaw the
strategic direction of our businesses and ECC performed various
corporate functions for us, including, but not limited to:
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selected human resources related functions;
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accounting;
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tax administration;
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selected legal functions, as well as external reporting;
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treasury administration, investor relations, internal audit and
insurance functions; and
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selected information technology and telecommunications services.
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Following the spin-off, neither ECC nor any of its affiliates
will have any obligation to provide these functions to us other
than those services that will be provided for a limited period
of time by ECC pursuant to the services agreement between us and
ECC. See Certain Intercompany Arrangements
Services Agreement. If, once this services agreement
terminates, we do not have in place our own systems and business
functions, we do not have agreements with other providers of
these services or we are not able to make these changes cost
effectively, we may not be able to operate our business
effectively and our profitability may decline. If ECC does not
continue to perform effectively the services that are called for
under the services agreement, we may not be able to operate our
business effectively after the spin-off.
Changes
in existing technologies or the emergence of new products or
technologies could significantly harm our
business.
Our businesses change rapidly as new technologies are developed.
These new technologies may cause our services and products to
become obsolete. Changes in existing technologies could also
cause demand for our products and services to decline. For
example, if changes in technology allow digital television
subscribers to use devices such as personal computers, cable
ready televisions and network based digital video recording
services in place of set-top boxes, our customers may not need
to purchase our set-top boxes to provide their digital
television subscribers with digital video recording and other
set-top box features. One or more new technologies also could be
introduced that compete favorably with our set-top boxes or that
cause our set-top boxes to no longer be of significant benefit
to our customers.
We and our suppliers also may not be able to keep pace with
technological developments. Alternatively, if the new
technologies on which we intend to focus our research and
development investments fail to achieve acceptance in the
marketplace, we could suffer a material adverse effect on our
future competitive position that could cause a reduction in our
revenues and earnings. Our competitors could also obtain or
develop proprietary technologies that are perceived by the
market as being superior to ours. Further, after we have
incurred substantial research and development costs, one or more
of the technologies under our development, or under development
by one or more of our strategic partners, could become obsolete
prior to its introduction. Finally, delays in the delivery of
components or other unforeseen problems may occur that could
materially and adversely affect our ability to generate revenue,
offer new services and remain competitive.
Technological innovation is important to our success and
depends, to a significant degree, on the work of technically
skilled employees. Competition for the services of these types
of employees is intense. We may not be able to attract and
retain these employees. If we are unable to attract and maintain
technically skilled employees, our competitive position could be
materially and adversely affected.
20
We
intend to make significant investments in new products and
services that may not be profitable.
We have made and will continue to make significant investments
in research, development, and marketing for new products,
services, and technologies, including new set-top box designs
and entry into new business areas. Investments in new technology
are inherently speculative and commercial success depends on
many factors including novelty, service and support, and
effective sales and marketing. We may not achieve significant
revenue from new product and service investments for a number of
years, if at all. Moreover, new products and services may not be
profitable, and even if they are profitable, operating margins
for new products and businesses may be minimal.
We
rely on key personnel.
We believe that our future success will depend to a significant
extent upon the performance of Charles W. Ergen, our
Chairman and Chief Executive Officer and certain other
executives. Mr. Ergen and certain of these executives will
also continue to devote significant time to their employment at
ECC. The loss of Mr. Ergen or of certain other key
executives or their ability to devote sufficient time and effort
to our business could have a material adverse effect on our
business, financial condition and results of operations.
Although all of our executives will execute agreements limiting
their ability to work for or consult with competitors if they
leave us, we do not have employment agreements with any of them.
Risks
Affecting Our Set-Top Business
We
depend on sales of set-top boxes for nearly all of our revenue,
and if sales of our set-top boxes decline, our business and
financial position will suffer.
Our historical revenues consist primarily of sales of our
set-top boxes. In addition, we currently derive, and expect to
continue to derive in the near term, nearly all of our revenue
from sales of our set-top boxes to ECC and Bell ExpressVu.
Continued market acceptance of our set-top boxes is critical to
our future success. If we are not able to expand sales of our
set-top boxes to other providers of digital television,
including cable operators, our growth prospects will be limited,
and our revenues will be substantially impacted if sales of our
set-top boxes to providers of satellite-delivered digital
television decline.
Our
business may suffer if direct-to-home satellite service
providers, who currently comprise our customer base, do not
compete successfully with existing and emerging alternative
platforms for delivering digital television, including
terrestrial networks, Internet protocol television and cable
television operators.
Our existing customers are direct-to-home satellite video
providers, which compete with cable television operators and
terrestrial broadcasters for the same pool of viewers. As
technologies develop, other means of delivering information and
entertainment to television viewers are evolving. For example,
some telecommunications companies, such as AT&T Inc. and
Verizon Communications, are seeking to compete with terrestrial
broadcasters, cable television network operators and
direct-to-home satellite services by offering IPTV, which allows
telecommunications companies to stream television programs
through telephone lines or fiber optic lines. To the extent that
the terrestrial television networks, telecommunications
companies and cable television network operators compete
successfully against direct-to-home satellite services for
viewers, the ability of our existing customer base to attract
and retain subscribers may be adversely affected. As a result,
demand for our satellite television set-top boxes could decline
and we may not be able to sustain our current revenue levels.
Our
future financial performance depends on our ability to penetrate
new markets for set-top boxes.
Our products were initially designed for, and have been deployed
mostly by, providers of satellite-delivered digital television.
To date, we have not made any sales of our set-top boxes to
cable operators. In addition, the cable set-top box market is
highly competitive and we expect competition to intensify in the
future. This competition may make it more difficult for us to
sell cable set-top boxes, and may result in pricing pressure,
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small profit margins, high sales and marketing expenses and
failure to obtain market share, any of which would likely
seriously harm our business, operating results and financial
condition.
Our
ability to sell our set-top boxes to cable television operators
depends on our ability to obtain licenses to use the conditional
access systems utilized by these cable television
operators.
Our commercial success in selling our set-top boxes to cable
television operators depends significantly on our ability to
obtain licenses to use the conditional access systems deployed
by these operators in our set-top boxes. In many cases, the
intellectual property rights to these conditional access systems
are owned by the set-top box manufacturer that currently
provides the cable television operator with its set-top boxes.
We cannot assure you that we will able to obtain any required
license on commercially favorable terms, if at all. If we do not
obtain the necessary licenses, we may be delayed or prevented
from pursuing the development of some potential products with
cable television operators. Our failure to obtain a license to
any technology that we may require to develop or commercialize
our set-top boxes with cable television operators will
significantly and negatively affect our business.
Growth
in our set-top box business likely requires expansion of our
sales to international customers; we may be unsuccessful in
expanding international sales.
We believe that in order to grow our set-top box revenue and
business and to build a large customer base, we must increase
sales of our set-top boxes in international markets. We have
limited experience selling our set-top boxes internationally. To
succeed in these sales efforts, we believe we must hire
additional sales personnel and develop and manage new
relationships with cable operators and other providers of
digital television in international markets. If we do not
succeed in our efforts to sell to these target markets and
customers, the size of our total addressable market may be
limited. This, in turn, would harm our ability to grow our
customer base and revenue.
The
set-top box business is extremely competitive.
Currently, there are many significant competitors in the set-top
box business including several established companies who have
sold set-top boxes to major cable operators in the United States
for many years. These competitors include companies such as
Motorola, Cisco Systems, which acquired Scientific Atlanta in
2006, and Pace. In addition, a number of rapidly growing
companies have recently entered the market, many of them with
set-top box offerings similar to our existing satellite set-top
box products. We also expect additional competition in the
future from new and existing companies who do not currently
compete in the market for set-top boxes. As the set-top box
business evolves, our current and potential competitors may
establish cooperative relationships among themselves or with
third parties, including software and hardware companies that
could acquire significant market share, which could adversely
affect our business. We also face competition from set-top boxes
that have been internally developed by digital video providers.
Any of these competitive threats, alone or in combination with
others, could seriously harm our business, operating results and
financial condition.
Our
set-top boxes are highly complex and may experience quality or
supply problems.
Our set-top boxes are extremely complex and can have defects in
design, manufacture or associated software. Set-top boxes often
contain bugs that can unexpectedly interfere with
their operation. Defects may also occur in components and
products that we purchase from third-parties. There can be no
assurance that we will be able to detect and fix all defects in
the set-top boxes that we sell. We could incur significant
expenses, lost revenue, and harm to our reputation if we fail to
detect or effectively address such issues through design,
testing or warranty repairs.
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The
average selling price of our set-top boxes may decrease, which
could negatively impact our operating results.
As a part of ECC, we have historically sold set-top boxes to ECC
at our cost. In order to operate a profitable business we will
be required to sell our set-top boxes at higher prices. It is
possible that our ability to increase the average selling prices
of our set-top boxes will be limited and that prices may
decrease in the future in response to competitive pricing
pressures, new product introductions by us or our competitors or
other factors. If we are unable to increase the average selling
prices of our set-top boxes, or if such selling prices decline,
and we are unable to respond in a timely manner by developing
and introducing new products and continually reducing our
product costs, our revenues and gross margin may be negatively
affected, which will harm our business and results of operations.
If
significant numbers of television viewers are unwilling to pay
for premium programming packages that utilize set-top boxes, we
may not be able to sustain our current revenue
level.
Our revenues are derived entirely from direct-to-home satellite
service providers who purchase our set-top boxes for their
subscribers. Therefore, we are substantially dependent upon the
ability of these providers to promote the delivery of premium
programming packages that utilize technology incorporated into
our set-top boxes, such as DVR technology and IPTV, to generate
future revenues.
However, direct-to-home satellite service providers may be
unsuccessful in promoting value-added services. Subscribers of
direct-to-home satellite services have historically purchased
stand-alone satellite receivers without the advanced set-top box
functionality that we offer. If direct-to-home satellite service
providers are unable to develop compelling reasons for their
subscribers to purchase our more advanced set-top boxes, it will
be difficult for us to sustain our historical revenues.
Our
reliance on several key components used in our set-top boxes
could restrict production and result in higher set-top box
costs.
We obtain many components for our set-top boxes from a single
supplier or a limited group of suppliers. Our reliance on a
single or limited group of suppliers, particularly foreign
suppliers, and our increasing reliance on subcontractors,
involves several risks. These risks include a potential
inability to obtain an adequate supply of required components,
and reduced control over pricing, quality, and timely delivery
of these components. We do not generally maintain long-term
agreements with any of our suppliers or subcontractors. An
inability to obtain adequate deliveries or any other
circumstances requiring us to seek alternative sources of supply
could affect our ability to ship our set-top boxes on a timely
basis, which could damage our relationships with current and
prospective customers and harm our business, resulting in a loss
of market share, and reduce revenues and income.
We generally maintain low inventory levels and do not make
binding long-term commitments to suppliers. As a result, it may
be difficult in the future to obtain components required for our
products or to increase the volume of components if demand for
our products increases.
Our
future growth depends on market acceptance of
HDTV.
Future demand for our set-top boxes will depend significantly on
the growing market acceptance of high definition television, or
HDTV. The effective delivery of HDTV will depend on digital
television operators developing and building infrastructure to
provide wide-spread HDTV programming. If the introduction or
adoption of HDTV or the deployment of HDTV is not as widespread
or as rapid as we or our customers expect, our revenue growth
will be limited.
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During
April 2006, a jury concluded that certain of our digital video
recorders, or DVRs, infringed a patent held by Tivo. If the
verdict is upheld on appeal and we are not able to successfully
implement alternative technology, we could be prohibited from
distributing DVRs, or be required to modify or eliminate certain
user-friendly DVR features that we currently offer to
consumers.
If the Tivo jury verdict is upheld on appeal, to the extent that
ECC does not indemnify us, we will be required to pay
substantial damages
and/or
license fees, and if we were not able to successfully implement
alternative technology (including the successful defense of any
challenge that such technology infringes Tivos patent), we
could also be prohibited from distributing DVRs, or be required
to modify or eliminate certain user-friendly DVR features that
we currently offer to consumers. In that event we would be at a
significant disadvantage to our competitors who could offer this
functionality and, while we would attempt to provide that
functionality through other manufacturers, the adverse affect on
our business could be material.
Risks
Affecting Our Fixed Satellite Services Business
We
currently face competition from established competitors in the
fixed satellite service business and may face competition from
others in the future.
In our fixed satellite services business, we will compete
against larger, well-established fixed satellite service
companies, such as Intelsat, SES Americom and Telesat Canada.
Because the satellite services industry is relatively mature,
our growth strategy depends largely on our ability to displace
current incumbent providers, which often have the benefit of
long-term contracts with customers. These long-term contracts
and other factors result in relatively high switching costs for
customers, making it more difficult for us to displace customers
from their current relationships with our competitors. In
addition, the supply of satellite capacity has increased in
recent years, which will make it more difficult for us to sell
our services in certain markets and to price our capacity at
acceptable levels. Competition may cause downward pressure on
prices and further reduce the utilization of our fleet capacity,
both of which would have an adverse effect on our financial
performance. Our fixed satellite services business also competes
with fiber optic cable and other terrestrial delivery systems,
which may have a cost advantage, particularly in point-to-point
applications where such delivery systems have been installed.
Our
satellites are subject to significant operational
risks.
Satellites are subject to significant operational risks while in
orbit. These risks include malfunctions, commonly referred to as
anomalies, that have occurred in our satellites and the
satellites of other operators as a result of various factors,
such as satellite manufacturers errors, problems with the
power systems or control systems of the satellites and general
failures resulting from operating satellites in the harsh
environment of space.
Although we work closely with the satellite manufacturers to
determine and eliminate the cause of anomalies in new satellites
and provide for redundancies of many critical components in the
satellites, we may experience anomalies in the future, whether
of the types described above or arising from the failure of
other systems or components.
Any single anomaly or series of anomalies could materially and
adversely affect our operations and revenues and our
relationship with current customers, as well as our ability to
attract new customers for our satellite services. In particular,
future anomalies may result in the loss of individual
transponders on a satellite, a group of transponders on that
satellite or the entire satellite, depending on the nature of
the anomaly. Anomalies may also reduce the expected useful life
of a satellite, thereby reducing the revenue that could be
generated by that satellite, or create additional expenses due
to the need to provide replacement or
back-up
satellites.
Meteoroid events pose a potential threat to all in-orbit
satellites. The probability that meteoroids will damage those
satellites increases significantly when the Earth passes through
the particulate stream left behind by comets. Occasionally,
increased solar activity also poses a potential threat to all
in-orbit satellites.
Some decommissioned spacecraft are in uncontrolled orbits which
pass through the geostationary belt at various points, and
present hazards to operational spacecraft, including our
satellites. We may be required to
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perform maneuvers to avoid collisions and these maneuvers may
prove unsuccessful or could reduce the useful life of the
satellite through the expenditure of fuel to perform these
maneuvers. The loss, damage or destruction of any of our
satellites as a result of an electrostatic storm, collision with
space debris, malfunction or other event could have a material
adverse effect on our business, financial condition and results
of operations.
Our
satellites have minimum design lives of 12 years, but could
fail or suffer reduced capacity before then.
Our ability to earn revenue depends on the usefulness of our
satellites. Each satellite has a limited useful life. A number
of factors affect the useful lives of the satellites, including,
among other things, the quality of their construction, the
durability of their component parts, the ability to continue to
maintain proper orbit and control over the satellites
functions, the efficiency of the launch vehicle used, and the
remaining on-board fuel following orbit insertion. Generally,
the minimum design life of each of our satellites is
12 years. We can provide no assurance, however, as to the
actual useful lives of the satellites.
In the event of a failure or loss of any of our satellites, we
may relocate another satellite and use it as a replacement for
the failed or lost satellite, which could have a material
adverse effect on our business, financial condition and results
of operations. Such a relocation would require FCC approval and,
among other things, a showing to the FCC that the replacement
satellite would not cause additional interference compared to
the failed or lost satellite. We cannot be certain that we could
obtain such FCC approval.
Our
satellites are subject to risks related to launch.
Satellite launches are subject to significant risks, including
launch failure, incorrect orbital placement or improper
commercial operation. Certain launch vehicles that may be used
by us have either unproven track records or have experienced
launch failures in the past. The risks of launch delay and
failure are usually greater when the launch vehicle does not
have a track record of previous successful flights. Launch
failures result in significant delays in the deployment of
satellites because of the need both to construct replacement
satellites, which can take more than two years, and to obtain
other launch opportunities. Such significant delays could
materially and adversely affect our ability to generate
revenues. If we were unable to obtain launch insurance, or
obtain launch insurance at rates we deem commercially
reasonable, and a significant launch failure were to occur, it
could have a material adverse effect on our ability to generate
revenues and fund future satellite procurement and launch
opportunities. In addition, the occurrence of launch failures
whether on our satellites or those of others may significantly
reduce the availability of launch insurance on our satellites or
make launch insurance premiums uneconomical.
Our
fixed satellite services business is subject to risks of adverse
government regulation.
Our satellite services business is subject to varying degrees of
regulation in the United States by the FCC, and other entities,
and in foreign countries by similar entities. These regulations
are subject to the political process and have been in constant
flux over the past decade. Moreover, a substantial number of
foreign countries in which we have, or may in the future make,
an investment, regulate, in varying degrees, the ownership of
satellites and the distribution and ownership of programming
services and foreign investment in programming companies.
Further material changes in law and regulatory requirements must
be anticipated, and there can be no assurance that our business
and the business of our affiliates will not be adversely
affected by future legislation, new regulation or deregulation.
Our
business depends substantially on FCC licenses that can expire
or be revoked or modified and applications that may not be
granted.
If the FCC were to cancel, revoke, suspend or fail to renew any
of our licenses or authorizations, it could have a material
adverse effect on our business, financial condition and results
of operations. Specifically, loss of a frequency authorization
would reduce the amount of spectrum available to us, potentially
reducing the amount of services available to our customers. The
materiality of such a loss of authorizations would vary based
upon,
25
among other things, the location of the frequency used or the
availability of replacement spectrum. In addition, Congress
often considers and enacts legislation that could affect us, and
FCC proceedings to implement the Communications Act and enforce
its regulations are ongoing. We cannot predict the outcomes of
these legislative or regulatory proceedings or their effect on
our business.
We may
not be aware of certain foreign government
regulations.
Because regulatory schemes vary by country, we may be subject to
regulations in foreign countries of which we are not presently
aware. If that were to be the case, we could be subject to
sanctions by a foreign government that could materially and
adversely affect our ability to operate in that country. We
cannot assure you that any current regulatory approvals held by
us are, or will remain, sufficient in the view of foreign
regulatory authorities, or that any additional necessary
approvals will be granted on a timely basis or at all, in all
jurisdictions in which we wish to operate new satellites, or
that applicable restrictions in those jurisdictions will not be
unduly burdensome. The failure to obtain the authorizations
necessary to operate satellites internationally could have a
material adverse effect on our ability to generate revenue and
our overall competitive position.
We, our customers and companies with which we do business may be
required to have authority from each country in which we or they
provide services or provide our customers use of our satellites.
Because regulations in each country are different, we may not be
aware if some of our customers
and/or
companies with which we do business do not hold the requisite
licenses and approvals.
Our
dependence on outside contractors could result in delays related
to the design, manufacture and launch of our new satellites,
which could in turn adversely affect our operating
results.
There are a limited number of manufacturers that are able to
design and build satellites according to the technical
specifications and standards of quality we require, including
Astrium Satellites, Boeing Satellite Systems, Lockheed Martin,
Loral and Thales Alenia Space. There are also a limited number
of agencies able to launch such satellites, including
International Launch Services, Arianespace, Lockheed Martin
Launch Systems and Sea Launch Company. The loss of any of our
manufacturers or launch agencies could result in the delay of
the design, building or launch of our satellites. Even if
alternate suppliers for such services are available, we may have
difficulty identifying them in a timely manner, we may incur
significant additional expense in changing suppliers, and this
could result in difficulties or delays in the design,
manufacturing or launch of our satellites. Any delays in the
design, building or launch of our satellites could have a
material adverse effect on our business, financial condition and
results of operations.
We
currently have no commercial insurance coverage on the
satellites we own.
We do not insure our owned satellites against in-orbit or other
failures. The loss of a satellite or other satellite
malfunctions or anomalies could have a material adverse effect
on our financial performance which we may not be able to
mitigate by using available capacity on other satellites. In
addition, the loss of a satellite or other satellite
malfunctions or anomalies could affect our ability to comply
with FCC regulatory obligations and our ability to fund the
construction or acquisition of replacement satellites for our
in-orbit fleet in a timely fashion, or at all.
Risks
Relating to the Spin-Off
Our
agreements with ECC may not reflect what two unaffiliated
parties might have agreed to.
The allocation of assets, liabilities, rights, indemnifications
and other obligations between ECC and us under the separation
and ancillary agreements we will enter into with ECC do not
necessarily reflect what two unaffiliated parties might have
agreed to. Had these agreements been negotiated with
unaffiliated third parties, their terms may have been more
favorable, or less favorable, to us.
26
The
spin-off could result in significant tax
liability.
ECC has requested a private letter ruling from the IRS to the
effect that, among other things, the spin-off, together with
certain related transactions, will qualify for tax-free
treatment under Sections 355 and 368(a)(1)(D) of the Code.
In addition, the spin-off is conditioned upon the receipt by ECC
of the opinion of White & Case LLP on the distribution
date (which condition ECC may waive) substantially to the effect
that, among other things, the spin-off, together with certain
related transactions, will qualify as reorganizations for
U.S. federal income tax purposes under Sections 355
and 368(a)(1)(D) of the Code, and that, accordingly for
U.S. federal income tax purposes, no gain or loss will be
recognized by, and no amount will be included in the income of,
a holder of ECC common stock upon the receipt of shares of our
common stock pursuant to the spin-off, except to the extent such
holder receives cash in lieu of fractional shares of our common
stock. See The Spin-Off Material
U.S. Federal Income Tax Consequences of the Spin-Off.
Although a private letter ruling from the IRS generally is
binding on the IRS, if the factual representations or
assumptions made in the letter ruling request are untrue or
incomplete in any material respect, we will not be able to rely
on the ruling. Furthermore, the IRS will not rule on whether a
distribution satisfies certain requirements necessary to obtain
tax-free treatment under Section 355 of the Code. Rather,
the ruling is based upon representations by ECC that these
conditions have been satisfied, and any inaccuracy in such
representations could invalidate the ruling. ECC has made it a
condition to the spin-off that ECC obtain the opinion of counsel
described above. The opinion will be based on, among other
things, certain assumptions and representations made by ECC and
us, which if incorrect or inaccurate in any material respect
would jeopardize the conclusions reached by counsel in its
opinion. The opinion will not be binding on the IRS or the
courts. See The Spin-Off Material
U.S. Federal Income Tax Consequences of the Spin-Off
for more information regarding the private letter ruling and the
tax opinion.
If the spin-off does not qualify for tax-free treatment for
U.S. federal income tax purposes, then, in general, ECC
would be subject to tax as if it had sold the common stock of
our company in a taxable sale for its fair market value.
ECCs shareholders would be subject to tax as if they had
received a distribution equal to the fair market value of our
common stock that was distributed to them, which would be
treated as a taxable dividend to the extent of ECCs
earnings and profits. It is expected that the amount of any such
taxes to ECCs shareholders and ECC would be substantial.
See The Spin-Off Material U.S. Federal
Income Tax Consequences of the Spin-Off.
A
potential indemnity liability to ECC if the spin-off is treated
as a taxable transaction could materially adversely affect our
company.
In the tax sharing agreement with ECC, we have agreed to
indemnify ECC for any losses, claims, and expenses (including
any resulting taxes) resulting from the spin-off or certain
related transactions failing to qualify as tax-free transactions
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. For a more detailed discussion, see Certain
Intercompany Agreements Agreements with
ECC Tax Sharing Agreement. Our indemnification
obligations to ECC and its subsidiaries are not limited in
amount or subject to any cap. If we are required to indemnify
ECC and its subsidiaries under the circumstances set forth in
the tax sharing agreement, we may be subject to substantial
liabilities.
We
will have potential conflicts of interest with ECC after the
spin-off.
Questions relating to conflicts of interest may arise between
ECC and us in a number of areas relating to our past and ongoing
relationships. Areas in which conflicts of interest between ECC
and us could arise include, but are not limited to, the
following:
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Cross officerships, directorships and stock
ownership.
We will continue to have significant
overlap in directors and executive officers with ECC, which may
lead to conflicting interests. At the time of the spin-
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off, certain of our executive officers, including Charles W.
Ergen, our Chairman and Chief Executive Officer, will continue
to serve as executive officers of ECC. Three of these
individuals will provide us services pursuant to a management
services agreement we will enter into with ECC. Our board of
directors will include persons who are members of the board of
directors of ECC, including Mr. Ergen, who will serve as
the Chairman of ECC and us. The executive officers and the
members of our board of directors who overlap with ECC will have
fiduciary duties to ECCs shareholders. Pursuant to the
management services agreement, three of these officers will be
paid by ECC even if their duties include work for EHC.
Therefore, these individuals may have actual or apparent
conflicts of interest with respect to matters involving or
affecting each company. For example, there will be the potential
for a conflict of interest when we or ECC look at acquisitions
and other corporate opportunities that may be suitable for both
companies. In addition, after the spin-off, many of our
directors and officers will continue to own ECC stock and
options to purchase ECC stock, which they acquired or were
granted prior to the spin-off, including Mr. Ergen, who
will immediately following the spin-off beneficially own
approximately 50.0% of the total equity and control
approximately 80.0% of the voting power of ECC and us. These
ownership interests could create actual, apparent or potential
conflicts of interest when these individuals are faced with
decisions that could have different implications for our company
and ECC.
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Intercompany agreements related to the
spin-off.
We will enter into certain agreements
with ECC pursuant to which it will provide us certain
management, administrative, accounting, tax, legal and other
services, for which we will reimburse ECC for cost plus an
agreed upon margin. In addition, we will enter into a number of
intercompany agreements covering matters such as tax sharing and
our responsibility for certain liabilities previously undertaken
by ECC for certain of our businesses. We will also enter into
certain commercial agreements with ECC pursuant to which we
will, among other things, be obligated to sell at specified
prices, set-top boxes and related equipment to ECC. The terms of
these agreements were established while we were a wholly-owned
subsidiary of ECC and were not the result of arms length
negotiations. In addition, conflicts could arise in the
interpretation or any extension or renegotiation of these
existing agreements after the completion of the spin-off.
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Future intercompany transactions.
In the
future, ECC 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 ECC and us and, when appropriate, subject
to the approval of the independent directors on our board or a
committee of disinterested directors, there can be no assurance
that the terms of any such transactions will be as favorable to
us or our subsidiaries or affiliates as may otherwise be
obtained in arms length negotiations.
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Business Opportunities.
ECC will retain its
interests in various U.S. and international companies that
have subsidiaries or controlled affiliates that own or operate
domestic or foreign services that may compete with services
offered by our businesses. We may also compete with ECC when we
participate in auctions for spectrum or orbital slots for our
satellites.
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We may not be able to resolve any potential conflicts, and, even
if we do so, the resolution may be less favorable to us than if
we were dealing with an unaffiliated party.
We do not have any agreements with ECC that restrict us from
selling our products to competitors of ECC. We also do not have
any agreements with ECC 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 ECC who are also officers
or directors of us. This policy could restrict our ability to
take advantage of certain corporate opportunities. The
principles for resolving such potential conflicts of interest
are described under Description of Our Capital
Stock Provisions of Our Articles of Incorporation
Relating to Related-Party Transactions and Corporate
Opportunities.
We may
incur material costs and expenses as a result of our separation
from ECC.
We may incur costs and expenses greater than those we currently
incur as a result of our separation from ECC. These increased
costs and expenses may arise from various factors, including
financial reporting, costs
28
associated with complying with federal securities laws
(including compliance with the Sarbanes-Oxley Act of 2002), tax
administration and human resources related functions. Although
ECC will continue to provide many of these services to us under
the services agreement, such services are for a limited period
of time. We cannot assure you that these costs will not be
material to our business.
Substantial
sales of our common stock may occur in connection with or
following the spin-off, which could cause our share price to
decline.
The EHC Class A common stock that is distributed in the
spin-off generally may be sold immediately in the public market.
We expect that some of our shareholders, including possibly some
of our larger shareholders, will sell the Class A common
stock that they receive in the spin-off because, among other
reasons, our business profile or market capitalization as an
independent, publicly-traded company do not fit their investment
objectives. Moreover, index funds hold ECC Class A common
stock. Unless we are included in these indices from the date of
the spin-off, these index funds will be required to sell our
Class A common stock that they receive in the distribution.
The sales of significant amounts of our Class A common
stock or the perception in the market that these sales will
occur could adversely affect the market price of our
Class A common stock.
Risks
Relating to our Common Stock and the Securities Market
We
cannot be certain that an active trading market will develop or
be sustained after the spin-off, and following the spin-off our
stock price may fluctuate significantly.
We cannot assure you that an active trading market will develop
or be sustained for our common stock after the spin-off. Nor can
we predict the prices at which classes of our common stock may
trade after the spin-off. Similarly, we cannot predict the
effect of the spin-off on the trading prices of ECCs
common stock or whether the market value of the shares of a
class of our common stock and the shares of the same class of
ECCs common stock held by a shareholder after the spin-off
will be less than, equal to or greater than the market value of
the shares of that class of ECCs common stock held by such
shareholder prior to the spin-off.
The market price of our common stock may fluctuate significantly
due to a number of factors, some of which may be beyond our
control, including:
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actual or anticipated fluctuations in our operating results;
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changes in earnings estimated by securities analysts or our
ability to meet those estimates;
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the operating and stock price performance of comparable
companies; and
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domestic and foreign economic conditions.
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If,
following the spin-off, we are unable to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of
2002, or our internal control over financial reporting is not
effective, the reliability of our financial statements may be
questioned and our stock price may suffer.
Section 404 of the Sarbanes-Oxley Act of 2002 requires any
company subject to the reporting requirements of the
U.S. securities laws to do a comprehensive evaluation of
its and its consolidated subsidiaries internal control
over financial reporting. To comply with this statute, we will
eventually be required to document and test our internal control
procedures, our management will be required to assess and issue
a report concerning our internal control over financial
reporting, and our independent auditors will be required to
issue an opinion on managements assessment of those
matters. The rules governing the standards that must be met for
management to assess our internal control over financial
reporting are complex and require significant documentation,
testing and possible remediation to meet the detailed standards
under the rules. During the course of its testing, our
management may identify material weaknesses or deficiencies
which may not be remedied in time to meet the deadline imposed
by the Sarbanes-Oxley Act. If our management cannot favorably
assess the effectiveness of our internal control over financial
reporting or our auditors identify
29
material weaknesses in our internal controls, investor
confidence in our financial results may weaken, and our stock
price may suffer.
It may
be difficult for a third party to acquire us, even if doing so
may be beneficial to our shareholders.
Certain provisions of our certificate of incorporation and
bylaws may discourage, delay or prevent a change in control of
our company that a shareholder may consider favorable. These
provisions include the following:
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authorizing a capital structure with multiple classes of common
stock: a Class A that entitles the holders to one vote per
share, a Class B that entitles the holders to ten votes per
share, a Class C that entitles the holders to one vote per
share, except upon a change in control of our company in which
case the holders of Class C are entitled to ten votes per
share and a non-voting Class D;
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authorizing the issuance of blank check preferred
stock, which could be issued by our board of directors to
increase the number of outstanding shares and thwart a takeover
attempt;
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limiting who may call special meetings of shareholders;
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establishing advance notice requirements for nominations of
candidates for election to our board of directors or for
proposing matters that can be acted upon by shareholders at
shareholder meetings;
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the existence of authorized and unissued stock which would allow
our board of directors to issue shares to persons friendly to
current management, thereby protecting the continuity of its
management, or which could be used to dilute the stock ownership
of persons seeking to obtain control of us.
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After
the spin-off, we will be controlled by one principal
shareholder.
Immediately after the spin-off, Charles W. Ergen, our Chairman
and Chief Executive Officer, will beneficially own approximately
80.0% of our total equity securities and possess approximately
50.0% of the total voting power. Thus, Mr. Ergen will have
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. Ergens voting power, we will be a
controlled company as defined in the Nasdaq listing
rules and, therefore, will not be 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 Boards selection, either by a
majority of the independent directors or a nominating committee
composed solely of independent directors. Mr. Ergen will
also beneficially own approximately 50.0% of the total equity
and 80.0% of the total voting power of ECC and will continue to
be the Chairman and Chief Executive Officer of ECC, which will
directly and through its subsidiaries continue to be our largest
customer, accounting for a substantial majority of our revenues.
Holders
of any single class of our common stock may not have any
remedies if any action by our directors or officers has an
adverse effect on only that series of our common
stock.
Principles of Nevada law and the provisions of our certificate
of incorporation may protect decisions of our board of directors
that have a disparate impact upon holders of any single class of
our common stock. Under Nevada law, the board of directors has a
duty to act with due care and in the best interests of all of
our shareholders, including the holders of all classes of our
common stock. Principles of Nevada law established in cases
involving differing treatment of multiple classes or series of
stock provide that a board of directors owes an equal duty to
all common shareholders regardless of class or series and does
not have separate or additional duties to any group of
shareholders. As a result, in some circumstances, our directors
may be required to make a decision that is adverse to the
holders of one class of our common stock. Under the principles
of Nevada law referred to above, you may not be able to
challenge these decisions if our board of directors is
disinterested and adequately informed with respect to these
decisions and acts in good faith and in the honest belief that
it is acting in the best interests of all of our shareholders.
30
We do
not intend to pay dividends for the foreseeable
future.
We have never declared or paid any dividends on our common
stock. We intend to retain any earnings to finance the operation
and expansion of our business, and we do not anticipate paying
any cash dividends in the future. As a result, you may only
receive a return on your investment in our common stock if the
market price of our common stock increases.
If
securities or industry analysts do not publish research or
publish unfavorable research about our business, our stock price
and trading volume could decline.
The trading market for our common stock will depend in part on
any research reports that securities or industry analysts
publish about us or our business. After our separation from ECC,
if no securities or industry analysts initiate coverage of us,
the trading price for our stock may be negatively impacted. In
the event securities or industry analysts cover us and one or
more of these analysts downgrade our stock or publish
unfavorable reports about our business, our stock price would
likely decline. In addition, if any securities or industry
analysts cease coverage of our company or fail to publish
reports on us regularly, demand for our stock could decrease,
which could cause our stock price and trading volume to decline.
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This information statement contains certain forward-looking
statements regarding business strategies, market potential,
future financial performance and other matters. In particular,
information included under the headings The
Spin-Off, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business contain forward-looking statements.
Forward-looking statements inherently involve many risks and
uncertainties that could cause actual results to differ
materially from those projected in these statements. Where, in
any forward-looking statement, we express an expectation or
belief as to future results or events, such expectation or
belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the
expectation or belief will result or be achieved or
accomplished. Please refer to Risk Factors for some
but not all of the factors that could cause actual results or
events to differ materially from those anticipated.
All cautionary statements made herein should be read as being
applicable to all forward-looking statements wherever they
appear. In this connection, investors should consider the risks
described herein and should not place undue reliance on any
forward-looking statements.
These forward-looking statements and such risks, uncertainties
and other factors speak only as of the date of this information
statement, and we expressly disclaim any obligation or
undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein, or to reflect any
change in our expectations with regard thereto or any other
change in events, conditions or circumstances on which any such
statement is based.
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Background
The board of directors of ECC has approved the spin-off of
EchoStar Holding Corporation, a wholly owned subsidiary of ECC.
EHC will hold the technology and certain infrastructure assets
of ECC. ECC will retain its consumer business, including DISH
Network, its U.S. consumer pay-TV business. In making its
determination, the ECC board of directors met numerous times and
considered, among other things, the continuation of ECCs
current operating strategy, and concluded that we and ECC would
be able to compete more effectively and have the opportunity to
achieve better revenue growth and profitability as a result of
the
spin-off.
Prior to the spin-off, we were a wholly-owned subsidiary of ECC.
Following a series of distributions and contributions from ECC
and its subsidiaries to us, we and the companies that will be
our subsidiaries after the spin-off, which we refer to as
EchoStar Holding Corporation, or EHC, will be engaged in the
digital set-top box business and the fixed satellite services
business.
To accomplish the spin-off, ECC will distribute all of its
equity interest in us, consisting of shares of our Class A
common stock and our Class B common stock, to ECCs
shareholders on a pro rata basis based on the class of ECC
common stock held by each such shareholder. Following the
spin-off, ECC will cease to own any equity interest in us, and
we will operate independently from ECC. No vote of ECCs
shareholders is required or being sought in connection with the
spin-off, and ECCs shareholders will not have any
appraisal rights in connection with the spin-off.
The distribution of our common stock as described in this
information statement is subject to the satisfaction or waiver
of certain conditions. For a more detailed description of these
conditions, see Conditions to the
Spin-Off.
Reasons
for the Spin-off
The ECC board of directors regularly reviews the operations that
ECC conducts to ensure that ECCs resources are being put
to use in a manner that is in the best interests of ECC and its
shareholders. As a result of this ongoing evaluation, ECC
concluded that some of its existing non-core businesses were
being undervalued by analysts and the market generally, and that
these businesses would be in a better competitive position if
they were operated as a separate entity from DISH Network.
Neither we nor ECC can assure you that, following the spin-off,
any benefits will be realized to the extent we anticipate or at
all. The board of directors of ECC considered the following
potential benefits in making its determination to consummate the
spin-off:
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Creating effective management incentives tied to each of
EHCs and ECCs performance and increasing the ability
to attract and retain personnel
. The separation
will permit the creation of equity securities, including options
and restricted share units, for each of ECC and our company with
a value that is expected to reflect more closely the efforts and
performance of each companys management. These equity
securities will enable each separate, publicly-traded company to
provide incentive compensation arrangements for its specific
employee base that is directly related to the market performance
of each companys respective Class A common stock. ECC
believes these equity-based compensation arrangements will
provide enhanced incentives for performance and improve the
ability for each of EHC and ECC to attract, retain and motivate
qualified employees. Equity based compensation is believed to be
particularly important in the case of emerging opportunities in
our fixed satellite services and international opportunities
divisions, which are young businesses in dynamic markets with
high potential, the achievements of which we believe can be
enhanced greatly through incentive compensation arrangements.
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Creating opportunities to effectively develop and finance
expansion plans.
The spin-off will allow each of
ECC and our company to develop financing strategies and capital
structures designed to correspond better to the underlying
fundamentals of its businesses and the industry in which it
operates. As a separate, publicly-traded company, our capital
structure is expected to facilitate selective acquisitions,
joint ventures, investments and financings, possibly using our
common stock as currency, as well as to facilitate strategic
alliances and internal expansion that are important for us to
remain competitive in our industry. Moreover,
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the spin-off may provide both ECC and EHC with greater
flexibility in raising capital and responding to strategic
opportunities and to avoid competing demands for capital.
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Increasing the market value of the
companies.
Although there can be no assurance,
ECC believes that, over time, following the separation, the
common stock of the separate, publicly-traded companies should
have a higher aggregate market value, on a fully distributed
basis and assuming the same market conditions, than if ECC were
not to complete the separation. The ECC board of directors
believes that this increase in the market value of the common
stock, if achieved, should permit each separate, publicly-traded
company to effect acquisitions, joint ventures and investments
with common stock in a manner that preserves capital with less
dilution of the existing shareholders interests than would
occur by issuing pre-distribution ECC common stock.
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Allowing each company to separately pursue the business
strategies that best suit its long-term
interest.
Each of ECC and EHC will be able to
focus its efforts on its strategic priorities, its businesses
and growth opportunities, which will allow each company to
respond more quickly and efficiently to developments in the
industry or industries in which it operates and which may
facilitate the potential expansion and growth of each company.
As a separate, publicly-traded company, the separation will
permit us to focus on, among other things, our set-top box
business, our international opportunities and investments, and
particularly our fixed satellite services business, without the
need to consider the strategic direction of ECC.
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Creating separate companies that have different financial
characteristics, which may appeal to different investor
bases.
Establishing separate, publicly-traded
companies will allow investors to make independent investment
decisions with respect to ECC and us. Investment in one or the
other company may appeal to investors with different goals,
interests and concerns.
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The board of directors of ECC also considered the costs and
risks associated with the spin-off. The board of directors of
ECC considered, among other factors, any potential negative
impact on ECCs credit ratings as a result of the
divestiture of assets that will be contributed to us; the
possibility that either we or ECC may experience disruptions in
our respective businesses as a result of the spin-off; actual or
perceived conflicts of interest that may arise between ECC and
us in a number of areas relating to our past and ongoing
relationships, including: (i) cross officerships,
directorships and stock ownership, (ii) intercompany
transactions, (iii) intercompany agreements and
(iv) business opportunities; the risk that the combined
trading prices of our common stock and ECCs common stock
after the spin-off may be lower than the trading price of
ECCs common stock before the spin-off; the loss of
synergies from operating as one company; and the additional
legal, accounting and administrative costs associated with our
becoming a separate, publicly-traded company. In view of the
wide variety of factors considered in connection with the
evaluation of the spin-off and the complexity of these matters,
the ECC board of directors did not find it useful to, and did
not attempt to quantify, rank or otherwise assign relative
weights to the factors considered. The board of directors of ECC
concluded, however, that the potential benefits of the spin-off
outweigh the potential negative factors, and that separating the
non-core business of ECC from ECC in the form of a tax-free
distribution to ECC shareholders is appropriate and advisable
for ECC and its shareholders.
Manner of
Effecting the Spin-Off
ECC will effect the spin-off by distributing to its shareholders
as a dividend:
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One share of our Class A common stock for every five shares
of ECC Class A common stock,
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and
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One share of our Class B common stock for every five shares
of ECC Class B common stock,
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in each case, owned of record by each shareholder on the record
date.
Prior to the spin-off, ECC will deliver all of the issued and
outstanding shares of our Class A common stock and
Class B common stock to the distribution agent. On or about
January 1, 2008, which we refer to as the distribution
date, the distribution agent will effect delivery of the shares
of our common stock issuable in the spin-off electronically, as
of the distribution date, to you or to your bank or brokerage
firm on your behalf by
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way of direct registration in book-entry form. Registration in
book-entry form refers to a method of recording share ownership
when no physical share certificates are issued to shareholders,
as is the case in this distribution.
Commencing on or shortly after the distribution date, if you
hold physical share certificates that represent your common
stock of ECC and you are the registered holder of the ECC shares
represented by those certificates, the distribution agent will
mail to you an account statement that indicates the number of
shares of our common stock that have been registered in
book-entry form in your name.
Please note that if any shareholder of ECC on the record date
sells shares of ECC common stock after the record date but on or
before the distribution date, the buyer of those shares, and not
the seller, will become entitled to receive the shares of our
common stock issuable in respect of the shares sold. See
Trading Between the Record Date and the
Distribution Date below for more information.
Most ECC shareholders hold their common stock of ECC through a
bank or brokerage firm. In such cases, the bank or brokerage
firm would be said to hold the shares in street name
and ownership would be recorded on the bank or brokerage
firms books. If you hold your ECC common stock through a
bank or brokerage firm, your bank or brokerage firm will credit
your account for the common stock of our company that you are
entitled to receive in the spin-off. If you have any questions
concerning the mechanics of having shares held in street
name, we encourage you to contact your bank or brokerage
firm.
Shareholders of ECC are not being asked to take any action in
connection with the spin-off. No shareholder approval of the
spin-off is required or being sought. We are not asking you for
a proxy, and you are requested not to send us a proxy. You are
also not being asked to surrender any of your shares of ECC
common stock for shares of our common stock. The number of
outstanding shares of ECC common stock will not change as a
result of the spin-off.
Interests
of EHC directors and officers in the spin-off
In connection with the spin-off, EHC directors and executive
officers have interests in the spin-off that are different from,
or in addition to, your interests as a shareholder, and that may
present actual or potential conflicts of interest. These
interests include:
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vesting of EHC stock options and restricted stock unit awards
held by EHC directors and executive officers;
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payment of base compensation and annual bonuses to EHC executive
officers;
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indemnification of EHC directors and executive officers pursuant
to EHCs articles of incorporation and bylaws;
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Charles W. Ergen, the Chairman and Chief Executive Officer of
ECC, will also be the Chairman and Chief Executive Officer of
EHC following the spin-off; and
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five directors from ECCs board of directors after the
distribution, currently expected to be Charles W. Ergen, Steven
R. Goodbarn, David K. Moskowitz, Tom A. Ortloff and Carl Vogel,
will be designated by EHC to serve on its board of directors. In
addition, two EHC directors, Michael T. Dugan and
C. Michael Schroeder, will resign from the board of
directors of ECC on or prior to the distribution date.
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Treatment
of Fractional Shares
The distribution agent will not distribute any fractional shares
in connection with the spin-off. Instead, any shareholder who
would be entitled to receive a fractional share of our
Class A common stock will instead receive a cash payment in
lieu of such fractional share. The distribution agent will
aggregate all fractional shares into whole shares and sell the
whole shares in the open market at prevailing market prices. The
distribution agent will then distribute the aggregate net cash
proceeds of the sales pro rata to each holder who otherwise
would have been entitled to receive a fractional share. The
distribution agent, in its sole discretion, without any
influence by ECC or us, will determine when, how, through which
broker-dealer and at what price to sell the whole shares. We
will reimburse the distribution agent for the cost of any
brokerage fees incurred
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by the distribution agent in connection with these sales, which
we expect to be reasonable and customary for transactions of
this type. The distribution agent and any broker-dealer used by
the distribution agent will not be an affiliate of either ECC or
us. Any shareholder who would be entitled to receive a
fractional share of our Class B common stock will have such
fractional share rounded off and will instead receive the number
of whole shares they are entitled to receive without regard to
any fractional share. The elimination of fractional shares of
our Class B common stock is due the limited number of
Class B shareholders and the small number of fractional
shares that would therefore result from the spin-off, making an
aggregation and public sale of such fractional shares
impractical.
The distribution agent will distribute a check to each record
holder of Class A shares representing the cash amount
deliverable in lieu of the record holders fractional share
interest as soon as practicable following the calculation of
these cash amounts. If you hold your shares through a bank or
brokerage firm, your bank or brokerage firm will receive, on
your behalf, your pro rata share of the aggregate net cash
proceeds of the sales and will electronically credit your
account for your share of such proceeds. No interest will be
paid on any cash distributed in lieu of fractional shares. The
receipt of cash in lieu of fractional shares will generally be
taxable to the recipient shareholders. See
Material U.S. Federal Income Tax
Consequences of the Spin-Off below for more information.
Treatment
of ECC Stock Incentive Awards
Options to purchase shares of ECC Class A common stock,
which we refer to as ECC Options, and restricted stock units
with respect to shares of ECC Class A common stock, which
we refer to as ECC RSUs have been granted to various directors,
officers and employees of ECC and certain of its subsidiaries
pursuant to the EchoStar Communications Corporation 1995 Stock
Incentive Plan, the Amended and Restated EchoStar Communications
Corporation 1999 Stock Incentive Plan, the Amended and Restated
EchoStar Communications 2001 Nonemployee Director Stock Option
Plan and the EchoStar Communications Corporation 1995
Nonemployee Director Stock Option Plan and various other stock
incentive plans administered by the compensation committee of
ECCs board of directors. Under the anti-dilution
provisions of the applicable plans, the ECC compensation
committee has the authority to make equitable adjustments to
outstanding ECC Options and ECC RSUs in the event of certain
transactions, including the distribution of our common stock in
connection with the spin-off. The ECC compensation committee has
determined to make various adjustments to outstanding ECC
Options and ECC RSUs, as described below, to preserve the
economic benefits of the original award following the spin-off.
These adjustments will be made in the same manner for all
holders of ECC options and other stock-based awards of ECC,
including ECCs executive officers and directors. Any
options to purchase, or awards relating to, shares of our common
stock issued in connection with such adjustments will be
obligations of our company. All options exercisable for, and all
awards relating to, shares of ECC Class A common stock,
regardless of any adjustment, will remain obligations of ECC.
We intend to file a registration statement with respect to
shares of our common stock issuable upon exercise, or vesting,
of the equity awards that we issue, as soon as practicable
following the effective date of this registration statement.
Option
Awards
As of the distribution date, each ECC Option will be divided
into two options as follows:
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an option (which we refer to as an EHC Option) to purchase
shares of our Class A common stock, exercisable for the
number of shares of our Class A common stock that would
have been issued in the spin-off in respect of the shares of ECC
Class A common stock subject to the applicable ECC Option,
if such ECC Option had been exercised in full immediately prior
to the record date, rounded down to the nearest
whole-share; and
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an option (which we refer to as an Adjusted ECC option) to
purchase shares of ECC Class A common stock, exercisable
for the same number of shares of ECC Class A common stock
that are exercisable with respect to the outstanding ECC Option,
rounded down to the nearest whole-share.
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The aggregate exercise price of each outstanding ECC option will
be allocated between the EHC Option and the Adjusted ECC Option
as follows:
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each EHC Option will have an exercise price equal to
(A) the exercise price of the ECC option prior to the
distribution date multiplied by (B) (i) the closing trading
price of EHC Class A common stock on the first regular
trading day after the distribution date divided by (ii) the
sum of (a) the closing trading price of ECC Class A
common stock on the first regular trading day after the
distribution date and (b) the closing trading price of EHC
Class A common stock on the first regular trading day after
the distribution date multiplied by 0.20, which we refer to as
the dividend ratio for EHC Class A common stock distributed
in the spin-off, rounded up to the nearest whole-cent.
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each Adjusted ECC Option will have an exercise price equal to
(A) the exercise price of the ECC option prior to the
distribution date multiplied by (B) (i) the closing trading
price of ECC Class A common stock on the first regular
trading day after to the distribution date divided by
(ii) the sum of (a) the closing trading price of ECC
Class A common stock on the first regular trading day after
to the distribution date and (b) the closing trading price
of EHC Class A common stock on the first regular trading
day after the distribution date multiplied by the dividend
ratio, rounded up to the nearest whole-cent.
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Set forth below is an example of how the allocation would work.
Assume that a current employee, executive officer or director of
ECC holds an option to purchase 100 shares of ECC
Class A common stock with an exercise price of $10.00 per
share. Also assume that the closing trading price of ECC common
stock on the first regular trading day after the distribution
date is $35.00, the closing trading price of EHC common stock on
the first regular trading day after the distribution date is
$25.00 and 0.20 of a share of EHC Class A common stock has
been issued for every share of ECC Class A common stock
held by a shareholder of ECC. The EHC Option would be an option
to purchase 20 shares of EHC Class A common stock
(
i.e.
, 100 x 0.20) with an exercise price of $6.25 per
share (
i.e.
, $10 * ($25 / ($35 + $5))). The
Adjusted ECC Option would be an option to purchase
100 shares of ECC Class A common stock with an
exercise price of $8.75 per share (
i.e.
, $10 *
($35 / ($35 + $5))). Assuming that the value of ECC
immediately prior to the allocation was equal to the combined
value of ECC and EHC following the spin-off (
i.e.
, ($35 +
($25 * 0.2)), or $40), the intrinsic value of the ECC stock
option prior to the allocation was $3,000 (
i.e.
,
($40 − $10) * 100), and after the allocation, the
intrinsic value of the EHC Option and Adjusted ECC Option, taken
together, would still be $3,000 (
i.e.
, ($25 −
$6.25) * 20, or $375)
plus
(
i.e.
,
($35 − $8.75) * 100, or $2,625).
Each Adjusted ECC Option and EHC Option will take into account
all employment with both ECC and EHC for purposes of determining
when the option vests and terminates. Fractional shares will be
adjusted or compensated by ECC as appropriate in the sole
discretion of the ECC compensation committee. All other terms
and conditions of the EHC Option and the Adjusted ECC Option
will generally be the same as the outstanding ECC Option, in all
material respects.
As a result of these adjustments, certain persons who are
employed by or associated with ECC immediately following the
distribution date will hold EHC Options, and certain persons who
will be employed by or associated with our company immediately
following the distribution date may hold Adjusted ECC Options.
Regardless of these employment or other relationships, ECC will
not be responsible for the exercise or settlement of any EHC
Option, and we will not be responsible for the exercise or
settlement of any option to purchase ECC common stock (including
an Adjusted ECC Option). Any exercising holder of an EHC Option
must exercise the security directly with us. Similarly, any
exercising holder of an option to purchase ECC common stock must
exercise the security directly with ECC. In this regard, we will
enter into an option agreement with each holder of an EHC
Option, and, if necessary, ECC will amend its existing option
agreement with each holder of an outstanding ECC Option, in each
case to reflect the provisions described above.
Restricted
Stock Unit Awards
For each ECC RSU outstanding as of the distribution date, the
holder of such ECC RSU will be entitled to receive, for each
share of ECC Class A common stock subject thereto, an EHC
RSU with respect to the
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number of shares our Class A common stock that would have
been issued in the spin-off in respect of the shares of ECC
Class A common stock subject to the applicable ECC RSU.
The distribution will not have any other effect on the
outstanding ECC RSUs, and the RSUs relating to our common stock
will be subject to the same terms and conditions as apply to the
ECC awards with respect to which the adjustment, or
distribution, as applicable, is made. Each such award will take
into account all employment with both ECC and EHC for purposes
of determining when the award vests or the restrictions on the
award lapse, as applicable. Fractional shares will be adjusted
or compensated by ECC as appropriate in the sole discretion of
the ECC compensation committee.
Material
U.S. Federal Income Tax Consequences of the Spin-Off
The following is a summary of certain material U.S. federal
income tax consequences to the holders of ECC common stock in
connection with the spin-off. The summary is based on the Code,
the Treasury Regulations promulgated thereunder and judicial and
administrative interpretations thereof, in each case as in
effect and available as of the date of this document and all of
which are subject to change at any time, possibly with
retroactive effect. Any such change could affect the tax
consequences described below.
This summary does not discuss all tax considerations that may be
relevant to shareholders in light of their particular
circumstances, nor does it address the consequences to
shareholders subject to special treatment under the
U.S. federal income tax laws, such as:
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dealers or traders in securities or currencies;
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tax-exempt entities;
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banks, financial institutions or insurance companies;
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real estate investment trusts, regulated investment companies or
grantor trusts;
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persons who acquired ECC common stock pursuant to the exercise
of employee stock options or otherwise as compensation;
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shareholders who own, or are deemed to own, at least 10% or
more, by voting power or value, of ECCs equity;
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holders owning ECC common stock as part of a position in a
straddle or as part of a hedging, conversion or other risk
reduction transaction for U.S. federal income tax purposes;
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certain former citizens or long-term residents of the United
States;
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holders who are subject to the alternative minimum tax;
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persons that own ECC common stock through partnerships or other
pass through entities; or
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holders of ECC common stock who are neither citizens nor
residents of the United States, or that are foreign
corporations, foreign partnerships or foreign estates or trusts
for U.S. federal income tax purposes.
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This summary does not address the U.S. federal income tax
consequences to ECC shareholders who do not hold ECC common
stock as a capital asset. Moreover, this summary does not
address any state, local or foreign tax consequences.
If a partnership (or any other entity treated as a partnership
for U.S. federal income tax purposes) holds ECC common
stock, the tax treatment of a partner in such partnership will
generally depend on the status of the partner and the activities
of the partnership. Such a partner or partnership should consult
its own tax advisor as to its tax consequences.
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You
should consult your own tax advisor with respect to the U.S.
federal, state, local and foreign tax consequences of the
distribution.
The spin-off is conditioned upon ECCs receipt of an
opinion of White & Case LLP to be delivered on the
distribution date (which condition ECC may waive), substantially
to the effect that the spin-off, together with certain related
transactions, will qualify as reorganizations under
Sections 355 and 368(a)(1)(D) of the Code. In addition, ECC
has applied for a private letter ruling from the IRS that the
distribution will so qualify. Assuming the spin-off so qualifies
for U.S. federal income tax purposes:
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except with respect to gain or loss recognized under the
applicable Treasury Regulations governing consolidated tax
returns, the spin-off will not result in any taxable income,
gain or loss to ECC;
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no gain or loss will be recognized by, or be includible in the
income of, a shareholder of ECC common stock solely as the
result of the receipt of our common stock in the spin-off,
except, as described below, in connection with cash received in
lieu of fractional shares of our Class A common stock;
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the basis of the ECC common stock and our common stock in the
hands of ECCs shareholders immediately after the spin-off
will be the same as the basis of the ECC common stock
immediately before the spin-off, allocated between the common
stock of ECC and us in proportion to their relative fair market
values on the date of the distribution; and
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the holding period of our common stock received by ECC
shareholders will include the holding period of their ECC common
stock, provided that such ECC common stock is held as a capital
asset on the date of the spin-off.
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ECC shareholders that have acquired different blocks of ECC
common stock at different times or at different prices should
consult their tax advisors regarding the allocation of their
aggregate adjusted basis among, and their holding period of,
shares of our common stock distributed with respect to such
blocks of ECC common stock.
If you receive cash in lieu of a fractional share of
Class A common stock as part of the spin-off, you will be
treated as though you first received a distribution of the
fractional share in the spin-off and then sold it for the amount
of such cash. You will generally recognize capital gain or loss,
provided that the fractional share is considered to be held as a
capital asset, measured by the difference between the cash you
receive for such fractional share and your tax basis in that
fractional share, as determined above. Such capital gain or loss
will be a long-term capital gain or loss if your holding period
for your ECC common stock is more than one year on the
distribution date.
Although a private letter ruling relating to the qualification
of the spin-off and certain related transactions under
Sections 355 and 368(a)(l)(D) of the Code will generally be
binding on the IRS, the continuing validity of such ruling, if
obtained, will be subject to the accuracy of factual
representations and assumptions made in the ruling request.
Also, as part of the IRSs general policy with respect to
rulings on spin-off transactions under Section 355 of the
Code, any private letter ruling obtained by ECC will not be
based upon a determination by the IRS that certain conditions
which are necessary to obtain tax-free treatment under
Section 355 of the Code have been satisfied. Rather, such
private letter ruling will be based upon representations by ECC
that these conditions have been satisfied, and any inaccuracy in
such representations could invalidate the private letter ruling.
As a result of this IRS policy, ECC has made it a condition to
the spin-off that ECC obtain an opinion of White &
Case LLP on the distribution date substantially to the effect
that the spin-off, together with certain related transactions,
will qualify as reorganizations under Sections 355 and
368(a)(1)(D) of the Code (which condition ECC may waive). The
opinion will be based upon various factual representations and
assumptions, as well as certain undertakings made by ECC and us.
If any of those factual representations or assumptions were
untrue or incomplete in any material respect, any undertaking
was not complied with, or the facts upon which the opinion is
based were materially different from the facts at the time of
the spin-off, the spin-off may not qualify for tax-free
treatment. Opinions of counsel are not binding on the IRS. As a
result, the conclusions expressed in the opinion of counsel
could be challenged by the IRS, and if the IRS prevails in such
challenge, the tax consequences to you could be materially less
favorable.
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The
Spin-off
If the spin-off were not to qualify as a tax-free transaction,
ECC would recognize taxable gain equal to the excess of the fair
market value of our common stock distributed to ECC shareholders
over ECCs tax basis in our common stock. In addition, each
shareholder who receives our common stock in the spin-off would
generally be treated as receiving a distribution in an amount
equal to the fair market value of our common stock received,
which would generally result in:
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a taxable dividend to the extent of such shareholders pro
rata share of ECCs current and accumulated earnings and
profits;
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a reduction in such shareholders basis (but not below
zero) in ECC common stock to the extent the amount received
exceeds such shareholders share of ECCs earnings and
profits; and
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a taxable gain from the exchange of ECC common stock to the
extent the amount received exceeds both such shareholders
share of ECCs earnings and profits and such
shareholders basis in ECC common stock.
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Even if the spin-off otherwise qualifies for tax-free treatment
under Section 355 of the Code, it may be disqualified as
tax-free to ECC under Section 355(e) of the Code if 50% or
more of the stock of either ECC or us is acquired as part of a
plan or series of related transactions that include the
distribution. For this purpose, any acquisitions of our stock or
ECCs stock within two years before or after the
distribution are presumed to be part of such a plan, although
ECC or we may be able to rebut that presumption. If such an
acquisition of our stock or ECCs stock triggers the application
of Section 355(e) of the Code, ECC would recognize taxable
gain as described above with respect to the spin-off, but the
spin-off would generally be tax-free to each ECC shareholder.
Under the tax sharing agreement between ECC and us, we would be
required to indemnify ECC against that taxable gain if it were
triggered by an acquisition of our stock, stock options or
assets. Additionally, pursuant to the tax sharing agreement
between ECC and us, we would be required to indemnify ECC
against any taxes, losses, claims and expenses resulting from
the spin-off and certain related transactions failing to qualify
as tax-free distributions pursuant to any provision of
Section 355 or Section 361 of the Code in certain
other circumstances.
ECC may incur some tax cost in connection with the spin-off (as
a result of certain intercompany transactions or as a result of
certain differences between federal, on the one hand, and
foreign or state tax rules, on the other), whether or not the
spin-off qualifies for tax-free treatment under
Sections 355 and 368(a)(1)(D) of the Code.
Information
Statement
U.S. Treasury Regulations require each ECC shareholder that
(i) receives shares of our stock in the spin-off and
(ii) immediately before the spin-off owned five percent or
more (by vote or value) of the total outstanding stock of ECC,
to attach to such shareholders U.S. federal income
tax return for the year in which such stock is received a
statement setting forth certain information related to the
spin-off.
THE ABOVE DESCRIPTION IS NOT INTENDED TO CONSTITUTE A
COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE
SPIN-OFF. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE
TAX CONSEQUENCES OF YOUR PARTICULAR SITUATION.
Results
of the Spin-Off
After the spin-off, we will be an independent, publicly-traded
company. Immediately following the spin-off, we expect to have
outstanding approximately 42.0 million shares of our
Class A common stock and approximately 47.7 million
shares of our Class B common stock, based upon the number
of shares of ECC Class A common stock and ECC Class B
common stock outstanding as of November 30, 2007. The
actual number of shares of our Class A common stock and
Class B common stock to be distributed in the spin-off will
depend upon the actual number of shares of ECC Class A
common stock and ECC Class B common stock outstanding on
the record date and will reflect any exercise of ECC options
between the date the ECC
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board of directors declares the dividend for the spin-off and
the record date of the spin-off. In addition, no shares of our
Class C common stock or Class D common stock will be
outstanding immediately following the spin-off. The spin-off
will not affect the number of outstanding shares of ECC common
stock or any rights of ECC shareholders, although it will affect
the market value of each outstanding share of ECC common stock.
Immediately following the spin-off, we expect to have
approximately 11,500 holders of record of shares of our
Class A common stock. Mr. Ergen and entities related
to Mr. Ergen will be the only holders of record of our
Class B common stock following the spin-off.
Before the spin-off, we will enter into a Separation Agreement
and other agreements with ECC to effect the spin-off and provide
a framework for our relationship with ECC after the spin-off.
These agreements will govern the relationships among ECC and us
subsequent to the completion of the spin-off and provide for the
allocation among ECC and us of ECCs assets, liabilities
and obligations attributable to periods prior to our separation
from ECC. The Separation Agreement, in particular, requires ECC
to assume certain of ECCs contingent corporate liabilities
and debt.
Listing
and Trading of our Common Stock
On the date of this information statement, we are a wholly-owned
subsidiary of ECC. Accordingly, there is currently no public
market for our common stock; although a when-issued
market in our Class A common stock may develop. See
Trading Between the Record Date and
Distribution Date below for an explanation of a
when-issued market. We have applied to list our
shares of Class A common stock on the Nasdaq Global Select
Market under the symbol
[ ].
Following the spin-off, ECC Class A common stock will
continue to trade on the Nasdaq Global Select Market under the
symbol DISH.
Neither we nor ECC can assure you as to the trading price of ECC
Class A common stock or our Class A common stock after
the spin-off or as to whether the combined trading prices of our
Class A common stock and the ECC Class A common stock
after the spin-off will be less than, equal to or greater than
the trading prices of ECC Class A common stock prior to the
spin-off. The trading price of our Class A common stock may
fluctuate significantly following the spin-off. See Risk
Factors Risks Relating to Our Common Stock and the
Securities Market.
The shares of our common stock distributed to ECCs
shareholders will be freely transferable, except for shares
received by individuals who are our affiliates and any shares
distributed in respect of any ECC RSUs. Individuals who may be
considered our affiliates after the spin-off include individuals
who control, are controlled by or are under common control with
us, as those terms generally are interpreted for federal
securities law purposes. This may include some or all of our
executive officers and directors. Individuals who are our
affiliates will be permitted to sell their shares of our common
stock only pursuant to an effective registration statement under
the Securities Act of 1933, as amended, or an exemption from the
registration requirements of the Securities Act, such as the
exemptions afforded by Section 4(1) of the Securities Act
or Rule 144 thereunder. Our affiliates will not be
permitted to sell shares of our common stock under Rule 144
until 90 days after the date on which the registration
statement of which this information statement forms a part is
declared effective.
Trading
Between the Record Date and Distribution Date
Between the record date and the distribution date, ECC
Class A common stock will continue to trade on the Nasdaq
Global Select Market in the regular way market. During this
time, shares of ECC Class A common stock that trade on the
regular way market will trade with an entitlement to receive
shares of our Class A common stock distributable in the
spin-off. No ex-dividend market will be established for any
class of our common stock until the first trading day following
the distribution date. Therefore, if you own shares of ECC
common stock on the record date and thereafter sell those shares
on or prior to the distribution date, you will also be selling
the shares of our common stock that would have been distributed
to you in the spin-off with respect to the shares of ECC common
stock you sell. On the first trading day following the
distribution date, shares of ECC Class A common stock will
begin trading without any entitlement to receive shares of our
common stock. Shares of ECC Class A common stock trade
under the symbol DISH.
41
Between the record date and the distribution date, a when-issued
trading market in our Class A common stock may develop. Our
Class A common stock is expected to be listed for trading
on the Nasdaq Global Select Market. The when-issued trading
market would be a market for the shares of our Class A
common stock that will be distributed in the spin-off. If you
own shares of ECC common stock on the record date (and do not
sell those shares of ECC common stock on or before the
distribution date), then you are entitled to a number of shares
of the same class of our common stock based upon the number of
shares of such class of ECC common stock you held at that time.
If you own ECC Class A common stock, you may trade this
entitlement to receive shares of our common stock, without the
shares of ECC Class A common stock you own, on the
when-issued trading market. We expect when-issued trades of our
Class A common stock to settle within three trading days
after the distribution date. On the first trading day following
the distribution date, any when-issued trading with respect to
our Class A common stock will end and regular way trading
will begin. If when-issued trading occurs, the listing for our
Class A common stock is expected to be under trading
symbols different from our regular way trading symbols.
Following the distribution date, shares of our Class A
common stock are expected to be listed on the Nasdaq Global
Select Market under the trading symbol
[ ].
If the spin-off does not occur, all when-issued trading will be
null and void.
Conditions
to the Spin-Off
We expect that the spin-off will be effective on the
distribution date, provided, that among other conditions
described in this information statement, the following
conditions shall have been satisfied or waived by ECC under the
Separation Agreement:
|
|
|
the Securities and Exchange Commission shall have declared
effective our registration statement on Form 10, of which
this information statement is a part, under the Securities
Exchange Act of 1934, no stop order relating to the registration
statement shall be in effect and this information statement
shall have been mailed to holders of ECC common stock;
|
|
|
|
all permits, registrations and consents required under the
securities or blue sky laws in connection with the spin-off
shall have been received;
|
|
|
|
ECC shall have received the opinion of White & Case
LLP confirming the tax-free status of the spin-off and certain
related transactions for U.S. federal income tax purposes
on the distribution date;
|
|
|
|
the listing of our common shares on the Nasdaq Global Select
Market shall have been approved;
|
|
|
|
all material governmental approvals and other consents necessary
to consummate the distribution, including without limitation FCC
approvals, shall have been received; and
|
|
|
no order, injunction or decree issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing
consummation of the distribution or any of the transactions
related thereto shall be in effect.
|
The fulfillment of the foregoing conditions will not create any
obligation on ECCs part to effect the spin-off. ECC has
the right not to complete the spin-off if, at any time,
ECCs board of directors determines, in its sole
discretion, that the distribution is not in the best interests
of ECC or its stockholders or that market conditions are such
that it is not advisable to separate EHC from ECC.
Reasons
for Furnishing this Information Statement
This information statement is being furnished solely to provide
information to ECC shareholders who will receive shares of our
common stock in the spin-off. It is not to be construed as an
inducement or encouragement to buy or sell any of our securities
or any securities of ECC. We believe that the information
contained in this information statement is accurate as of the
date set forth on the cover. Changes to the information
contained in this information statement may occur after that
date, and neither our company nor ECC undertakes any obligation
to update the information except in the normal course of our
respective public disclosure obligations and practices.
42
SELECTED
HISTORICAL AND UNAUDITED PRO FORMA COMBINED
AND ADJUSTED FINANCIAL DATA
The following tables present selected historical information
relating to our combined financial condition and results of
operations for the nine months ended September 30, 2007 and
2006 and the past five years. The financial data for the three
years ended December 31, 2006 has been derived from our
audited combined financial statements for the corresponding
periods. Data for the other periods presented has been derived
from unaudited information. The data should be read in
conjunction with our combined financial statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations
included elsewhere
herein. Our historical and pro forma financial data included in
this information statement may not be indicative of our future
performance and does not necessarily reflect what our financial
condition and results of operations would have been had we
operated as a separate, stand-alone entity during the periods
presented, particularly since changes will occur in our
operations and capitalization as a result of our spin-off from
ECC. Our audited combined financial statements reflect the
historical financial position and results of operations of
entities included in consolidated financial statements of ECC,
representing almost exclusively ECCs set-top box business,
using the historical results of operations and historical bases
of assets and liabilities of this business. Our historical
combined financial statements reflect sales to ECC at cost and
do not include certain satellites, uplink and satellite
transmission assets, real estate and other assets and related
liabilities that will be contributed to us by ECC in the
spin-off. These assets and liabilities, which will primarily
comprise our fixed satellite services business, have been
separately audited and are included in the Statement of Net
Assets to be Contributed by ECC and Unaudited Pro Forma Combined
and Adjusted Financial Information included herein. The
financial condition and results of operations of our fixed
satellite services business have not been included in our
historical combined financial statements because our fixed
satellite services business was operated as an integral part of
ECCs subscription television business and did not
constitute a business in the historical financial
statements of ECC. Our historical financial data also does not
include financial information of Sling Media, Inc., which was
recently acquired by ECC and will be contributed to us in the
spin-off. Sling Medias audited consolidated financial
statements are included elsewhere in this information statement,
and its historical financial information also has been included
in our
Unaudited Pro Forma Combined and Adjusted
Financial Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For the Years Ended December 31,
|
|
Statements of
|
|
2007
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations Data:
|
|
Pro Forma
|
|
|
2007
|
|
|
2006
|
|
|
Pro Forma
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
1,592,381
|
|
|
$
|
1,182,768
|
|
|
$
|
1,132,899
|
|
|
$
|
2,080,259
|
|
|
$
|
1,525,320
|
|
|
$
|
1,513,691
|
|
|
$
|
1,720,091
|
|
|
$
|
976,636
|
|
|
$
|
1,037,862
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization)
|
|
|
1,247,536
|
|
|
|
1,121,067
|
|
|
|
1,065,216
|
|
|
|
1,609,571
|
|
|
|
1,440,178
|
|
|
|
1,438,629
|
|
|
|
1,650,775
|
|
|
|
886,665
|
|
|
|
934,997
|
|
Research and development
|
|
|
53,712
|
|
|
|
40,634
|
|
|
|
39,093
|
|
|
|
62,966
|
|
|
|
56,451
|
|
|
|
45,928
|
|
|
|
39,809
|
|
|
|
32,361
|
|
|
|
32,966
|
|
General and administrative, including sales and marketing
|
|
|
93,962
|
|
|
|
56,844
|
|
|
|
43,973
|
|
|
|
100,400
|
|
|
|
60,106
|
|
|
|
56,366
|
|
|
|
65,059
|
|
|
|
50,472
|
|
|
|
72,366
|
|
Depreciation and amortization
|
|
|
211,499
|
|
|
|
4,391
|
|
|
|
4,593
|
|
|
|
285,987
|
|
|
|
6,032
|
|
|
|
5,832
|
|
|
|
5,071
|
|
|
|
5,511
|
|
|
|
6,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,606,709
|
|
|
|
1,222,936
|
|
|
|
1,152,875
|
|
|
|
2,058,924
|
|
|
|
1,562,767
|
|
|
|
1,546,755
|
|
|
|
1,760,714
|
|
|
|
975,009
|
|
|
|
1,046,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(14,328
|
)
|
|
$
|
(40,168
|
)
|
|
$
|
(19,976
|
)
|
|
$
|
21,335
|
|
|
$
|
(37,447
|
)
|
|
$
|
(33,064
|
)
|
|
$
|
(40,623
|
)
|
|
$
|
1,627
|
|
|
$
|
(9,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,296
|
)
|
|
$
|
(39,943
|
)
|
|
$
|
(20,486
|
)
|
|
$
|
104,835
|
|
|
$
|
(34,162
|
)
|
|
$
|
(44,940
|
)
|
|
$
|
(43,237
|
)
|
|
$
|
4,329
|
|
|
$
|
(97,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
89,699
|
|
|
|
|
|
|
|
|
|
|
|
89,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
90,056
|
|
|
|
|
|
|
|
|
|
|
|
90,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
As of December 31,
|
|
Balance Sheet Data:
|
|
Pro Forma
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
1,538,516
|
|
|
$
|
530,753
|
|
|
$
|
323,576
|
|
|
$
|
106,109
|
|
|
$
|
143,437
|
|
|
$
|
156,814
|
|
|
$
|
52,148
|
|
Restricted cash
|
|
$
|
3,550
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,581
|
|
|
$
|
1,699
|
|
|
$
|
1,523
|
|
|
$
|
|
|
Total assets
|
|
$
|
3,837,454
|
|
|
$
|
919,624
|
|
|
$
|
517,821
|
|
|
$
|
229,392
|
|
|
$
|
277,843
|
|
|
$
|
248,811
|
|
|
$
|
228,191
|
|
Long-term debt (including current portion)
|
|
$
|
389,137
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
495
|
|
|
$
|
647
|
|
|
$
|
2,214
|
|
|
$
|
756
|
|
Net investment in EHC
|
|
$
|
3,242,225
|
|
|
$
|
863,768
|
|
|
$
|
502,283
|
|
|
$
|
217,132
|
|
|
$
|
258,452
|
|
|
$
|
230,023
|
|
|
$
|
68,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For the Years Ended December 31,
|
|
Cash Flow Data:
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net cash flows from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(34,276
|
)
|
|
$
|
(3,780
|
)
|
|
$
|
(36,374
|
)
|
|
$
|
(14,193
|
)
|
|
$
|
(78,916
|
)
|
|
$
|
(49,463
|
)
|
|
$
|
(2,796
|
)
|
Investing activities
|
|
$
|
(160,236
|
)
|
|
$
|
(75,953
|
)
|
|
$
|
(54,781
|
)
|
|
$
|
(16,700
|
)
|
|
$
|
(5,619
|
)
|
|
$
|
(12,244
|
)
|
|
$
|
(30,814
|
)
|
Financing activities
|
|
$
|
198,625
|
|
|
$
|
91,176
|
|
|
$
|
104,534
|
|
|
$
|
39,782
|
|
|
$
|
69,715
|
|
|
$
|
74,899
|
|
|
$
|
35,390
|
|
44
UNAUDITED
PRO FORMA COMBINED AND ADJUSTED FINANCIAL INFORMATION
Our audited historical combined financial statements reflect the
historical financial position and results of operations of
entities included in the consolidated financial statements of
ECC, principally representing only the digital set-top box
business, using the historical results of operations and
historical bases of assets and liabilities of this business. Our
historical combined financial statements reflect sales to ECC at
cost and do not include certain satellites, uplink and satellite
transmission assets, real estate and other assets and related
liabilities that will be contributed to us by ECC in the
spin-off. These assets and liabilities, which will primarily
comprise our fixed satellite services business, have been
separately audited and are included in the Statement of Net
Assets to be Contributed by ECC and Unaudited Pro Forma Combined
and Adjusted Financial Information included herein. Our
historical financial data also does not include financial
information of Sling Media, Inc., which was recently acquired by
ECC and will be contributed to us in the spin-off. Sling
Medias audited consolidated financial statements are
included elsewhere in this information statement, and its
historical financial information also has been included in our
Unaudited Pro Forma Combined and Adjusted Financial Information
included herein.
The Unaudited Pro Forma Combined and Adjusted Financial
Information give effect to:
|
|
|
the contribution by ECC to us of the net assets to primarily be
used in our fixed satellite services business, including
$1 billion in cash;
|
|
|
the results of operations and other expenses, including
depreciation expenses, related to the assets contributed to us
by ECC to be used in our fixed satellite services business;
|
|
|
the impact of the transition services and commercial agreements
between us and ECC;
|
|
|
|
the distribution of approximately 89.7 million shares of
our common stock to holders of ECC stock; and
|
|
|
|
the contribution of Sling Media to us.
|
The share numbers are based on ECC share numbers as of
September 30, 2007, and the settlement amount is based on
our balances as of September 30, 2007.
The unaudited pro forma combined financial statements of EHC
presented below have been derived in part from our audited
combined financial statements for the year ended
December 31, 2006 and from our unaudited combined financial
statements as of and for the nine months ended
September 30, 2007.
These unaudited pro forma combined financial statements should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our combined financial statements and the
notes to those statements included elsewhere in this information
statement.
The unaudited pro forma combined statements of operations for
the nine months ended September 30, 2007 and for the year
ended December 31, 2006 have been prepared as if the
transactions described above occurred as of January 1,
2006. The unaudited pro forma combined balance sheet as of
September 30, 2007 has been prepared as if these
transactions occurred as of September 30, 2007. The pro
forma adjustments are based upon available information and
assumptions that management believes are reasonable based on our
current plans and expectations. However, such adjustments are
subject to change based on the final valuation of Sling Media
and the final terms of the spin-off and the transaction
agreements. Our historical financial, pro forma and other data
included in this information statement are not necessarily
indicative of our future financial position, future results of
operations or future cash flows, nor do they reflect what our
financial position, results of operations or cash flows would
have been as a stand-alone company during the periods presented.
45
The preliminary allocation of the purchase price for Sling Media
used in the unaudited pro forma combined financial information
is based on preliminary estimates and currently available
information. These assumptions and estimates will be revised as
additional information becomes available upon final valuation of
Sling Medias assets and liabilities. The final
determination of the allocation of the purchase price will be
based on the actual intangible assets, and net tangible assets
of Sling Media existing as of the date of the acquisition.
Our unaudited pro forma combined statements of operations do not
give effect to initial expenses directly attributable to the
spin-off because of their non-recurring nature. A significant
portion of these non-recurring charges to effect the separation
will be incurred by ECC, such as investment banker fees, outside
legal and accounting fees relating to the spin-off, office move
costs, costs to separate information systems and temporary
consulting costs. We will incur separation costs that have a
future benefit to our company such as employee compensation
expenses and temporary labor used to develop ongoing processes.
See Certain Intercompany Agreements.
46
ECHOSTAR
HOLDING CORPORATION
UNAUDITED
PRO FORMA COMBINED AND ADJUSTED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
Pro Forma
|
|
|
EHC
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
EHC
|
|
|
Spin
|
|
|
Pro Forma
|
|
|
Sling Media
|
|
|
Acquisition
|
|
|
Combined and
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC
|
|
$
|
1,288,691
|
|
|
$
|
172,418
|
(a)
|
|
$
|
1,461,109
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,461,109
|
|
Equipment sales
|
|
|
236,629
|
|
|
|
|
|
|
|
236,629
|
|
|
|
29,055
|
|
|
|
|
|
|
|
265,684
|
|
FSS ECC
|
|
|
|
|
|
|
331,434
|
(b)
|
|
|
331,434
|
|
|
|
|
|
|
|
|
|
|
|
331,434
|
|
FSS other
|
|
|
|
|
|
|
8,557
|
(c)
|
|
|
8,557
|
|
|
|
|
|
|
|
|
|
|
|
8,557
|
|
Other ECC
|
|
|
|
|
|
|
13,475
|
(d)
|
|
|
13,475
|
|
|
|
|
|
|
|
|
|
|
|
13,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,525,320
|
|
|
|
525,884
|
|
|
|
2,051,204
|
|
|
|
29,055
|
|
|
|
|
|
|
|
2,080,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment and other sales
|
|
|
1,440,178
|
|
|
|
2,876
|
(e)
|
|
|
1,443,054
|
|
|
|
20,191
|
|
|
|
|
|
|
|
1,463,245
|
|
FSS cost of sales (exclusive of depreciation and amortization(f))
|
|
|
|
|
|
|
146,326
|
(f)
|
|
|
146,326
|
|
|
|
|
|
|
|
|
|
|
|
146,326
|
|
Research and development
|
|
|
56,451
|
|
|
|
|
|
|
|
56,451
|
|
|
|
6,515
|
|
|
|
|
|
|
|
62,966
|
|
General and administrative
|
|
|
60,106
|
|
|
|
16,166
|
(g)
|
|
|
76,272
|
|
|
|
5,573
|
|
|
|
|
|
|
|
81,845
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,555
|
|
|
|
|
|
|
|
18,555
|
|
Depreciation and amortization
|
|
|
6,032
|
|
|
|
231,823
|
(h)
|
|
|
237,855
|
|
|
|
|
|
|
|
48,132
|
(q)
|
|
|
285,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,562,767
|
|
|
|
397,191
|
|
|
|
1,959,958
|
|
|
|
50,834
|
|
|
|
48,132
|
|
|
|
2,058,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(37,447
|
)
|
|
|
128,693
|
|
|
|
91,246
|
|
|
|
(21,779
|
)
|
|
|
(48,132
|
)
|
|
|
21,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
831
|
|
|
|
52,259
|
(i)
|
|
|
53,090
|
|
|
|
1,478
|
|
|
|
|
|
|
|
54,568
|
|
Interest expense, net of amounts capitalized
|
|
|
(1,059
|
)
|
|
|
(36,677
|
)(j)
|
|
|
(37,736
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
(38,248
|
)
|
Other
|
|
|
6,588
|
|
|
|
(2,160
|
)
|
|
|
4,428
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
4,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
6,360
|
|
|
|
13,422
|
|
|
|
19,782
|
|
|
|
921
|
|
|
|
|
|
|
|
20,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(31,087
|
)
|
|
|
142,115
|
|
|
|
111,028
|
|
|
|
(20,858
|
)
|
|
|
(48,132
|
)
|
|
|
42,038
|
|
Income tax (provision) benefit, net
|
|
|
(3,075
|
)
|
|
|
53,616
|
(k)
|
|
|
50,541
|
|
|
|
(74
|
)
|
|
|
12,330
|
(l)
|
|
|
62,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(34,162
|
)
|
|
$
|
195,731
|
|
|
$
|
161,569
|
|
|
$
|
(20,932
|
)
|
|
$
|
(35,802
|
)
|
|
$
|
104,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.17
|
|
Diluted(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.16
|
|
Pro forma shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,699
|
|
Diluted(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,056
|
|
See accompanying notes.
47
ECHOSTAR
HOLDING CORPORATION
UNAUDITED
PRO FORMA COMBINED AND ADJUSTED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
EHC
|
|
|
Spin
|
|
|
EHC
|
|
|
Sling Media
|
|
|
Acquisition
|
|
|
Combined and
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC
|
|
$
|
1,019,729
|
|
|
$
|
135,720
|
(a)
|
|
$
|
1,155,449
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,155,449
|
|
Equipment sales
|
|
|
163,039
|
|
|
|
|
|
|
|
163,039
|
|
|
|
21,233
|
|
|
|
|
|
|
|
184,272
|
|
FSS ECC
|
|
|
|
|
|
|
227,619
|
(b)
|
|
|
227,619
|
|
|
|
|
|
|
|
|
|
|
|
227,619
|
|
FSS other
|
|
|
|
|
|
|
14,871
|
(c)
|
|
|
14,871
|
|
|
|
|
|
|
|
|
|
|
|
14,871
|
|
Other ECC
|
|
|
|
|
|
|
10,170
|
(d)
|
|
|
10,170
|
|
|
|
|
|
|
|
|
|
|
|
10,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,182,768
|
|
|
|
388,380
|
|
|
|
1,571,148
|
|
|
|
21,233
|
|
|
|
|
|
|
|
1,592,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment and other sales
|
|
|
1,121,067
|
|
|
|
2,010
|
(e)
|
|
|
1,123,077
|
|
|
|
15,408
|
|
|
|
|
|
|
|
1,138,485
|
|
FSS cost of sales (exclusive of depreciation and amortization(f))
|
|
|
|
|
|
|
109,051
|
(f)
|
|
|
109,051
|
|
|
|
|
|
|
|
|
|
|
|
109,051
|
|
Research and development
|
|
|
40,634
|
|
|
|
|
|
|
|
40,634
|
|
|
|
13,078
|
|
|
|
|
|
|
|
53,712
|
|
General and administrative
|
|
|
56,844
|
|
|
|
13,491
|
(g)
|
|
|
70,335
|
|
|
|
3,932
|
|
|
|
|
|
|
|
74,267
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,695
|
|
|
|
|
|
|
|
19,695
|
|
Depreciation and amortization
|
|
|
4,391
|
|
|
|
171,009
|
(h)
|
|
|
175,400
|
|
|
|
|
|
|
|
36,099
|
(q)
|
|
|
211,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,222,936
|
|
|
|
295,561
|
|
|
|
1,518,497
|
|
|
|
52,113
|
|
|
|
36,099
|
|
|
|
1,606,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(40,168
|
)
|
|
|
92,819
|
|
|
|
52,651
|
|
|
|
(30,880
|
)
|
|
|
(36,099
|
)
|
|
|
(14,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,861
|
|
|
|
42,981
|
(i)
|
|
|
45,842
|
|
|
|
378
|
|
|
|
|
|
|
|
46,220
|
|
Interest expense, net of amounts capitalized
|
|
|
(785
|
)
|
|
|
(25,557
|
)(j)
|
|
|
(26,342
|
)
|
|
|
|
|
|
|
|
|
|
|
(26,342
|
)
|
Other
|
|
|
782
|
|
|
|
(38
|
)
|
|
|
744
|
|
|
|
(493
|
)
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,858
|
|
|
|
17,386
|
|
|
|
20,244
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
20,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(37,310
|
)
|
|
|
110,205
|
|
|
|
72,895
|
|
|
|
(30,995
|
)
|
|
|
(36,099
|
)
|
|
|
5,801
|
|
Income tax (provision) benefit, net
|
|
|
(2,633
|
)
|
|
|
(26,294
|
)(k)
|
|
|
(28,927
|
)
|
|
|
(103
|
)
|
|
|
13,933
|
(l)
|
|
|
(15,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(39,943
|
)
|
|
$
|
83,911
|
|
|
$
|
43,968
|
|
|
$
|
(31,098
|
)
|
|
$
|
(22,166
|
)
|
|
$
|
(9,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.10
|
)
|
Diluted(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.10
|
)
|
Pro forma shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,699
|
|
Diluted(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,056
|
|
See accompanying notes.
48
ECHOSTAR
HOLDING CORPORATION
UNAUDITED
PRO FORMA COMBINED AND ADJUSTED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC
|
|
|
|
|
|
|
Net Assets
|
|
|
EHC
|
|
|
Pro Forma
|
|
|
EHC
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
EHC
|
|
|
to be
|
|
|
Historical
|
|
|
Spin
|
|
|
Pro Forma
|
|
|
Sling Media
|
|
|
Acquisition
|
|
|
Combined and
|
|
|
|
Historical
|
|
|
Contributed
|
|
|
Combined
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,734
|
|
|
$
|
1,000,000
|
|
|
$
|
1,033,734
|
|
|
$
|
|
|
|
$
|
1,033,734
|
|
|
$
|
7,763
|
|
|
$
|
|
|
|
$
|
1,041,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investment securities
|
|
|
497,019
|
|
|
|
|
|
|
|
497,019
|
|
|
|
|
|
|
|
497,019
|
|
|
|
|
|
|
|
|
|
|
|
497,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net of allowance for doubtful accounts
|
|
|
38,511
|
|
|
|
2,692
|
|
|
|
41,203
|
|
|
|
|
|
|
|
41,203
|
|
|
|
7,276
|
|
|
|
|
|
|
|
48,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
13,055
|
|
|
|
|
|
|
|
13,055
|
|
|
|
|
|
|
|
13,055
|
|
|
|
6,446
|
|
|
|
|
|
|
|
19,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
|
|
|
|
|
4,816
|
|
|
|
4,816
|
|
|
|
1,146
|
(n)
|
|
|
5,962
|
|
|
|
|
|
|
|
7,202
|
(l)
|
|
|
13,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
10,215
|
|
|
|
6,025
|
|
|
|
16,240
|
|
|
|
|
|
|
|
16,240
|
|
|
|
2,107
|
|
|
|
|
|
|
|
18,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
592,534
|
|
|
|
1,013,533
|
|
|
|
1,606,067
|
|
|
|
1,146
|
|
|
|
1,607,213
|
|
|
|
23,592
|
|
|
|
7,202
|
|
|
|
1,638,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and marketable investment securities
|
|
|
|
|
|
|
3,150
|
|
|
|
3,150
|
|
|
|
|
|
|
|
3,150
|
|
|
|
400
|
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
187,217
|
|
|
|
1,281,682
|
|
|
|
1,468,899
|
|
|
|
|
|
|
|
1,468,899
|
|
|
|
3,877
|
|
|
|
|
|
|
|
1,472,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FCC authorizations
|
|
|
42,873
|
|
|
|
83,121
|
|
|
|
125,994
|
|
|
|
|
|
|
|
125,994
|
|
|
|
|
|
|
|
|
|
|
|
125,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
11,037
|
|
|
|
147,374
|
|
|
|
158,411
|
|
|
|
|
|
|
|
158,411
|
|
|
|
2,597
|
|
|
|
328,174
|
(q)
|
|
|
489,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliates
|
|
|
81,391
|
|
|
|
|
|
|
|
81,391
|
|
|
|
|
|
|
|
81,391
|
|
|
|
|
|
|
|
|
|
|
|
81,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets, net
|
|
|
4,572
|
|
|
|
21,254
|
|
|
|
25,826
|
|
|
|
|
|
|
|
25,826
|
|
|
|
728
|
|
|
|
|
|
|
|
26,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
919,624
|
|
|
$
|
2,550,114
|
|
|
$
|
3,469,738
|
|
|
$
|
1,146
|
|
|
$
|
3,470,884
|
|
|
$
|
31,194
|
|
|
$
|
335,376
|
|
|
$
|
3,837,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
31,384
|
|
|
$
|
|
|
|
$
|
31,384
|
|
|
$
|
(28,566
|
)
|
|
$
|
2,818
|
|
|
$
|
3,643
|
|
|
$
|
|
|
|
$
|
6,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
24,171
|
|
|
|
14,535
|
|
|
|
38,706
|
|
|
|
(10,932
|
)
|
|
|
27,774
|
|
|
|
5,304
|
|
|
|
|
|
|
|
33,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
38,167
|
|
|
|
38,167
|
|
|
|
|
|
|
|
38,167
|
|
|
|
1,380
|
|
|
|
|
|
|
|
39,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
55,555
|
|
|
|
52,702
|
|
|
|
108,257
|
|
|
|
(39,498
|
)
|
|
|
68,759
|
|
|
|
10,327
|
|
|
|
|
|
|
|
79,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
349,590
|
|
|
|
349,590
|
|
|
|
|
|
|
|
349,590
|
|
|
|
|
|
|
|
|
|
|
|
349,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
301
|
|
|
|
237,079
|
|
|
|
237,380
|
|
|
|
(58,467
|
)(n)
|
|
|
178,913
|
|
|
|
|
|
|
|
(19,061
|
)(l)
|
|
|
159,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,701
|
|
|
|
|
|
|
|
6,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations, net of current portion
|
|
|
301
|
|
|
|
586,669
|
|
|
|
586,970
|
|
|
|
(58,467
|
)
|
|
|
528,503
|
|
|
|
6,701
|
|
|
|
(19,061
|
)
|
|
|
516,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,856
|
|
|
|
639,371
|
|
|
|
695,227
|
|
|
|
(97,965
|
)
|
|
|
597,262
|
|
|
|
17,028
|
|
|
|
(19,061
|
)
|
|
|
595,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
ECHOSTAR
HOLDING CORPORATION
UNAUDITED
PRO FORMA COMBINED AND ADJUSTED BALANCE SHEET
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC
|
|
|
|
|
|
|
Net Assets
|
|
|
EHC
|
|
|
Pro Forma
|
|
|
EHC
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
EHC
|
|
|
to be
|
|
|
Historical
|
|
|
Spin
|
|
|
Pro Forma
|
|
|
Sling Media
|
|
|
Acquisition
|
|
|
Combined and
|
|
|
|
Historical
|
|
|
Contributed
|
|
|
Combined
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in EHC (Owners Equity (Deficit)):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Series A Preferred Stock of Sling Media
$.0001 par value, 8,400,000 shares authorized,
7,759,082 shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)(r)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Series B Preferred Stock of Sling Media
$.0001 par value, 7,930,000 shares authorized,
7,694,271 shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)(r)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sling Media common stock, warrants and additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,832
|
|
|
|
(70,832
|
)(r)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock of EHC, $.001 par value,
20,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC Class A common stock, $.001 par value,
1,600,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
(o)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC Class B common stock, $.001 par value,
800,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
(o)
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
103,863
|
|
|
|
|
|
|
|
103,863
|
|
|
|
|
|
|
|
103,863
|
|
|
|
95
|
|
|
|
(95
|
)(r)
|
|
|
103,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners net investment
|
|
|
759,905
|
|
|
|
|
|
|
|
759,905
|
|
|
|
2,009,764
|
(p)
|
|
|
2,769,669
|
|
|
|
(56,763
|
)
|
|
|
56,763
|
(r)
|
|
|
3,138,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342,340
|
(q)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,263
|
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets to be contributed
|
|
|
|
|
|
|
1,910,743
|
|
|
|
1,910,743
|
|
|
|
(1,910,743
|
)(p)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment in EHC (Owners equity)
|
|
|
863,768
|
|
|
|
1,910,743
|
|
|
|
2,774,511
|
|
|
|
99,111
|
|
|
|
2,873,622
|
|
|
|
14,166
|
|
|
|
354,437
|
|
|
|
3,242,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net investment in EHC (Owners equity)
|
|
$
|
919,624
|
|
|
$
|
2,550,114
|
|
|
$
|
3,469,738
|
|
|
$
|
1,146
|
|
|
$
|
3,470,884
|
|
|
$
|
31,194
|
|
|
$
|
335,376
|
|
|
$
|
3,837,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
50
ECHOSTAR
HOLDING CORPORATION
NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Adjustments
to Pro Forma Combined Statements of Operations:
The pro forma adjustments for the spin-off represent the
estimated incremental revenue and expenses of EHC associated
with operating as a stand-alone company, primarily consisting of
the results of operations and other expenses, including
depreciation expenses, associated with the net assets
contributed to us by ECC to primarily be used in our fixed
satellite services business and our commercial agreements with
ECC (see Certain Intercompany Agreements).
(a) Represents incremental revenue on equipment sales to
ECC at cost plus an agreed upon margin, which we believe to be
fair market value pricing.
(b) Represents revenue for sales of services to ECC related
to the satellites, uplink and satellite transmission assets to
be contributed to us by ECC, including uplink, telemetry,
tracking and control, and professional engineering services,
which we believe to be fair market value pricing.
(c) Represents revenue for sales of services to
third-parties related to the satellites, uplink and satellite
transmission assets to be contributed to us by ECC.
(d) Primarily represents rental revenue related to
buildings contributed to us by ECC, and leased back to ECC.
(e) Represents incremental cost of sales related to the
purchase of remanufactured receivers from ECC, which are resold
to third parties, pursuant to our receiver agreement with ECC.
(f) Represents cost of sales related to services sold to
ECC and other third-parties related to the satellites, uplink
and satellite transmission assets to be contributed to us by
ECC, including satellite leasing, uplink, telemetry, tracking
and control services. These amounts are exclusive of
depreciation and amortization expense.
Depreciation and amortization expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Year Ended
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
(In thousands)
|
|
|
Satellites
|
|
$
|
104,451
|
|
|
$
|
139,427
|
|
Furniture, fixtures, equipment and other
|
|
|
52,818
|
|
|
|
75,240
|
|
Identifiable intangible assets subject to amortization
|
|
|
14,311
|
|
|
|
18,781
|
|
Buildings and improvements
|
|
|
3,820
|
|
|
|
4,407
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
175,400
|
|
|
$
|
237,855
|
|
|
|
|
|
|
|
|
|
|
(g) Represents additional general and administrative
expenses primarily related to corporate overhead expenses and
related employee benefits charged to us by ECC.
(h) Represents additional depreciation and amortization
expense primarily associated with the satellites, uplink and
satellite transmission assets and certain other real estate
assets to be contributed to us by ECC.
(i) Represents interest income primarily related to the
$1.0 billion of cash to be contributed to us by ECC.
(j) Primarily represents the reversal of interest expense
for a note payable to ECC that will be contributed to us as
capital by ECC.
(k) Represents the tax effect of pro forma adjustments
using our blended Federal, state and international statutory tax
rate adjusted for permanent differences and the release of our
valuation
51
ECHOSTAR
HOLDING CORPORATION
NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL
DATA (Continued)
allowance of $93.8 million in 2006. The release of the
valuation allowance based on our commercial agreements with ECC,
which, together with existing third-party contracts, are
expected to result in EHC having taxable income for the
foreseeable future. As a result, we expect to use all of our
federal net operating losses before they expire. Additionally,
we expect sufficient capital gains to offset any realized
capital losses within the statutory period as related to the
impairments included in the deferred tax assets.
The pro forma adjustments for the acquisition of Sling Media are
as follows:
(l) Represents the reversal of Sling Medias deferred
tax asset valuation allowance. The release of the valuation
allowance based on our commercial agreements with ECC, which,
together with existing third-party contracts, are expected to
result in EHC having taxable income for the foreseeable future.
As a result, we expect to use all of our federal net operating
losses before they expire, including those attributable to Sling
Media.
(m) The calculation of pro forma basic earnings per share
and shares outstanding is based on the number of shares of ECC
common stock outstanding as of November 30, 2007 adjusted
for the distribution ratio of one share of EHC common stock for
every five shares of ECC common stock. The calculation of pro
forma diluted earnings per share and shares outstanding for the
periods presented is based on the number of shares of ECC common
stock outstanding as of November 30, 2007 and diluted
shares of common stock outstanding as of November 30, 2007
adjusted for the same distribution ratio. This calculation may
not be indicative of the dilutive effect that will actually
result from the replacement of ECC stock-based awards held by
our employees and employees of ECC or the grant of new
stock-based awards. The actual number of dilutive shares of our
common stock that will result from ECC stock options and
restricted stock units held by our employees will not be
determined until immediately after the spin-off.
Adjustments
to Pro Forma Combined Balance Sheet:
Further information regarding the Net Assets to be Contributed
can be found in the audited Statement of Net Assets included in
this information statement.
The pro forma balance sheet adjustments for the spin-off
represent the following:
(n) Represents the tax effect of pro forma adjustments
using our pro forma blended Federal and state statutory tax
rate, the reduction of net operating losses and credits not
transferred to EHC as part of the transaction and the release of
our valuation allowance. The release of the valuation allowance
based on our commercial agreements with ECC, which, together
with existing third-party contracts, are expected to result in
EHC having taxable income for the foreseeable future. As a
result, we expect to use all of our federal net operating losses
before they expire. Additionally, we expect sufficient capital
gains to offset any realized capital losses within the statutory
period as related to the impairments included in the deferred
tax assets.
(o) The distribution of approximately 89.7 million
shares of our common stock to holders of ECC common stock.
(p) Represents the elimination of ECCs net investment
in us and the contribution of $1.0 billion of cash and
other net assets by ECC to us.
52
ECHOSTAR
HOLDING CORPORATION
NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL
DATA (Continued)
The pro forma adjustments for the acquisition of Sling Media are
as follows:
(q) Based on information currently available, the purchase
price (including cash paid and estimated transaction costs to
us) has been preliminarily allocated as follows (in thousands):
|
|
|
|
|
Cash
|
|
$
|
341,715
|
|
Estimated transaction costs
|
|
|
625
|
|
|
|
|
|
|
Total purchase price
|
|
|
342,340
|
|
Less: Sling Media net assets
|
|
|
(14,166
|
)
|
|
|
|
|
|
Preliminary excess purchase price over book value of net assets
acquired
|
|
$
|
328,174
|
|
|
|
|
|
|
We have not yet completed an analysis of the estimated fair
value of Sling Media in order to determine a preliminary
allocation of the purchase price to the net assets to be
acquired. The final appraisal and purchase price allocation is
expected to be finalized within one year after the
October 19, 2007 acquisition date. Accordingly, the excess
of the purchase price over the carrying value of Sling
Medias net assets has been presented as an adjustment to
total intangible assets in the accompanying unaudited pro forma
combined and adjusted balance sheet. For purposes of the
unaudited pro forma financial statements, we have estimated that
approximately 44% of the excess of the purchase price over the
carrying value of Sling Medias net assets will be
allocated to intangible assets with a weighted-average composite
life of approximately 3 years. We have also estimated that
approximately 56% of the excess of the purchase price over the
carrying value of Sling Medias net assets will be
allocated to goodwill, which has an indefinite life. In the
event that final appraisals determine that other material
amortizable intangibles exist, actual annual amortization could
be substantially higher than amounts presented in the unaudited
pro forma combined and adjusted statements of operations.
(r) Adjustment to reflect elimination of Sling Medias
historical stockholders equity.
53
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations together with the audited
and unaudited combined financial statements and notes to the
financial statements included elsewhere in this information
statement. This discussion 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 the sections of this
information statement entitled Risk Factors
andCautionary Statement Concerning Forward-Looking
Statements and other sections in this information
statement. To facilitate your understanding of our financial
performance we also discuss certain pro forma financial data in
this section. Our pro forma financial information is set out in
more detail under the caption Unaudited Pro Forma Combined
and Adjusted Financial Information elsewhere in this
information statement.
Executive
Overview
Business
Summary
In September 2007, the board of directors of ECC authorized
management to pursue a plan to create two separate
publicly-traded companies by spinning off certain of ECCs
assets to its shareholders. The new company, which ECC has named
EchoStar Holding Corporation, principally consists of the
technology and certain infrastructure assets of ECC, including
ECCs historical set-top box business and certain of
ECCs satellites.
Our historical revenue was $1.183 billion,
$1.525 billion, $1.514 billion and $1.720 billion
during the nine months ended September 30, 2007 and during
2006, 2005 and 2004, respectively. Historically, ECC and one
third party customer, Bell ExpressVu, have accounted for a
significant portion of our revenue. ECC accounted for
approximately 86.2%, 84.5%, 85.6% and 89.7% of our revenue
during the nine months ended September 30, 2007 and during
2006, 2005 and 2004, respectively. Bell ExpressVu accounted for
approximately 10.0%, 12.2%, 11.4% and 7.3% of our revenue during
the nine months ended September 30, 2007 and during 2006,
2005 and 2004, respectively. Our historical net losses were
$39.9 million, $34.2 million, $44.9 million and
$43.2 million during the nine months ended
September 30, 2007 and during 2006, 2005 and 2004,
respectively.
As a consequence of the rapidly evolving nature of our business,
and in light of the fact that we have historically sold set-top
boxes to ECC at cost, period-to-period comparisons of revenue
and income are not necessarily meaningful and should not be
relied upon as indications of future performance. Following the
spin-off, we will sell set-top boxes to ECC at cost plus an
agreed upon margin. As a result, we expect that our revenues and
net income will improve over those reflected in our financial
statements for our historical periods. See Unaudited Pro
Forma Combined and Financial Information.
We expect performance in international markets to be a
significant factor contributing to our ability 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. A substantial majority of our
international revenue during the nine months ended
September 30, 2007 and the year ended December 31,
2006, respectively, was attributable to sales of set-top boxes
that we made to Bell ExpressVu. We can not assure that we will
continue to make sales to Bell ExpressVu at historical levels,
or at all.
Challenges
In 2005 and 2006, sales of our set-top boxes declined. Growth
and maintenance of our revenue will depend on our ability to
attract new customers and on additional sales to existing
customers, including ECC and Bell ExpressVu. The growth and
maintenance of our revenue will also depend on our ability to
introduce, and the
54
market acceptance of, new set-top boxes that we develop, as
well as our ability to penetrate the market for fixed satellite
services.
The number of potential new customers for our set-top boxes and
fixed satellite services is small, and we expect our current
customer concentration will therefore continue for the
foreseeable future. Our operating results will consequently
likely continue to depend on sales to a relatively small number
of customers and on the continued success of these customers
relative to their competitors. 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 even maintain
our revenue will be impacted.
In addition, unfavorable events in the economy, including the
current downturn in real estate mortgage and credit markets,
could cause consumer demand for our set-top boxes to materially
decline because consumers may delay purchasing decisions or
change or reduce their discretionary spending.
Our ability to sustain or increase profitability will also be
affected by costs associated with our efforts to expand our
sales, marketing, product development and general and
administrative capabilities, as well as expenses that we incur
as a separate publicly-traded company. These costs include costs
associated with, among other things, financial reporting,
information technology, complying with federal securities laws
(including compliance with the Sarbanes-Oxley Act of 2002), tax
administration and human resources related functions. As we
expand internationally, we may also incur additional costs to
conform our set-top boxes to comply with local laws or local
specifications and to ship our set-top boxes to our
international customers.
We currently have substantial unused satellite capacity. Future
costs associated with this excess capacity will negatively
impact our margins if we do not generate revenue to offset these
costs. In addition, because a substantial portion of the
capacity of each of our AMC-15, AMC-16 and EchoStar IX
satellites remains unused, there is a significant risk that in
the future, in addition to reporting lower than expected
revenues and profitability, we will be required to record a
substantial impairment charge relating to one or more of these
satellites. We currently estimate that these potential charges
could aggregate up to $250 million, which, if incurred
would have a material adverse effect on our reported operating
results and financial position. Furthermore, it is possible that
in 2008 ECC will discontinue the use of some or all of the
capacity on one or more other satellites that it will initially
lease from us. To the extent that this occurs and we are unable
to find other customers to lease this additional anticipated
excess capacity, we may be required to record substantial
impairment charges that we currently estimate could aggregate up
to $100 million.
Our businesses change rapidly as new technologies are developed.
These new technologies may cause our services and products to
become obsolete. Changes in existing technologies could also
cause demand for our products and services to decline. For
example, if changes in technology allow digital television
subscribers to use devices such as personal computers, cable
ready televisions and network-based digital video recording
services in place of set-top boxes, our customers may not need
to purchase our set-top boxes to provide their digital
television subscribers with digital video recording and other
set-top box features. One or more new technologies also could be
introduced that compete favorably with our set-top boxes or that
cause our set-top boxes to be less attractive to our customers.
Basis of
Presentation
The combined financial statements, which are discussed below,
reflect the historical financial position, results of operations
and cash flows of the entities included in the consolidated
financial statements and accounting records of ECC, principally
representing the set-top box business, using the historical
results of operations and the historical bases of assets and
liabilities of this segment.
The historical combined financial statements reflect sales of
set-top boxes and related components to ECC at cost. Our
historical combined financial statements do not include certain
satellites, uplink and satellite transmission assets, real
estate and other assets and related liabilities that will be
contributed to us by ECC in the spin-off. These assets and
liabilities, which will primarily comprise our fixed satellite
services business, have been separately audited and are included
in the Statement of Net Assets to be Contributed by ECC and
Unaudited Pro Forma Combined and Adjusted Financial Information
included herein. Our historical financial
55
data also does not include financial information of Sling Media,
Inc., which was recently acquired by ECC and will be contributed
to us in the spin-off. Sling Medias audited consolidated
financial statements are included elsewhere in this information
statement, and its historical financial information also has
been included in our Unaudited Pro Forma Combined and Adjusted
Financial Information. We have prepared unaudited pro forma
combined financial statements to make adjustments for and give
effect to the spin-off. See Unaudited Pro Forma Combined
and Adjusted Financial Information above.
In addition, the combined statements of operations include
expense allocations for certain corporate functions historically
provided to us by ECC, including, among other things, treasury,
tax, accounting and reporting, risk management, legal, internal
audit, human resources, investor relations and information
technology. In certain cases, these allocations were made on a
specific identification basis. Otherwise, the expenses related
to services provided to us by ECC were allocated to us based on
the relative percentages, as compared to ECCs other
businesses, of headcount or other appropriate methods depending
on the nature of each item of cost to be allocated. Pursuant to
transition services agreements we will enter into with ECC prior
to the spin-off, ECC will continue to provide us with certain of
these services at prices agreed upon by ECC and us for a period
of two years from the date of the spin-off at cost plus an
agreed upon margin, which is believed to be fair market value
pricing. We will arrange to procure other services pursuant to
arrangements with third parties. See Certain Intercompany
Agreements for a description of the transition services
agreements. The costs historically allocated to us by ECC may
not be indicative of the costs that we will incur following the
spin-off, nor are they necessarily indicative of costs that we
will be charged or incur in the future. Following the spin-off,
we will perform these functions using our own resources or
purchased services, however, for an interim period, some of
these functions will continue to be provided by ECC under the
transition services agreement. In addition to the transition
services agreement, we will enter into a number of commercial
agreements with ECC in connection with the spin-off, many of
which are expected to have terms longer than one year. See
Certain Intercompany Agreements.
We will incur increased costs as a result of becoming an
independent publicly traded company, primarily from audit fees
paid to our independent public accounting firm, Public Company
Accounting Oversight Board fees, Nasdaq listing fees, legal fees
and stockholder communications fees. We will also bear directly
the costs of certain services currently provided to us by ECC,
which may be higher than the allocated cost to us as described
above.
We believe the assumptions underlying the combined financial
statements are reasonable. However, for the reasons discussed
above, the combined financial statements included herein will
not reflect our future results of operations, financial position
and cash flows or reflect what our results of operations,
financial position and cash flows would have been had we been a
separate, stand-alone company during the periods presented.
Introduction
Managements discussion and analysis, or
MD&A, of our results of operations and
financial condition is provided as a supplement to the audited
annual financial statements and unaudited interim financial
statements and footnotes thereto included elsewhere herein to
help provide an understanding of our financial condition,
changes in financial condition and results of our operations.
The information included in MD&A should be read in
conjunction with the annual and interim financial statements.
Explanation
of Key Metrics and Other Items.
Equipment and other sales
ECC.
Equipment and other sales
ECC primarily includes sales of set-top boxes and related
components to ECC at cost as discussed in Basis of
Presentation above and other services provided to ECC.
Equipment sales.
Equipment sales
primarily includes sales of set-top boxes and related components
to Bell ExpressVu and other international customers.
Cost of equipment and other sales.
Cost
of equipment and other sales principally includes costs
associated with set-top boxes and related components sold to
ECC, Bell ExpressVu and to other international customers.
56
Research and development
expenses.
Research and development
expenses consist primarily of all costs associated with
the design and development of our set-top boxes and related
components including, among other things, salaries and
consulting fees.
General and administrative
expenses.
General and administrative
expenses consists primarily of all other employee-related
costs associated with administrative services such as legal,
information systems and accounting and finance, including
non-cash, stock-based compensation expense directly incurred by
us. It also includes outside professional fees (i.e. legal,
information systems and accounting services) and other items
associated with facilities and administration. In addition,
General and administrative expenses includes
administrative support services, as discussed above, provided by
ECC and charged to us as discussed in Basis of
Presentation above.
Other income (expense).
The main
components of Other income and expense are gains and
losses realized on the sale of investments, equity in earnings
and losses of our affiliates, and impairment of marketable and
non-marketable investment securities.
Earnings before interest, taxes, depreciation and
amortization (EBITDA).
EBITDA is
defined as Net income (loss) plus Interest
expense net of Interest income, Income
taxes and Depreciation and amortization. This
non-GAAP measure is reconciled to net income in our
discussion of Results of Operations below.
Free cash flow.
We define free cash flow as
Net cash flows from operating activities less
Purchases of property and equipment, as shown on our
Combined Statements of Cash Flows.
57
Results
of Operations
The following discussion of combined results of operations
refers to the nine months ended September 30, 2007 compared
to the same period in 2006, the year ended December 31,
2006 compared to the same period in 2005, and the year ended
December 31, 2005 compared to the same period in 2004.
Nine
Months Ended September 30, 2007 Compared to the Nine Months
Ended September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC
|
|
$
|
1,019,729
|
|
|
$
|
948,683
|
|
|
$
|
71,046
|
|
|
|
7.5
|
|
Equipment sales
|
|
|
163,039
|
|
|
|
184,216
|
|
|
|
(21,177
|
)
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,182,768
|
|
|
$
|
1,132,899
|
|
|
$
|
49,869
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment and other sales
|
|
|
1,121,067
|
|
|
|
1,065,216
|
|
|
|
55,851
|
|
|
|
5.2
|
|
% of Total revenue
|
|
|
94.8
|
%
|
|
|
94.0
|
%
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
40,634
|
|
|
|
39,093
|
|
|
|
1,541
|
|
|
|
3.9
|
|
% of Total revenue
|
|
|
3.4
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
56,844
|
|
|
|
43,973
|
|
|
|
12,871
|
|
|
|
29.3
|
|
% of Total revenue
|
|
|
4.8
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,391
|
|
|
|
4,593
|
|
|
|
(202
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,222,936
|
|
|
|
1,152,875
|
|
|
|
70,061
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(40,168
|
)
|
|
|
(19,976
|
)
|
|
|
(20,192
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,861
|
|
|
|
568
|
|
|
|
2,293
|
|
|
|
N/M
|
|
Interest expense, net of amounts capitalized
|
|
|
(785
|
)
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
782
|
|
|
|
188
|
|
|
|
594
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,858
|
|
|
|
(29
|
)
|
|
|
2,887
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(37,310
|
)
|
|
|
(20,005
|
)
|
|
|
(17,305
|
)
|
|
|
(86.5
|
)
|
Income tax (provision) benefit, net
|
|
|
(2,633
|
)
|
|
|
(481
|
)
|
|
|
(2,152
|
)
|
|
|
N/M
|
|
Effective tax rate
|
|
|
7.1
|
%
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(39,943
|
)
|
|
$
|
(20,486
|
)
|
|
$
|
(19,457
|
)
|
|
|
(95.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(34,995
|
)
|
|
$
|
(15,195
|
)
|
|
$
|
(19,800
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC.
For
the nine months ended September 30, 2007, revenue from
Equipment and other sales ECC totaled
$1.020 billion, an increase of $71.0 million or 7.5%
compared to the same period during 2006. This change resulted
from an increase in sales of set-top boxes and related
components to ECC, and an increase in the average sales price
per unit. As discussed in Note 2 in the Notes to Combined
Financial Statements of EchoStar Holding Corporation, set-top
boxes and related components were historically sold to ECC
at cost.
In the near term, we expect ECC to remain the primary customer
of our set-top box business and the primary source of our total
revenue. Pursuant to the commercial agreements we will enter
into with ECC prior to the spin-off, we will continue to be
obligated to sell set-top boxes to ECC at cost plus an agreed
upon margin,
58
which is believed to be fair market value pricing, for a period
of two years from the date of the spin-off, although ECC will
have no obligations to purchase set-top boxes from us during or
after this two year period.
Equipment sales.
For the nine months ended
September 30, 2007, Equipment sales totaled
$163.0 million, a decrease of $21.2 million or 11.5%
compared to the same period during 2006. This decrease
principally resulted from a decline in sales of set-top boxes
and related components to international customers.
While we currently have certain binding purchase orders from
Bell ExpressVu through the beginning of 2008, the availability
of new compression technology could impact our relationship with
Bell ExpressVu, depending on its strategy to upgrade customers.
There can be no assurance that Bell ExpressVu will continue to
purchase set-top boxes from us.
Cost of equipment and other sales.
Cost
of equipment and other sales totaled $1.121 billion
during the nine months ended September 30, 2007, an
increase of $55.9 million or 5.2% compared to the same
period in 2006. This change resulted from an increase in sales
of set-top boxes and related components to ECC, partially offset
by a decline in the sale of set-top boxes and related components
to international customers. As discussed above, set-top boxes
and related components were historically sold to ECC at cost.
Cost of equipment and other sales represented 94.8%
and 94.0% of Total revenue during the nine months
ended September 30, 2007 and 2006, respectively. The
increase in the expense to revenue ratio principally related to
an increase from 2006 to 2007 in the relative percentage of
equipment sales to ECC at cost versus sales to international
customers. Additionally, this was partially offset by an
increase in margins on sales of set-top boxes and related
components sold to international customers.
General and administrative
expenses.
General and administrative
expenses totaled $56.8 million during the nine months
ended September 30, 2007, an increase of $12.9 million
or 29.3% compared to the same period in 2006. This increase was
primarily attributable to increased personnel and related costs,
including non-cash, stock-based compensation expense, and
increased administrative support from ECC. General and
administrative expenses represented 4.8% and 3.9% of
Total revenue during the nine months ended
September 30, 2007 and 2006, respectively. The increase in
the ratio of those expenses to Total revenue was
primarily attributable to the increases in General and
administrative expenses discussed above.
Earnings before interest, taxes, depreciation and
amortization.
EBITDA was negative
$35.0 million during the nine months ended
September 30, 2007, a decrease of $19.8 million
compared to the same period in 2006. The following table
reconciles EBITDA to the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
EBITDA
|
|
$
|
(34,995
|
)
|
|
$
|
(15,195
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(2,076
|
)
|
|
|
217
|
|
Income tax provision, net
|
|
|
2,633
|
|
|
|
481
|
|
Depreciation and amortization
|
|
|
4,391
|
|
|
|
4,593
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(39,943
|
)
|
|
$
|
(20,486
|
)
|
|
|
|
|
|
|
|
|
|
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.
59
Management also believes that EBITDA is useful to investors
because it is frequently used by securities analysts, investors
and other interested parties to evaluate companies in the
digital set top box industry.
Income tax (provision) benefit, net.
Our
income tax policy is to record the estimated future tax effects
of temporary differences between the tax bases of assets and
liabilities and amounts reported in our accompanying combined
balance sheets, as well as operating loss and tax credit
carryforwards. We follow the guidelines set forth in Statement
of Financial Accounting Standards No. 109, Accounting
for Income Taxes, or SFAS 109, regarding the
recoverability of any tax assets recorded on the balance sheet
and provide any necessary allowances as required. Determining
necessary 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 currently have an approximate $67.8 million valuation
allowance recorded as an offset against all of our net deferred
tax assets. In accordance with SFAS 109, we have evaluated
our need for a valuation allowance based on historical evidence,
including trends. All or a portion of the current valuation
allowance is expected to be reversed on the effective date of
the spin-off since we are expected to realize sufficient profit
to utilize our deferred tax benefits as a result of the
commercial and transitional agreements with ECC.
Net income (loss).
Net loss was
$39.9 million during the nine months ended
September 30, 2007, an increase in net loss of
$19.5 million compared to the same period in 2006. The
increase in losses was primarily attributable to the changes in
revenue and expenses discussed above.
60
Year
Ended December 31, 2006 Compared to the Year Ended
December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Variance
|
|
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC
|
|
$
|
1,288,691
|
|
|
$
|
1,295,861
|
|
|
$
|
(7,170
|
)
|
|
|
(0.6
|
)
|
Equipment sales
|
|
|
236,629
|
|
|
|
217,830
|
|
|
|
18,799
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,525,320
|
|
|
|
1,513,691
|
|
|
|
11,629
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment and other sales
|
|
|
1,440,178
|
|
|
|
1,438,629
|
|
|
|
1,549
|
|
|
|
0.1
|
|
% of Total revenue
|
|
|
94.4
|
%
|
|
|
95.0
|
%
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
56,451
|
|
|
|
45,928
|
|
|
|
10,523
|
|
|
|
22.9
|
|
% of Total revenue
|
|
|
3.7
|
%
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
60,106
|
|
|
|
56,366
|
|
|
|
3,740
|
|
|
|
6.6
|
|
% of Total revenue
|
|
|
3.9
|
%
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,032
|
|
|
|
5,832
|
|
|
|
200
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,562,767
|
|
|
|
1,546,755
|
|
|
|
16,012
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(37,447
|
)
|
|
|
(33,064
|
)
|
|
|
(4,383
|
)
|
|
|
(13.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
831
|
|
|
|
252
|
|
|
|
579
|
|
|
|
N/M
|
|
Interest expense, net of amounts capitalized
|
|
|
(1,059
|
)
|
|
|
(1,088
|
)
|
|
|
29
|
|
|
|
2.7
|
|
Other
|
|
|
6,588
|
|
|
|
(10,109
|
)
|
|
|
16,697
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
6,360
|
|
|
|
(10,945
|
)
|
|
|
17,305
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(31,087
|
)
|
|
|
(44,009
|
)
|
|
|
12,922
|
|
|
|
29.4
|
|
Income tax (provision) benefit, net
|
|
|
(3,075
|
)
|
|
|
(931
|
)
|
|
|
(2,144
|
)
|
|
|
N/M
|
|
Effective tax rate
|
|
|
9.9
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(34,162
|
)
|
|
$
|
(44,940
|
)
|
|
$
|
10,778
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(24,827
|
)
|
|
$
|
(37,341
|
)
|
|
$
|
12,514
|
|
|
|
33.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC.
For
the year ended December 31, 2006, revenue from
Equipment and other sales ECC totaled
$1.289 billion, a decrease of $7.2 million or 0.6%
compared to the same period during 2005. This change resulted
from a decline in sales of set-top boxes and related components
to ECC, partially offset by an increase in the average sales
price per set-top box as a result of increased sales of advanced
products, such as receivers with multiple tuners, DVRs and HD
receivers.
Equipment sales.
For the year ended
December 31, 2006, Equipment sales totaled
$236.6 million, an increase of $18.8 million or 8.6%
compared to the same period during 2005. This increase
principally resulted from an increase in sales of set-top boxes
and related components to international customers.
Cost of equipment and other sales.
Cost
of equipment and other sales totaled $1.440 billion
during the year ended December 31, 2006, an increase of
$1.5 million or 0.1% compared to the same period in 2005.
This increase primarily resulted from an increase in the sale of
set-top boxes and related components to international customers,
partially offset by a decrease in sales to ECC. Cost of
equipment and other sales represented 94.4% and 95.0% of
Total revenue during the years ended
December 31, 2006 and 2005, respectively. The decrease in
the expense to revenue ratio principally related to an
improvement in margins on sales to international customers. As
previously discussed, set-top boxes and related components were
historically sold to ECC at cost.
61
Research and development
expenses.
Research and development
expenses totaled $56.5 million during the year ended
December 31, 2006, an increase of $10.5 million or
22.9% compared to the same period in 2005. This increase was
primarily attributable to increases in personnel costs and
consulting fees. Research and development expenses
represented 3.7% and 3.0% of Total revenue during
the years ended December 31, 2006 and 2005, respectively. The
increase in the ratio of those expenses to Total
revenue was primarily attributable to an increase in
expenses, discussed above.
General and administrative
expenses.
General and administrative
expenses totaled $60.1 million during the year ended
December 31, 2006, an increase of $3.7 million or 6.6%
compared to 2005. This increase was primarily attributable to
increased personnel and related costs including, among other
things, non-cash, stock-based compensation expense recorded
related to the adoption of SFAS 123R, outside professional
fees, and administrative support from ECC. General and
administrative expenses represented 3.9% and 3.7% of
Total revenue during the years ended
December 31, 2006 and 2005, respectively. The increase in
the ratio of those expenses to Total revenue was
primarily attributable to an increase in expenses, discussed
above.
Other.
Other income totaled
$6.6 million during the year ended December 31, 2006
compared to Other expense of $10.1 million
during 2005. The increase of $16.7 million primarily
resulted from a loss in 2005 related to a $25.4 million
charge to earnings for other than temporary declines in the fair
value of an investment in the marketable common stock of a
company in the home entertainment industry, partially offset by
a $16.9 million gain related to the conversion of certain
bond instruments into common stock. The increase also includes
larger gains from the sale of investments in 2006 as compared to
2005.
Earnings before interest, taxes, depreciation and
amortization.
EBITDA was negative
$24.8 million during the year ended December 31, 2006,
an improvement of $12.5 million compared to the same period
in 2006. The following table reconciles EBITDA to the
accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
EBITDA
|
|
$
|
(24,827
|
)
|
|
$
|
(37,341
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
228
|
|
|
|
836
|
|
Income tax provision, net
|
|
|
3,075
|
|
|
|
931
|
|
Depreciation and amortization
|
|
|
6,032
|
|
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(34,162
|
)
|
|
$
|
(44,940
|
)
|
|
|
|
|
|
|
|
|
|
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.
EBITDA is used as a measurement of operating efficiency and
overall financial performance and we believe it to be a helpful
measure for those evaluating companies in our industries.
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.
Net income (loss).
Net loss was
$34.2 million during the year ended December 31, 2006,
compared to a $44.9 million loss in 2005. The larger loss
was primarily attributable to the changes in revenue and
expenses discussed above.
62
Year
Ended December 31, 2005 Compared to the Year Ended
December 31, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Variance
|
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
|
%
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC
|
|
$
|
1,295,861
|
|
|
$
|
1,543,513
|
|
|
$
|
(247,652
|
)
|
|
|
(16.0
|
)
|
Equipment sales
|
|
|
217,830
|
|
|
|
176,578
|
|
|
|
41,252
|
|
|
|
23.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,513,691
|
|
|
|
1,720,091
|
|
|
|
(206,400
|
)
|
|
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment and other sales
|
|
|
1,438,629
|
|
|
|
1,650,775
|
|
|
|
(212,146
|
)
|
|
|
(12.9
|
)
|
% of Total revenue
|
|
|
95.0
|
%
|
|
|
96.0
|
%
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
45,928
|
|
|
|
39,809
|
|
|
|
6,119
|
|
|
|
15.4
|
|
% of Total revenue
|
|
|
3.0
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
56,366
|
|
|
|
65,059
|
|
|
|
(8,693
|
)
|
|
|
(13.4
|
)
|
% of Total revenue
|
|
|
3.7
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,832
|
|
|
|
5,071
|
|
|
|
761
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,546,755
|
|
|
|
1,760,714
|
|
|
|
(213,959
|
)
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(33,064
|
)
|
|
|
(40,623
|
)
|
|
|
7,559
|
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
252
|
|
|
|
349
|
|
|
|
(97
|
)
|
|
|
(27.8
|
)
|
Interest expense, net of amounts capitalized
|
|
|
(1,088
|
)
|
|
|
(1,123
|
)
|
|
|
35
|
|
|
|
3.1
|
|
Other
|
|
|
(10,109
|
)
|
|
|
(1,412
|
)
|
|
|
(8,697
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(10,945
|
)
|
|
|
(2,186
|
)
|
|
|
(8,759
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(44,009
|
)
|
|
|
(42,809
|
)
|
|
|
(1,200
|
)
|
|
|
(2.8
|
)
|
Income tax (provision) benefit, net
|
|
|
(931
|
)
|
|
|
(428
|
)
|
|
|
(503
|
)
|
|
|
N/M
|
|
Effective tax rate
|
|
|
2.1
|
%
|
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(44,940
|
)
|
|
$
|
(43,237
|
)
|
|
$
|
(1,703
|
)
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(37,341
|
)
|
|
$
|
(36,964
|
)
|
|
$
|
(377
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC.
For
the year ended December 31, 2005, revenue from
Equipment and other sales ECC totaled
$1.296 billion, a decrease of $247.7 million or 16.0%
compared to the same period during 2004. This change resulted
from a significant decline in sales of set-top boxes and related
components to ECC, partially offset by an increase in the
average sales price per set-top box as a result of increased
sales of advanced products, such as receivers with multiple
tuners, DVRs and HD receivers.
Equipment sales.
For the year ended
December 31, 2005, Equipment and other sales
totaled $217.8 million, an increase of $41.3 million
or 23.4% compared to the same period during 2004. This increase
principally resulted from an increase in sales of set-top boxes
and related components to international customers.
Cost of equipment and other sales.
Cost
of equipment and other sales totaled $1.439 billion
during the year ended December 31, 2005, a decrease of
$212.1 million or 12.9% compared to the same period in
2004. This change resulted from a decline in sales of set-top
boxes and related components to ECC, partially offset by an
increase in the sale of set-top boxes and related components to
international customers. Cost of equipment and other
sales represented 95.0% and 96.0% of Total
revenue during the years ended December 31, 2005 and
2004, respectively. As previously discussed, set-top boxes and
related components were historically sold to ECC at cost. The
decrease in the expense to revenue ratio principally resulted
from a
63
decrease from 2004 to 2005 in the relative percentage of
equipment sales to ECC at cost versus sales to international
customers.
Research and development
expenses.
Research and development
expenses totaled $45.9 million during the year ended
December 31, 2005, an increase of $6.1 million or
15.4% compared to the same period in 2004. This increase was
primarily attributable to increases in personnel costs and
consulting fees. Research and development expenses
represented 3.0% and 2.3% of Total revenue during
the years ended December 31, 2006 and 2005, respectively. The
increase in the ratio of those expenses to Total
revenue was primarily attributable to an increase in
expenses, discussed above.
General and administrative
expenses.
General and administrative
expenses totaled $56.4 million during the year ended
December 31, 2005, a decrease of $8.7 million or 13.4%
compared to 2004. The decrease in General and
administrative expenses was primarily attributable to a
decrease in administrative support from ECC, partially offset by
an increase in personnel costs. General and administrative
expenses represented 3.7% and 3.8% of Total
revenue during the years ended December 31, 2005 and
2004, respectively.
Other.
Other expense totaled
$10.1 million during the year ended December 31, 2005
compared to $1.4 million during 2004. The decrease in
income of $8.7 million primarily resulted from a loss in
2005 related to a $25.4 million charge to earnings for
other than temporary declines in the fair value of an investment
in the marketable common stock of a company in the home
entertainment industry, partially offset by a $16.9 million
gain related to the conversion of certain bond instruments into
common stock.
Earnings before interest, taxes, depreciation and
amortization.
EBITDA was negative
$37.3 million during the year ended December 31, 2005,
a decrease of $0.4 million compared to the same period in
2004. The following table reconciles EBITDA to the accompanying
financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
EBITDA
|
|
$
|
(37,341
|
)
|
|
$
|
(36,964
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
836
|
|
|
|
774
|
|
Income tax provision (benefit), net
|
|
|
931
|
|
|
|
428
|
|
Depreciation and amortization
|
|
|
5,832
|
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(44,940
|
)
|
|
$
|
(43,237
|
)
|
|
|
|
|
|
|
|
|
|
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.
EBITDA is used as a measurement of operating efficiency and
overall financial performance and we believe it to be a helpful
measure for those evaluating companies in our industries.
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.
Net income (loss).
Net loss was
$44.9 million during the year ended December 31, 2005,
compared to a $43.2 million loss in 2004. The increase was
primarily attributable to the changes in revenue and expenses
discussed above.
64
Liquidity
and Capital Resources
As of September 30, 2007, our cash, cash equivalents and
marketable investment securities totaled $530.8 million,
compared to $323.6 million as of December 31, 2006. As
discussed in Note 12 to our Combined Financial Statements,
ECC has historically funded our working capital requirements. As
of the effective date of the spin-off, this amount will be
contributed to us as capital. In addition, in connection with
the spin-off, ECC will distribute $1.0 billion in cash to
us. We intend to use this cash for, among other things, future
working capital needs, satellite construction and strategic
initiatives as necessary, and we may also repurchase shares of
our Class A common stock pursuant to the authorization from
our Board of Directors to repurchase up to $1.0 billion of
our Class A common stock
Following the spin-off, we expect that our future working
capital and capital expenditure and debt service requirements
will be satisfied primarily from existing cash and marketable
investment securities, cash generated from operations and future
financings. Our ability to generate positive future operating
and net cash flows is dependent upon, among other things, our
ability to retain existing customers and generate new business.
There can be no assurance we will be successful in executing our
business plan.
From time to time we evaluate opportunities for strategic
investments or acquisitions that may complement our current
services and products, enhance our technical capabilities,
improve or sustain our competitive position, or otherwise offer
growth opportunities. We may make investments in or partner with
others to expand our business. Future material investments or
acquisitions may require that we obtain additional capital,
assume third party debt or other long-term obligations. There
can be no assurance that we could raise all required capital or
that required capital would be available on acceptable terms.
Capital
Requirements
We have incurred losses during each of the nine months ended
September 30, 2007 and the years ended December 31,
2006, 2005 and 2004, including a net loss of $39.9 million
during the nine months ended September 30, 2007. These
historical losses arose primarily as a result of the fact that
we have historically sold set-top boxes to ECC at cost. We
expect to have net income in future periods primarily because
following the completion of the spin-off we will sell set-top
boxes to ECC at cost plus an agreed upon margin. We anticipate
that our current cash and cash equivalents, marketable
securities, and cash from operations, will enable us to maintain
our operations for a period of at least 12 months following
the completion of the spin-off. However, our future capital
requirements will be substantial and the level of these capital
requirements will depend on many factors, certain of which may
require us to consume available capital resources more rapidly
than we currently anticipate. These factors include:
|
|
|
Our levels of investment in infrastructure necessary to support
our fixed satellite services business, other strategic
initiatives, including strategic investments, and research and
development related to our set-top box and related component
business;
|
|
|
|
the level of revenue that we receive from ECC and Bell ExpressVu;
|
|
|
|
the level of purchases that we make pursuant to our stock
buyback program of up to $1.0 billion;
|
|
|
|
the number of satellites leased or under construction at any
point in time;
|
|
|
|
whether we experience any significant satellite failures;
|
|
|
|
the cost of any acquisitions of or investments in businesses,
products and technologies;
|
|
|
|
losses in connection with any acquisitions of or investments in
businesses, products and technologies;
|
|
|
|
the effect of competing technological and market developments;
|
|
|
|
the effect of a general economic downturn;
|
65
|
|
|
the filing, maintenance, prosecution, defense and enforcement of
patent claims and other intellectual property rights; and
|
|
|
|
the cost and timing of establishing or contracting for sales,
marketing and distribution capabilities.
|
If our capital resources are insufficient to meet future capital
requirements, we will have to raise additional funds. We have no
experience as a separate entity in raising capital and we may be
unable to raise sufficient additional capital when we need it,
on favorable terms or at all. The sale of equity or convertible
debt securities in the future may be dilutive to our
shareholders, and debt-financing arrangements may require us to
pledge certain assets and enter into covenants that would
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.
Cash,
Cash Equivalents and Marketable Investment
Securities
We consider all liquid investments purchased within 90 days
of their maturity to be cash equivalents. See
Quantitative and Qualitative Disclosures About
Market Risk for further discussion regarding our
marketable investment securities. As of September 30, 2007,
our cash, cash equivalents and marketable investment securities
totaled $530.8 million compared to $323.6 million as
of December 31, 2006.
The following discussion highlights our free cash flow and cash
flow activities during the nine months ended September 30,
2007 and years ended December 31, 2006, 2005 and 2004.
Free
Cash Flow
We define free cash flow as Net cash flows from operating
activities less Purchases of property and
equipment, as shown on our Combined Statements of Cash
Flows. We believe free cash flow is an important liquidity
metric because it measures, during a given period, the amount of
cash generated that is available to repay debt obligations, make
investments, fund acquisitions and for certain other activities.
Free cash flow is not a measure determined in accordance with
GAAP and should not be considered a substitute for
Operating income, Net income, Net
cash flows from operating activities or any other measure
determined in accordance with GAAP. Since free cash flow
includes investments in operating assets, we believe this
non-GAAP liquidity measure is useful in addition to the most
directly comparable GAAP measure Net cash
flows from operating activities.
During the nine months ended September 30, 2007 and years
ended December 31, 2006, 2005 and 2004, free cash flow was
significantly impacted by changes in operating assets and
liabilities as shown in the Net cash flows from operating
activities section of our Combined Statements of Cash
Flows included herein. Operating asset and liability balances
can fluctuate significantly from period to period and there can
be no assurance that free cash flow will not be negatively
impacted by material changes in operating assets and liabilities
in future periods, since these changes depend upon, among other
things, managements timing of payments and control of
inventory levels, and cash receipts. In addition to fluctuations
resulting from changes in operating assets and liabilities, free
cash flow can vary significantly from period to period depending
upon, among other things, operating efficiencies, increases or
decreases in purchases of property and equipment and other
factors.
66
The following table reconciles free cash flow to Net cash
flows from operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
(154,352
|
)
|
|
$
|
(23,366
|
)
|
|
$
|
(69,143
|
)
|
|
$
|
(18,443
|
)
|
|
$
|
(84,851
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
120,076
|
|
|
|
19,586
|
|
|
|
32,769
|
|
|
|
4,250
|
|
|
|
5,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
$
|
(34,276
|
)
|
|
$
|
(3,780
|
)
|
|
$
|
(36,374
|
)
|
|
$
|
(14,193
|
)
|
|
$
|
(78,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow was negative $154.4 million and negative
$23.4 million for the nine months ended September 30,
2007 and 2006, respectively. Free cash flow was negative
$69.1 million, negative $18.4 million and negative
$84.9 million for the years ended December 31, 2006,
2005 and 2004, respectively.
The decline in free cash flow during the nine months ended
September 30, 2007 compared to the same period in 2006 of
$131.0 million resulted from an increase in Purchases
of property and equipment of $100.5 million primarily
related to construction of the CMBStar satellite, discussed
below, and a decrease in Net cash flows from operating
activities of $30.5 million principally attributable
to an increase in net loss. CMBStar is scheduled to be completed
during the second quarter of 2008. Based on the expected
satellite obligations included in the schedule of obligations
and future capital requirement, which includes CMBStar, we
expect 2008 purchases of property and equipment to decrease from
the 2007 levels.
The $50.7 million decline in free cash flow during 2006
compared to 2005 resulted from an increase in Purchases of
property and equipment of $28.5 million primarily
related to satellite construction and a decrease in Net
cash flows from operating activities of $22.2 million
principally attributable to a decrease in cash resulting from
changes in operating assets and liabilities and an increase in
net loss.
The $66.4 million improvement in free cash flow during 2005
compared to 2004 resulted from an increase in Net cash
flows from operating activities of $64.7 million and
a decrease in Purchases of property and equipment of
$1.7 million. The increase in Net cash flows from
operating activities was primarily attributable to an
increase in cash resulting from changes in operating assets and
liabilities, together with, a decline net loss.
Our future capital expenditures are likely to increase if we
make additional investments in infrastructure necessary to
support and expand our fixed satellite services business, if we
increase the number of set-top boxes that we produce as a result
of the expansion of our business because of improvements in the
economy or otherwise, if we make additional investments in new
businesses, products and technologies, and if we decide to
purchase one or more additional satellites. Conversely, our
future capital expenditures are likely to decrease if we are
unable to successfully compete in the market for fixed satellite
services, if we produce fewer set-top boxes as a result of a
decrease in actual or anticipated set-top box revenues, and if
we do not make material investments in new businesses, products
and technology.
67
Other
Liquidity Items Obligations and Future Capital
Requirements
Contractual
Obligations and Off-balance Sheet Arrangements
Historical
In general, we do not engage in off-balance sheet financing
activities. Our contractual obligations as of December 31,
2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Satellite-related obligations
|
|
$
|
98,270
|
|
|
$
|
79,530
|
|
|
$
|
18,740
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
4,003
|
|
|
|
879
|
|
|
|
906
|
|
|
|
933
|
|
|
|
961
|
|
|
|
324
|
|
|
|
|
|
Purchase obligations
|
|
|
614,978
|
|
|
|
614,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
717,251
|
|
|
$
|
695,387
|
|
|
$
|
19,646
|
|
|
$
|
933
|
|
|
$
|
961
|
|
|
$
|
324
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future commitments related to satellites on the historical
balance sheets are included in the table above under
Satellite-related obligations. CMBStar, an S-band
satellite, is scheduled to be completed during the second
quarter of 2008. If the required regulatory approvals are
obtained and contractual conditions are satisfied, the
transponder capacity of that satellite will be leased to a Hong
Kong joint venture, which in turn will sublease a portion of the
transponder capacity to an affiliate of a Chinese regulatory
entity.
Contractual
Obligations and Off-balance Sheet Arrangements Pro
Forma Adjustments (excludes acquisition of Sling Media,
Inc.)
As of the effective date of the spin-off, ECC will contribute
additional contracts for satellites under construction, capital
leases and other long-term obligations related to our fixed
satellite services business. Commitments related to these
contracts are detailed in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Satellite-related obligations
|
|
$
|
987,494
|
|
|
$
|
248,612
|
|
|
$
|
179,061
|
|
|
$
|
184,813
|
|
|
$
|
88,251
|
|
|
$
|
57,763
|
|
|
$
|
228,994
|
|
Purchase obligations
|
|
|
6,077
|
|
|
|
6,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
993,571
|
|
|
$
|
254,689
|
|
|
$
|
179,061
|
|
|
$
|
184,813
|
|
|
$
|
88,251
|
|
|
$
|
57,763
|
|
|
$
|
228,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Interest
on Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Capital lease obligations
|
|
$
|
160,527
|
|
|
$
|
33,843
|
|
|
$
|
30,707
|
|
|
$
|
27,216
|
|
|
$
|
23,337
|
|
|
$
|
19,032
|
|
|
$
|
26,392
|
|
Other long-term debt
|
|
|
4,842
|
|
|
|
722
|
|
|
|
678
|
|
|
|
630
|
|
|
|
579
|
|
|
|
524
|
|
|
|
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,369
|
|
|
$
|
34,565
|
|
|
$
|
31,385
|
|
|
$
|
27,846
|
|
|
$
|
23,916
|
|
|
$
|
19,556
|
|
|
$
|
28,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite-Related
Obligations
Satellites under Construction.
As part of the
spin-off, ECC will contribute several of its contracts to
construct new satellites, described below, which are
contractually scheduled to be completed within the next three
years. Future commitments related to these satellites are
included in the table above under Satellite-related
obligations.
68
ECC has entered into contracts for the construction of three
additional SSL Ka
and/or
Ku
expanded band satellites which are expected to be completed
during 2009 and 2010. ECC will contribute these to us as part of
the spin-off. ECC has not yet procured launches for these
satellites.
Leased Satellites.
In addition to its lease of
the AMC-15 and AMC-16 satellites discussed below under
Capital Lease Obligations,
ECC will also
contribute satellite service agreements to lease all of the
capacity on other satellites discussed below. Future commitments
related to these satellites are included in the table above
under Satellite-related obligations.
AMC-2.
AMC-2 is a fixed satellite services
satellite positioned at the 85 degree orbital location. Our
lease of this satellite is expected to continue through 2007 and
has been accounted for as an operating lease.
AMC-14.
AMC-14 is a DBS satellite, which is
currently expected to launch early in 2008 and commence
commercial operation at an orbital location to be determined at
a future date. The initial ten-year lease for all of the
capacity on the satellite will be accounted for as a capital
lease.
Capital
Lease Obligations
As part of the spin-off, ECC will also contribute to us two
ten-year satellite service agreements with SES Americom to lease
all the capacity on the following satellites:
AMC-15.
AMC-15, a fixed satellite services
satellite, commenced commercial operation during January 2005.
This lease will be renewable by us on a year to year basis
following the initial term, and will provide us with certain
rights to replacement satellites.
AMC-16.
AMC 16, a fixed satellite services
satellite, commenced commercial operation during February 2005.
This lease is renewable by us on a year to year basis following
the initial term, and will provide us with certain rights to
replacement satellites.
In accordance with Statement of Financial Accounting Standards
No. 13, Accounting for Leases
(SFAS 13), we will account for the satellite
component of these agreements as a capital lease. The commitment
related to the present value of the net future minimum lease
payments for the satellite component of the agreement is
included under Capital Lease Obligations in the
table above. The commitment related to future minimum payments
designated for the lease of the orbital slots and other
executory costs is included under Satellite-Related
Obligations in the table above. The commitment related to
the amount representing interest is included under Interest on
Long-Term Debt in the table above.
Purchase
Obligations
Our purchase obligations primarily consist of binding purchase
orders for set-top boxes and related components. Our purchase
obligations can fluctuate significantly from period to period
due to, among other things, managements control of
inventory levels, and can materially impact our future operating
asset and liability balances, and our future working capital
requirements.
Satellite
Insurance
We do not anticipate carrying insurance for any of the in-orbit
satellites that we will own because we believe that the premium
costs are uneconomic 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.
69
Future
Capital Requirements
From time to time we evaluate opportunities for strategic
investments or acquisitions that would complement our current
services and products, enhance our technical capabilities or
otherwise offer growth opportunities. For example, we are
exploring business plans for extended Ku-band and
Ka-band
satellite systems, including licenses to operate at the 86.5, 97
and 113 degree orbital locations. Future material investments or
acquisitions may require that we obtain additional capital.
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.
Critical
Accounting Estimates
The preparation of the combined 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 Combined Financial
Statements for EchoStar Holding Corporation.
Accounting for investments in 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 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
investments current carrying value, thereby possibly
requiring an impairment charge in the future.
Valuation of investments in non-marketable investment
securities.
We calculate the fair value of our
interest in non-marketable investment securities either at
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.
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. The
carrying value of a long-lived asset or asset group is
considered impaired when the anticipated undiscounted cash flow
from such asset or asset group is less than its carrying value.
In that event, a loss is recognized 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. 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. 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 could be material to
our combined results of operations and financial position.
Allowance for doubtful accounts.
Management
estimates the amount of required allowances for the potential
non-collectibility of accounts receivable based upon past
collection experience and consideration of other
70
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 reserve.
Management estimates the
amount of reserve required for potential obsolete inventory
based upon past experience, the introduction of new technology
and consideration of other relevant factors. However, past
experience may not be indicative of future reserve requirements
and therefore additional charges could be incurred in the future
to reflect differences between estimated and actual reserve
requirements.
Stock-based compensation.
We account for
stock
-
based compensation in accordance with the
fair value recognition provisions of SFAS 123R. We use the
Black-Scholes option pricing model, which requires the input of
subjective assumptions. These assumptions include, among other
things, estimating the length of time employees will retain
their vested stock options before exercising them (expected
term); the estimated volatility of our common stock price over
the expected term (volatility), and the number of options that
will ultimately not complete their vesting requirements
(forfeitures), see Note 3 in the Notes to our Combined
Financial Statements of EchoStar Holding Corporation. Changes in
these assumptions can materially affect the estimate of fair
value of stock-based compensation.
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 combined balance sheets, as well as
operating loss and tax credit carryforwards. We follow the
guidelines set forth in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes,
or SFAS 109, regarding the recoverability of any tax assets
recorded on the balance sheet and provide any necessary
valuation allowances as required. 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.
In accordance with SFAS 109, we periodically evaluate our
need for a valuation allowance based on both historical
evidence, including trends, and future expectations in each
reporting period. Future performance could have a significant
effect on the realization of tax benefits, or reversals of
valuation allowances, as reported in our 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 contingency matter,
a charge could be recorded in a future period that would be
material to our consolidated results of operations and financial
position.
New
Accounting Pronouncements
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109, or
FIN 48, on January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, and prescribes a
recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS 157, which defines fair value,
establishes a framework for measuring fair value in accordance
with generally accepted accounting principles and expands
disclosures about fair value measurements. This pronouncement
applies to other accounting standards that require or permit
fair value measurements. Accordingly, this statement does not
require any new fair value measurement. This statement is
effective for fiscal years beginning after November 15,
2007, and interim periods within that fiscal year. We
71
are currently evaluating the impact the adoption of
SFAS 157 will have on our financial position and results of
operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities, or
SFAS 159, which permits entities to choose to measure
financial instruments and certain other items at fair value.
This statement is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. We are currently evaluating the impact
the adoption of SFAS 159 will have on our financial
position and results of operations.
Seasonality
Our revenues vary throughout the year depending upon the
seasonality of our customers in the subscription television
service industry. As is typical for our customers, the first
half of the year generally produces fewer new subscribers than
the second half of the year.
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. We do not have
any material backlog of our products.
Quantitative
and Qualitative Disclosures About Market Risk
Market
Risks Associated With Financial Instruments
As of September 30, 2007, our cash, cash equivalents and
marketable investment securities had a fair value of
$530.8 million. Of that amount, a total of
$33.7 million was invested in fixed or variable rate
instruments or money market type accounts. The primary purpose
of these investing activities has been to preserve principal
until the cash is required to, among other things, fund
operations, make strategic investments and expand the business.
Consequently, the size of this portfolio fluctuates
significantly as cash is received and used in our business.
Our cash, cash equivalents and marketable investment securities
had an average annual return for the nine months ended
September 30, 2007 of 5.3%. A hypothetical 10% decrease in
interest rates would result in a decrease of approximately
$0.2 million in annual interest income. The value of
certain of the investments in this portfolio can be impacted by,
among other things, the risk of adverse changes in securities
and economic markets, as well as the risks related to the
performance of the companies whose commercial paper and other
instruments we hold. However, the high quality of these
investments (as assessed by independent rating agencies) reduces
these risks. The value of these investments can also be impacted
by interest rate fluctuations.
Included in our marketable investment securities portfolio
balance is debt and equity of public companies we hold for
strategic and financial purposes. As of September 30, 2007,
we held strategic and financial debt and equity investments of
public companies with a fair value of $497.0 million. These
investments are highly speculative and are concentrated in a
small number of companies. We may make additional strategic and
financial investments in debt and other equity securities in the
future. The fair value of our strategic and financial debt and
equity investments can be significantly impacted by the risk of
adverse changes in securities markets generally, as well as
risks related to the performance of the companies whose
securities we have invested in, risks associated with specific
industries, and other factors. These investments are subject to
significant fluctuations in fair value due to the volatility of
the securities markets and of the underlying businesses. A
hypothetical 10.0% adverse change in the price of our public
strategic debt and equity investments would result in
approximately a $49.7 million decrease in the fair value of
that portfolio. The fair value of our strategic debt investments
are currently not materially impacted by interest rate
fluctuations due to the nature of these investments.
72
We currently classify all marketable investment securities as
available-for-sale. 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 owners equity
(deficit), net of related deferred income tax. Declines in
the fair value of a marketable investment security which are
estimated to be other than temporary are recognized
in the Combined 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. Generally, absent specific
factors to the contrary, declines in the fair value of
investments below cost basis for a continuous period of less
than six months are considered to be temporary. Declines in the
fair value of investments for a continuous period of six to nine
months are evaluated on a case by case basis to determine
whether any company or market-specific factors exist which would
indicate that such declines are other than temporary. Declines
in the fair value of investments below cost basis for a
continuous period greater than nine months are considered other
than temporary and are recorded as charges to earnings, absent
specific factors to the contrary.
As of September 30, 2007, we had gains net of related tax
effect of $104.5 million as a part of Accumulated
other comprehensive income (loss) within Total
owners equity (deficit). During the nine months
ended September 30, 2007, we did not record any charge to
earnings for other than temporary declines in the fair value of
our marketable investment securities. In addition, during the
nine months ended September 30, 2007, we recognized in our
Combined Statements of Operations and Comprehensive Income
(Loss) realized and net gains on marketable investment
securities of $5.0 million. During the nine months ended
September 30, 2007, our strategic investments have
experienced and continue to experience volatility. If the fair
value of our strategic marketable investment securities
portfolio does not remain above cost basis or if we become aware
of any market or company specific factors that indicate that the
carrying value of certain of our securities is impaired, we may
be required to record charges to earnings in future periods
equal to the amount of the decline in fair value.
We have several strategic investments in certain non-marketable
equity securities which are included in Investment in
affiliates on our Combined Balance Sheets. Generally, we
account for our unconsolidated equity investments under either
the equity method or cost method of accounting. Because these
equity securities are not publicly traded, it is not practical
to regularly estimate the fair value of the investments;
however, these investments are subject to an evaluation for
other than temporary impairment on a quarterly basis. This
quarterly evaluation consists of reviewing, among other things,
company business plans and current financial statements, if
available, for factors that may indicate an impairment of our
investment. Such factors may include, but are not limited to,
cash flow concerns, material litigation, violations of debt
covenants and changes in business strategy. The fair value of
these equity investments is not estimated unless there are
identified changes in circumstances that may indicate an
impairment exists and these changes are likely to have a
significant adverse effect on the fair value of the investment.
As of September 30, 2007, we had $81.4 million
aggregate carrying amount of non-marketable and unconsolidated
strategic equity investments, of which $60.4 million is
accounted for under the cost method. During the nine months
ended September 30, 2007, we did not record any impairment
charges with respect to these investments.
In general, we do not use derivative financial instruments for
hedging or speculative purposes, but we may do so in the future.
73
The following table sets forth certain information concerning
our principal properties. 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.
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Approximate
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|
|
|
|
|
|
|
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|
Square
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|
Owned or
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|
Description/Use/Location
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|
Footage
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|
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Leased
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|
|
|
|
|
Corporate headquarters, Englewood, Colorado
|
|
|
476,000
|
|
|
|
Owned
|
|
|
|
|
|
Corporate facilities, Littleton, Colorado
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|
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202,000
|
|
|
|
Owned
|
|
|
|
|
|
EchoStar Technologies Corporation engineering offices and
service center, Englewood, Colorado
|
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144,000
|
|
|
|
Owned
|
|
|
|
|
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EchoStar Technologies Corporation engineering offices,
Englewood, Colorado
|
|
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63,000
|
|
|
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Owned
|
|
|
|
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EchoStar Data Networks engineering offices, Atlanta, Georgia
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|
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50,000
|
|
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Leased
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Digital broadcast operations center, Cheyenne, Wyoming
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143,000
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|
|
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Owned
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Digital broadcast operations center, Gilbert, Arizona
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124,000
|
|
|
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Owned
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|
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Regional digital broadcast operations center, Monee, Illinois
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45,000
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|
|
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Owned
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Regional digital broadcast operations center, New Braunsfels,
Texas
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35,000
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|
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Owned
|
|
|
|
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Regional digital broadcast operations center, Quicksberg,
Virginia
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35,000
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|
|
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Owned
|
|
|
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Regional digital broadcast operations center, Spokane, Washington
|
|
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35,000
|
|
|
|
Owned
|
|
|
|
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Engineering offices and warehouse, Almelo, The Netherlands
|
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55,000
|
|
|
|
Owned
|
|
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Engineering offices, Steeton, England
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43,000
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Owned
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Under the terms of our separation from ECC, we will lease
portions of certain of our owned facilities to ECC. See
Certain Intercompany Agreements Agreements
with ECC Real Estate Lease Agreements.
74
Overview
We intend to operate two primary businesses, a digital set-top
box business and a fixed satellite services business.
Our set-top box business designs, develops and distributes
set-top boxes and related products for direct-to-home satellite
service providers. In 2006, our set-top box business shipped
over nine million set-top boxes. Most of these set-top boxes
were sold to ECC, but we also sold set-top boxes to Bell
ExpressVu and other international customers. We currently employ
over 700 engineers in our set-top box and related businesses.
Our fixed satellite services business will be developed using
our nine owned or leased in-orbit satellites and related FCC
licenses, a network of seven full service digital broadcast
centers, and leased fiber optic capacity with points of presence
in approximately 150 cities. All of these assets will be
contributed to us on the distribution date. We expect that our
primary customer initially will be ECC. However, we also expect
to lease capacity in the spot market and to government and
enterprise customers.
We will enter into commercial agreements with ECC pursuant to
which we will have the obligation to sell set-top boxes and
related products and provide fixed satellite services to ECC at
set prices for a period of two years. However, ECC is under no
obligation to purchase our set-top boxes and related products
during or after this two-year period and ECC may terminate the
agreements to receive fixed satellite services upon 60 days
notice.
As part of ECC, we competed with many of our potential
customers. We believe our separation from ECC may expand our
opportunities to enter into commercial relationships with these
and other new customers, although there can be no assurance that
we will be successful in entering into any of these commercial
relationships.
Products
and Services
Set-top
Boxes and Related Products
Our set-top boxes permit consumers to watch, control and record
television programming through digital video recorder, or DVR,
technology integrated with satellite receivers. Certain of our
set-top boxes are also capable of incorporating internet
protocol television, or IPTV, functionality, which allows
consumers to download movies, music and other content from the
internet through an Ethernet connection.
Our current set-top box lineup includes:
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Standard-definition (SD) basic digital set-top
boxes:
These devices allow consumers who
subscribe to television service from multi-channel video
distributors to access encrypted digital video and audio content
and make use of a variety of interactive applications. These
applications include an on-screen interactive program guide,
pay-per-view
offerings, the ability to support V-chip type technology, games
and shopping and parental control.
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SD-DVR digital set-top boxes:
In addition to
the functionality of a SD basic digital set-top box, these
devices enable subscribers to pause, stop, reverse, fast
forward, record and replay live or recorded digital television
content using a built-in hard drive capable of storing up to
200 hours of content. They also include the ability to
support
video-on-demand,
or VOD, services.
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High-Definition (HD) digital set-top
boxes:
These devices enable subscribers to access
the enhanced picture quality and sound of high-definition
content, in addition to the functionality of a SD digital
set-top box.
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HD-DVR digital set-top boxes:
These devices
combine the functionality of the HD set-top box and the DVR
digital set-top box into a single device. Our most-advanced
HD-DVR set-top boxes are capable of storing up to 350 hours
of SD, or 55 hours of HD, content, contain IPTV
functionality, and allow users to greatly increase their DVR
storage capacity through the use of external hard drives.
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75
In addition to set-top boxes we also design and develop related
products such as satellite dishes, remote controls and other
devices and accessories.
Fixed
Satellite Services
Following the completion of the spin-off, we will operate six
owned and three leased in-orbit satellites. We will also have
one owned and one leased satellite under construction.
We will also operate a number of digital broadcast centers in
the United States. Our principal digital broadcast centers are
located in Cheyenne, Wyoming and Gilbert, Arizona. We also have
five regional digital broadcast centers that allow us to utilize
the spot beam capabilities of our satellites. Programming and
other data is received at these centers by fiber or satellite,
processed, and then uplinked to our satellites for
transmission to consumers. Equipment at our digital broadcast
centers also performs compression and encryption of our
customers programming signals.
Our transponder capacity is currently used for a variety of
applications:
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Broadcasting Services.
We lease satellite
transponder capacity to broadcasters and programmers who use our
satellites to deliver their programming to U.S. cable systems
and cable households. Our satellites are also used for the
transmission of live sporting events and satellite news
gathering services.
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Government Services.
We lease satellite
capacity and provide technical services to US government
agencies and contractors. We believe the U.S. government may
increase its use of commercial satellites for Homeland Security,
emergency response, continuing education, distance learning, and
training.
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Network Services.
We lease satellite
transponder capacity and provide terrestrial network services to
corporations. These networks are dedicated private networks that
allow delivery of video and data services for corporate
communications. Our satellites can be used for point to point or
point to multi-point one way or two way communications.
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Satellite IP.
We currently aggregate content
at our digital broadcast centers and offer transport services
for over 300 channels of MPEG IV IP encapsulated
standard-definition and high-definition programming from our
satellite located at the 85 degree orbital location. We intend
to offer these wholesale programming transport services to
telecommunication companies, rural cable operators, local
exchange carriers and wireless broadband providers.
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Other
Business Opportunities
ECC has entered into agreements to construct and launch an
S-band satellite and to lease its transponder capacity to a Hong
Kong joint venture, which in turn will sublease a portion of
such transponder capacity to an affiliate of a Chinese
governmental entity to support the development of
satellite-delivered mobile video services in China. ECC also has
recently completed several other strategic investments, and we
intend to evaluate new strategic development opportunities both
in the United States and in other international markets. These
investments will be transferred to us as part of the spin-off,
and are part of our strategy to expand our business and support
the development of new satellite-delivered services, such as
mobile video services. The expertise we obtain through these
investments may also help us to improve and expand the services
that we provide to our existing customers.
However, these investments involve many significant risks,
including, among other things, the risks that required
regulatory approvals and other conditions may not be obtained or
satisfied, that we may not be able to enter into necessary
distribution and other relationships, and that the companies in
which we invest or with whom we partner may not be able to
compete effectively in their markets or that there may be
insufficient demand for the new services planned by these
companies.
During 2007 ECC participated in an FCC auction for licenses in
the 1.4 GHz band and was the winning bidder for several licenses
with total winning bids of $57.4 million. ECC intends to
transfer these licenses to us in the spin-off subject to receipt
of final FCC approvals. We are currently evaluating commercial
uses for this spectrum. While its propagation characteristics
are attractive, the small amount of spectrum limits its
76
potential commercial use. There can be no assurance that we will
be able to exploit these licenses or that we could raise all
capital required to develop these licenses.
Sling
Media
Sling Media, Inc. was acquired in October 2007 by ECC and will
be transferred to us as part of the spin-off. Sling Media is the
maker of the Slingbox, which allows consumers to watch and
control their television programming at any time, from any
location, using personal computers, personal digital assistants,
smartphones and other digital media devices. This information
statement includes historical financial statements and other
information regarding Sling Media.
Our
Business Strategy
Expand set-top box business to additional
customers.
We believe our separation from ECC
could enhance our opportunities to sell set-top boxes to a
broader group of multi-channel video distributors. Historically,
many of our potential customers have perceived us as a
competitor due to our affiliation with ECC. After the spin-off,
we believe we could have opportunities to enter into commercial
relationships with other multi-channel video distributors. There
can be no assurance, however, that we will be successful in
entering into any of these commercial relationships (particulary
if we continue to be perceived as affiliated with ECC as a
result of common ownership and related management).
Leverage satellite capacity and related
infrastructure.
Our fixed satellite services
business benefits from excess satellite and fiber capacity that
we believe was in large part created through innovation and
operational efficiencies at ECC. While we expect that ECC will
initially be our primary customer for fixed satellite services,
we believe market opportunities exist to utilize our capacity to
provide digital video distribution, satellite-delivered IP,
corporate communications and government services to a broader
customer base.
Offer comprehensive network infrastructure
solutions.
We intend to leverage our over 700
engineers to customize infrastructure solutions for a broad base
of customers. For example, we could offer a customer the ability
to deliver a fully integrated video programming solution,
incorporating our satellite and backhaul capacity, customized
set-top boxes and network design and management.
Capitalize on change in regulations.
Changes
in federal law and regulations applicable to the set-box
industry may create opportunities for us to expand our business.
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Digital transition.
Congress has mandated that
by February 2009 all network broadcasts be transmitted
digitally, which will require households that receive
over-the-air broadcast signals with an analog television to
obtain a digital converter device. This digital converter device
is a new product and we believe that we are in a position to
develop and market devices that could allow us to effectively
compete in this new market.
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Removable security systems.
The Federal
Communications Commission, or FCC, mandated that by July 2007
cable providers use removable security modules to provide
conditional access security for television content. The FCC
intends for this regulation to spur competition in the retail
set-top box market, providing an even playing field between
leased cable set-top boxes and retail-bought, cable-ready TVs
and set-top box equipment. We believe this new regulation may
create an opportunity for us to compete on a more level field in
the domestic market for cable set-top boxes.
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Exploit international opportunities.
We
believe that direct-to-home satellite service is particularly
well-suited for countries without extensive cable
infrastructure, and we intend to continue to try to secure new
customer relationships from international direct-to-home
satellite service providers.
Pursue strategic partnerships, joint ventures and
acquisitions.
We intend to selectively pursue
partnerships, joint ventures and strategic acquisition
opportunities that we believe may allow us to increase our
existing market share, expand into new markets, broaden our
portfolio of products or intellectual property, or strengthen
our relationships with our customers.
77
Act on the set-top box replacement cycle.
The
broader adoption of high definition television by consumers will
require more advanced compression (e.g., MPEG-4) and security
technologies within set-top boxes. This may launch a replacement
cycle, particularly among direct-to-home and cable providers
with substantial bases of legacy equipment, which may create
additional market opportunities for us.
Customers
Digital
Set-top Box Business
Historically the primary customer of our digital set-top box
business has been ECC. For the nine month period ended
September 30, 2007 and the fiscal years ended
December 31, 2006, 2005 and 2004, ECC accounted for
approximately 86.2%, 84.5%, 85.6% and 89.7% of our total
historical revenue, respectively. In addition, Bell ExpressVu, a
direct-to-home satellite service provider in Canada, accounted
for 10.0%,12.2%, 11.4% and 7.3% respectively, of our historical
total revenue for the nine month period ended September 30,
2007 and the fiscal year ended December 31, 2006, 2005 and
2004. We also currently sell our set-top boxes to other
international direct-to-home satellite service providers,
although these customers do not account for a significant amount
of our total revenue.
In the near term, we expect to rely on ECC to remain the primary
customer of our set-top box business and the primary source of
our total revenue. We will enter into commercial agreements with
ECC pursuant to which we will be obligated to sell set-top boxes
and related products to ECC at set prices for a period of two
years. ECC is under no obligation to purchase our set-top boxes
or related products during or after this two- year period. In
addition, while we currently have certain binding purchase
orders from Bell ExpressVu through the beginning of 2008, the
availability of new compression technology could impact our
relationship with Bell ExpressVu, depending on its strategy to
upgrade customers. There can be no assurance that ECC or Bell
ExpressVu will continue to use our set-top boxes in the future
or that we will be successful in growing our set-top box
business.
Fixed
Satellite Services
We lease transponder capacity on our satellite fleet primarily
to ECC, but also to a small number of government and enterprise
customers, telecommunications companies and other users. In the
near term, due to our limited base of customers, we expect to
have a substantial amount of excess capacity. For the nine month
period ended September 30, 2007 and the fiscal year ended
December 31, 2006, ECC accounted for approximately 93.9%
and 97.5% of our pro forma total fixed satellite services
revenue, respectively. We will enter into commercial agreements
with ECC pursuant to which we will be obligated to provide ECC
with fixed satellite services at fixed prices for up to two
years. However, ECC may terminate these agreements upon 60 days
notice. Our other fixed satellite service sales are generally
characterized by shorter-term contracts or spot market sales.
We currently have substantial unused satellite capacity. Future
costs associated with this excess capacity will negatively
impact our margins if we do not generate revenue to offset these
costs. In addition, because a substantial portion of the
capacity of each of our AMC-15, AMC-16 and EchoStar IX
satellites remains unused, there is a significant risk that in
the future, in addition to reporting lower than expected
revenues and profitability, we will be required to record a
substantial impairment charge relating to one or more of these
satellites. We currently estimate that these potential charges
could aggregate up to $250 million, which, if incurred
would have a material adverse effect on our reported operating
results and financial position. Furthermore, it is possible that
in 2008 ECC will discontinue the use of some or all of the
capacity on one or more other satellites that it will initially
lease from us. To the extent that this occurs and we are unable
to find other customers to lease this additional anticipated
excess capacity, we may be required to record additional
substantial impairment charges that we currently estimate could
aggregate up to $100 million.
Marketing
and Sales
Historically, our sales and marketing efforts have been limited
in scope and focused on international opportunities because the
majority of our products and services were provided to ECC
pursuant to purchase
78
orders and not long term contracts. Therefore, to successfully
implement our business strategy we will need to significantly
expand our marketing and sales capabilities both domestically
and internationally.
Manufacturing
and Material Sources
Although we design, engineer and distribute set-top boxes and
related products, we are not generally engaged in the
manufacturing process. Instead we outsource the manufacturing of
our set-top boxes and related products to third party
manufacturers who manufacture our products according to
specifications supplied by us. We depend on a few manufacturers,
and in some cases a single manufacturer, for the production of
set-top boxes and related products. Although there can be no
assurance, we do not believe that the loss of any single
manufacturer would materially impact our business. Sanmina-SCI
Corporation and Jabil Circuit, Inc. currently manufacture the
majority of our set-top boxes.
Research
and Development
For the fiscal years ended December 31, 2006, 2005 and
2004, we have invested approximately $56.5 million,
$45.9 million and $39.8 million, respectively, in
research and development primarily related to our set-top box
business.
Competition
Digital
Set-top box Business
As we seek to establish ourselves in the digital set-top box
industry as an independent business we will face substantial
competition. Many of our primary competitors, such as Motorola
and Cisco, which recently acquired Scientific Atlanta, have
established longstanding relationships with their customers. For
instance, some of these competitors own the conditional access
technology deployed by their customers. We may not be able to
license this technology from these competitors on favorable
terms or at all. In addition, we may face competition from
international developers of set-top box systems who may be able
to develop and manufacture products and services at costs that
are substantially lower than ours. Our ability to compete in the
digital multi-media industry will also depend heavily on our
ability to successfully bring new technologies to market to keep
pace with our competitors.
Fixed
Satellite Services Business
We compete against larger, well-established fixed satellite
service companies, such as Intelsat, SES Americom and Telesat
Canada, in an industry that is characterized by long-term leases
and high switching costs. Therefore, it will be difficult to
displace customers from their current relationships with our
competitors. Intelsat and SES Americom maintain key North
American orbital slots which may further limit competition and
competitive pricing. In addition, our fixed satellite service
business could face significant competition from suppliers of
terrestrial communications capacity.
While we believe that there may be opportunities to capture new
business as a result of market trends such as the digital
transition and the increased communications demands of homeland
security initiatives, there can be no assurance that we will be
able to effectively compete against our competitors due to their
significant resources and operating history.
Satellite
Fleet Overview
As discussed above, we will have six owned and three leased
in-orbit satellites, and we will have one owned and one leased
satellite currently under construction. While we believe that
overall our satellite fleet is generally in good condition,
during 2007 and prior periods certain satellites in our fleet
have experienced anomalies, some of which have had a significant
adverse impact on their commercial operation. There can be no
assurance that we can recover critical transmission capacity in
the event one or more of our in-orbit satellites were to fail.
We do not anticipate carrying insurance for any of the in-orbit
satellites that we will own.
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Owned
Satellites
EchoStar III.
EchoStar III was launched
during October 1997 and currently operates at the 61.5 degree
orbital location. The satellite was originally designed to
operate a maximum of 32 transponders at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230
watts per channel, and was equipped with a total of 44
transponders to provide redundancy. Prior to 2006, TWTA
anomalies caused 22 transponders to fail. During April and
October 2006, further TWTA anomalies caused the failure of four
additional transponders. As a result, a maximum of 18
transponders are currently available for use on EchoStar III,
but due to redundancy switching limitations and specific channel
authorizations, we can only operate on 15 of the 30 FCC
authorized frequencies we will have the right to utilize at the
61.5 degree location. While we do not expect a large number of
additional TWTAs to fail in any year, and the failures have not
reduced the original minimum
12-year
design life of the satellite, it is likely that additional TWTA
failures will occur from time to time in the future, and those
failures will further impact commercial operation of the
satellite.
EchoStar IV.
EchoStar IV was launched
during May 1998 and currently operates at the 77 degree orbital
location. The satellite was originally designed to operate a
maximum of 32 transponders at approximately 120 watts per
channel, switchable to 16 transponders operating at over 230
watts per channel. As a result of past TWTA failures, only six
transponders are currently available for use and the satellite
has been fully depreciated on our books. There can be no
assurance that further material degradation, or total loss of
use, of EchoStar IV will not occur in the immediate future.
EchoStar VI.
EchoStar VI was launched during
July 2000 and is currently stationed at the 110 degree orbital
location as an in-orbit spare. The satellite was originally
equipped with 108 solar array strings, approximately 102 of
which are required to assure full power availability for the
original minimum
12-year
design life of the satellite. Prior to 2006, EchoStar VI
experienced anomalies resulting in the loss of 15 solar array
strings. During 2006, two additional solar array strings failed,
reducing the number of functional solar array strings to 91.
While the design life of the satellite has not been affected,
commercial operability has been reduced. The satellite was
designed to operate 32 transponders at approximately 125 watts
per channel, switchable to 16 transponders operating at
approximately 225 watts per channel. The power reduction
resulting from the solar array failures limits us to operation
of a maximum of 26 transponders in standard power mode, or 13
transponders in high power mode currently. The number of
transponders to which power can be provided is expected to
continue to decline in the future at the rate of approximately
one transponder every three years. See discussion of evaluation
of impairment in Long-Lived Satellite Assets in
Note 2 in the Notes to Statement of Net Assets to be
Contributed by ECC.
EchoStar VIII.
EchoStar VIII was launched
during August 2002 and currently operates at the 110 degree
orbital location. The satellite was designed to operate 32
transponders at approximately 120 watts per channel, switchable
to 16 transponders operating at approximately 240 watts per
channel. EchoStar VIII also includes spot-beam technology. This
satellite has experienced several anomalies since launch, but
none have reduced the
12-year
estimated useful life of the satellite. However, there can be no
assurance that future anomalies will not cause further losses
which could materially impact its commercial operation, or
result in a total loss of the satellite.
EchoStar IX.
EchoStar IX was launched during
August 2003 and currently operates at the 121 degree orbital
location. The satellite was designed to operate 32 fixed
satellite services transponders operating at approximately 110
watts per channel, along with transponders that can provide
services in the
Ka-Band
(a
Ka-band
payload). The satellite also includes a C-band payload
which is owned by a third party. During 2006, EchoStar IX
experienced the loss of one of its three momentum wheels, two of
which are utilized during normal operations. A spare wheel was
switched in at the time and the loss did not reduce the
12-year
estimated useful life of the satellite. During September 2007,
the satellite experienced anomalies resulting in the loss of
three solar array strings. An investigation of the anomalies is
continuing. The anomalies have not impacted commercial operation
of the satellite to date. The design life of the satellite is
not expected to be impacted since the satellite is equipped with
a total of 288 solar array strings, only approximately 276 of
which are required to assure full power availability for the
design life of the satellite. However, there can be
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no assurance future anomalies will not cause further losses,
which could impact the remaining life or commercial operation of
the satellite.
EchoStar XII.
EchoStar XII was launched during
July 2003 and currently operates at the 61.5 degree orbital
location. The satellite was designed to operate 13 transponders
at 270 watts per channel, in CONUS mode, or 22 spot beams
using a combination of 135 and 65 watt TWTAs. We currently
operate the satellite in CONUS mode. EchoStar XII has a total of
24 solar array circuits, approximately 22 of which are required
to assure full power for the original minimum
12-year
design life of the satellite. Since late 2004, eight solar array
circuits on EchoStar XII have experienced anomalous behavior
resulting in both temporary and permanent solar array circuit
failures. The cause of the failures is still being investigated.
The design life of the satellite has not been affected. However,
these temporary and permanent failures have resulted in a
reduction in power to the satellite which will preclude us from
using the full complement of transponders on EchoStar XII for
the
12-year
design life of the satellite. The exact extent of this impact
has not yet been determined. There can be no assurance future
anomalies will not cause further losses, which could further
impact commercial operation of the satellite or its useful life.
See discussion of evaluation of impairment in Long-Lived
Satellite Assets in Note 2 in the Notes to Statement
of Net Assets to be Contributed by ECC.
Leased
Satellites
We are currently leasing all of the capacity on an existing
in-orbit fixed satellite services satellite, AMC-2, at the 85
degree orbital location. Our lease of this satellite is expected
to continue through 2007 and has been accounted for as an
operating lease.
AMC-15.
AMC-15 commenced commercial operation
during January 2005 and currently operates at the 105 degree
orbital location. This SES Americom fixed satellite services
satellite is equipped with 24 Ku fixed satellite services
transponders that operate at approximately 120 watts per channel
and a Ka fixed satellite services payload consisting of 12 spot
beams. As part of the spin-off, ECC will contribute to us a
ten-year satellite service agreement for this satellite which
will be renewable by us on a year to year basis following the
initial term, and provides us with certain rights to replacement
satellites.
AMC-16.
AMC-16 commenced commercial operation
during February 2005 and currently operates at the 85 degree
orbital location. This SES Americom fixed satellite services
satellite is equipped with 24 Ku-band transponders that operate
at approximately 120 watts per channel and a
Ka-band
payload consisting of 12 spot beams. As part of the spin-off,
ECC will contribute to us a ten-year satellite service agreement
for this satellite which will be renewable by us on a year to
year basis following the initial term, and provides us with
certain rights to replacement satellites.
Satellites
Under Construction
CMBStar.
The CMBStar satellite is an S-band
satellite intended to be used in our mobile video project in
China and is scheduled to be completed during the second quarter
of 2008. If the required regulatory approvals are obtained and
contractual conditions are satisfied, the transponder capacity
of that satellite will be leased to a Hong Kong joint venture,
which in turn will sublease a portion of the transponder
capacity to an affiliate of a Chinese regulatory entity.
AMC-14.
AMC-14 will launch and commence
commercial operation in early 2008 at an orbital location to be
determined at a future date. The satellite is being equipped
with transmit antennas optimized for multiple orbital locations,
providing greater backup flexibility in the event certain other
in-orbit satellites fail.
ECC has entered into contracts for the construction of three
additional SSL Ka
and/or
Ku
expanded band satellites which are expected to be completed
during 2009 and 2010. ECC will contribute these contracts to us
as part of the spin-off.
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 and the International
Telecommunication Union. Depending
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upon the circumstances, noncompliance with legislation or
regulations promulgated by these entities could result in
suspension or revocation of our licenses or authorizations, the
termination or loss of contracts or the imposition of
contractual damages, civil fines or criminal penalties.
The following summary of regulatory developments and legislation
in the United States is not intended to describe all present and
proposed government regulation and legislation affecting the
satellite and set-top box equipment markets. Government
regulations that are currently the subject of judicial or
administrative proceedings, legislative hearings or
administrative proposals could change our industry to varying
degrees. We cannot predict either the outcome of these
proceedings or any potential impact they might have on the
industry or on our operations.
Regulations
Applicable to Satellite Operations
FCC Jurisdiction over our Satellite
Operations.
The Communications Act gives the FCC
broad authority to regulate the operations of satellite
companies. Specifically, the Communications Act gives the FCC
regulatory jurisdiction over the following areas relating to
communications satellite operations:
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the assignment of satellite radio frequencies and orbital
locations;
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licensing of satellites, earth stations, the granting of related
authorizations, and evaluation of the fitness of a company to be
a licensee;
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approval for the relocation of satellites to different orbital
locations or the replacement of an existing satellite with a new
satellite;
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ensuring compliance with the terms and conditions of such
assignments and authorizations, including required timetables
for construction and operation of satellites and other due
diligence requirements;
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avoiding interference with other radio frequency
emitters; and
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ensuring compliance with other applicable provisions of the
Communications Act and FCC rules and regulations governing the
operations of satellite communications providers.
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In order to obtain FCC satellite licenses and authorizations,
satellite operators must satisfy strict legal, technical and
financial qualification requirements. Once issued, these
licenses and authorizations are subject to a number of
conditions including, among other things, satisfaction of
ongoing due diligence obligations, construction milestones, and
various reporting requirements. Applications for new or modified
satellites and earth stations are necessary for further
development and expansion of satellites services. Necessary
federal approval of these applications may not be granted, or
may not be granted in a timely manner.
Overview of Our Satellites Licenses and
Authorizations.
This overview describes the
satellite licenses and authorizations that will be contributed
to us in the spin-off, and it assumes for purposes of this
description the completion of these contributions. However,
transfer of these licenses and authorizations remains subject to
receipt of all required FCC and other governmental approvals.
Our satellites are located in orbital positions, or slots, that
are designated by their western longitude. An orbital position
describes both a physical location and an assignment of spectrum
in the applicable frequency band. Each transponder on our
satellites typically exploits one frequency channel. Through
digital compression technology, we can currently transmit up to
13 standard-definition digital video channels from each
transponder. Several of our satellites also include spot-beam
technology which enables us to provide services on a local or
regional basis, but reduces the number of video channels that
could otherwise be offered across the entire United States.
We have U.S. DBS licenses for 30 frequencies at the 61.5
degree orbital location, capable of providing service to the
Eastern and Central United States. We are also currently
operating on the two unassigned frequencies at the 61.5 orbital
location under a conditional special temporary authorization. We
recently sought renewal of that authority. The licensing of
those two channels is under FCC review, and also subject to an
FCC moratorium on new DBS applications. The FCC has previously
found that existing DBS providers will not be
82
eligible for the two unassigned channels at the 61.5 degree
orbital location. EchoStar Satellite L.L.C. has a pending
reconsideration petition of that decision.
Following the spin-off, we will have the right to use 32
frequencies at a Mexican DBS orbital slot at
the 77 degree orbital location, but it is likely to be
several years before a satellite is available to exploit all of
that spectrum.
We also hold licenses or have entered into agreements to lease
capacity on satellites at the following fixed satellite services
orbital locations including:
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500 MHz of Ku spectrum divided into 32 frequencies at the
121 degree orbital location, capable of providing service to
CONUS, plus 500 MHz of Ka spectrum at the 121 degree
orbital location capable of providing service into select spot
beams;
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500 MHz of Ku spectrum divided into 24 frequencies at the
105 degree orbital location, currently capable of providing
service to CONUS, Alaska and Hawaii, plus approximately
720 MHz of Ka spectrum capable of providing service through
spot beams to CONUS, Alaska and Hawaii; and
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500 MHz of Ku spectrum divided into 24 frequencies at the
85 degree orbital location, currently capable of providing
service to CONUS, plus approximately 720 MHz of Ka spectrum
capable of providing service through spot beams to CONUS.
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We also hold authorizations to construct additional satellites
at other orbital locations. Specifically, we hold
Ka-band
licenses at the 97 and 113 degree orbital locations. More
recently, we were granted authority for a tweener
DBS satellite at the 86.5 degree orbital location. That
authorization will be conditioned on final FCC licensing and
service rules in the tweener proceeding, in which
the FCC is examining permitting satellites to operate from
orbital locations 4.5 degrees (half of the usual 9 degrees) away
from traditional DBS satellites. The FCC has also granted
authorizations to Spectrum Five for a tweener satellite at the
114.5 degree orbital location. EchoStar Satellite L.L.C.
challenged the Spectrum Five authorization, and Telesat Canada,
a Canadian satellite operator, has challenged our license.
Use of these licenses and conditional authorizations is subject
to certain technical and due diligence requirements, including
the requirement to construct and launch satellites according to
specific milestones and deadlines. There can be no assurance
that we will develop acceptable plans to meet these deadlines,
or that we will be able to utilize these orbital slots.
Duration of our Satellite Licenses.
Generally
speaking, all of our satellite licenses are subject to
expiration unless renewed by the FCC. The term of each of our
DBS licenses is 10 years; fixed satellite services licenses
generally are for 15 year terms. In addition, our special
temporary authorizations are granted for periods of only
180 days or less, subject again to possible renewal by the
FCC.
Opposition and other Risks to our
Licenses.
Several third parties have opposed, and
we expect them to continue to oppose, some of our FCC satellite
authorizations and pending requests to the FCC for extensions,
modifications, waivers and approvals of our licenses. In
addition, we may not have fully complied with all of the FCC
reporting and filing requirements in connection with our
satellite authorizations. Consequently, it is possible the FCC
could revoke, terminate, condition or decline to extend or renew
certain of our authorizations or licenses.
FCC Rulemaking Affecting our Licenses and
Applications.
A number of our other applications
have been denied or dismissed without prejudice by the FCC, or
remain pending. We cannot be sure that the FCC will grant any of
our satellite applications, or that the authorizations, if
granted, will not be subject to onerous conditions. Moreover,
the cost of building, launching and insuring a satellite can be
as much as $300 million or more, and we cannot be sure that
we will be able to construct and launch all of the satellites
for which we have requested authorizations. The FCC has also
imposed a $3.0 million bond requirement for our fixed
satellite services satellite licenses, all or part of which
would be forfeited by a licensee that does not meet its
diligence milestones for a particular satellite.
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Reverse Band (17/24 GHz BSS)
Spectrum.
The FCC has recently announced
licensing and service rules for the 17/24 GHz BSS or
reverse band spectrum, which could create
substantial additional capacity for satellite providers. It
could also result in additional satellite competition from new
entrants. Under FCC rules, we are eligible for up to 5 orbital
locations. We cannot predict when, or whether, the FCC will
grant our applications. Nor can we predict whether FCC action,
or other applicants selected orbital locations, will limit
the utility of this new spectrum for our operations.
Interference from Other Services Sharing Satellite
Spectrum.
The FCC has adopted rules that allow
non-geostationary orbit fixed satellite services to operate on a
co-primary basis in the same frequency band as DBS and
Ku-band-based fixed satellite services. The FCC has also
authorized the use of terrestrial communication services (MVDDS)
in the DBS band. MVDDS licenses were auctioned in 2004. Despite
regulatory provisions to protect DBS operations from harmful
interference, there can be no assurance that operations by other
satellite or terrestrial communication services in the DBS band
will not interfere with our DBS operations and adversely affect
our business.
International Satellite Competition and
Interference.
DIRECTV has obtained FCC authority
to provide service to the United States from a Canadian DBS
orbital slot. We have also received authority to do the same
from a Mexican orbital slot at 77 degrees. The possibility that
the FCC will allow service to the U.S. from additional
foreign slots may permit additional competition against us from
other satellite providers. 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 FCCs tweener proceeding.
Emergency Alert System.
The Emergency Alert
System (EAS) requires participants to interrupt
programming during nationally declared emergencies and to pass
through emergency-related information. The FCC requires
satellite carriers to participate in the national
portion of EAS, and is considering whether to mandate that
satellite carriers also interrupt programming for local
emergencies and weather events. We cannot be sure that this
requirement will not affect us adversely by requiring us to
devote additional resources to complying with EAS requirements.
The International Telecommunication Union.
Our
satellites also must conform to the International
Telecommunication Union, or ITU, requirements and regulations.
We have cooperated, and continue to cooperate, with the FCC in
the preparation of ITU filings and responses. Requests for
modification that have been filed by the United States
government for our satellites are pending or in various stages
of completion. We cannot predict if all the required requests
will be made or when the ITU will act upon them.
Regulations
Applicable to Set-top box Operations
Plug and Play.
Cable companies were required
to separate the security functionality from their set-top boxes
to increase competition and encourage the sale of set-top boxes
in the retail market by July 1, 2007. Traditionally, cable
service providers sold or leased set-top boxes with integrated
security functionality to subscribers. DBS providers are not
currently subject to the removable security requirements. The
development of a retail market for cable set-top boxes could
provide us with an opportunity to expand operations providing
set-top box equipment to non-DBS households. The FCC has an open
proceeding addressing the need to expand the scope of the cable
plug and play rules, and the need for all-video
provider set-top box solutions. If the FCC were to extend or
expand its separate security rules to include DBS providers,
sales of our set-top boxes to DBS providers may be negatively
impacted. Specifically, if a retail DBS set-top box market
develops capable of accepting the security modules, we risk
reduced sales if competitors produce DBS set-top boxes.
NTIA Digital Converter Box Program.
The
Commerce Departments National Telecommunications and
Information Administration (NTIA) has established a coupon
program allowing U.S. households to request up to two
coupons, worth $40 each, to be used toward the purchase of up to
two, digital-to-analog converter boxes as part of the February
2009 digital television transition. This program is necessary to
ensure that
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consumers with analog televisions will continue to be able to
view over-the-air broadcast signals after the digital
transition. To be eligible for the coupons, converter boxes must
be approved by the NTIA, and we have submitted a converter box
for NTIA approval. We cannot predict when, or if, our box will
be approved for the coupon program.
Export
Control Regulation Applicable to Satellite and Set-top box
Equipment
We are required to obtain import and export licenses from the
United States government to receive and deliver components of
direct-to-home satellite TV systems. In addition, the delivery
of satellites and the supply of related ground control
equipment, technical data, and satellite
communication/control
services to destinations outside the United States is subject to
strict export control and prior approval requirements from the
United States government (including prohibitions on the sharing
of certain satellite-related goods and services with China).
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
EHC will offer. In general, if a court determines that one or
more of our products infringes on intellectual property held by
others, we may be required to cease developing or marketing
those products, to obtain licenses from the holders of the
intellectual property at a material cost, or to redesign those
products in such a way as to avoid infringing the patent claims.
If those intellectual property rights are held by a competitor,
we may be unable to obtain the intellectual property at any
price, which could adversely affect our competitive position.
We may not be aware of all intellectual property rights that our
products may potentially infringe. In addition, patent
applications in the United States are confidential until the
Patent and Trademark Office issues a patent and, accordingly,
our products may infringe claims contained in pending patent
applications of which we are not aware. Further, the process of
determining definitively whether a claim of infringement is
valid often involves expensive and protracted litigation, even
if we are ultimately successful on the merits.
We cannot estimate the extent to which we may be required in the
future to obtain intellectual property licenses or the
availability and cost of any such licenses. Those costs, and
their impact on our results of operations, could be material.
Damages in patent infringement cases may also include treble
damages in certain circumstances. To the extent that we are
required to pay unanticipated royalties to third parties, these
increased costs of doing business could negatively affect our
liquidity and operating results. EHC is currently defending
multiple patent infringement actions. We cannot be certain the
courts will conclude these companies do not own the rights they
claim, that our products do not infringe on these rights, that
we would be able to obtain licenses from these persons on
commercially reasonable terms or, if we were unable to obtain
such licenses, that we would be able to redesign our products to
avoid infringement. See Legal Proceedings.
Environmental
Regulations
We are subject to the requirements of federal, state, local and
foreign environmental and occupational safety and health laws
and regulations. These include laws regulating air emissions,
water discharge and waste management. We attempt to maintain
compliance with all such requirements. We do not expect capital
or other expenditures for environmental compliance to be
material in 2007 or 2008. Environmental requirements are
complex, change frequently and have become more stringent over
time. Accordingly, we cannot provide assurance that these
requirements will not change or become more stringent in the
future in a manner that could have a material adverse effect on
our business.
Geographic
Area Data and Transactions with Major Customers
For principal geographic area data and transactions with major
customers for 2006, 2005 and 2004, see Note 8 in the Notes
to the Combined Financial Statements of EchoStar Holding
Corporation.
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Employees
Upon completion of the spin-off, we will have approximately
1,500 employees. We anticipate that subsequent to the
spin-off, ECC will provide us with certain management and
administrative services, which will include the services of
certain executive officers of ECC. See Certain
Intercompany Agreements Management Services
Agreement.
Legal
Proceedings
Separation
Agreement
In connection with the spin-off, we have entered into a
separation agreement with ECC, which provides for, among other
things, the division of liability resulting from litigation.
Under the terms of the separation agreement, we have assumed
liability for any acts or omissions that relate to our business
whether such acts or omissions occurred before or after the
spin-off. Certain exceptions are provided, including for
intellectual property related claims generally, whereby we will
only be liable for our acts or omissions that occurred following
the spin-off. In accordance with these terms of the separation
agreement, we may be partially or completely responsible for any
liability resulting from the legal proceedings described below.
Acacia
During 2004, Acacia Media Technologies, which we refer to as
Acacia filed a lawsuit against us and ECC in the United States
District Court for the Northern District of California. The suit
also named DirecTV, Comcast, Charter, Cox and a number of
smaller cable companies as defendants. Acacia is an intellectual
property holding company which seeks to license the patent
portfolio that it has acquired. The suit alleges infringement of
United States Patent Nos. 5,132,992 (the 992 patent),
5,253,275 (the 275 patent), 5,550,863 (the 863
patent), 6,002,720 (the 720 patent) and 6,144,702 (the
702 patent). The 992, 863, 720 and
702 patents have been asserted against us.
The patents relate to various systems and methods related to the
transmission of digital data. The 992 and 702
patents have also been asserted against several Internet content
providers in the United States District Court for the Central
District of California. During 2004 and 2005, the Court issued
Markman rulings which found that the 992 and 702
patents were not as broad as Acacia had contended, and that
certain terms in the 702 patent were indefinite. In April
2006, ECC and other defendants asked the Court to rule that the
claims of the 702 patent are invalid and not infringed.
That motion is pending. In June and September 2006, the Court
held Markman hearings on the 992, 863, 720 and
275 patents, and issued a ruling during December 2006.
Acacias various patent infringement cases have been
consolidated for pre-trial purposes in the United States
District Court for the Northern District of California.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off.
Broadcast
Innovation, L.L.C.
In 2001, Broadcast Innovation, L.L.C., which we refer to as
Broadcast Innovation, filed a lawsuit against ECC, DirecTV,
Thomson Consumer Electronics and others in Federal District
Court in Denver, Colorado. The suit alleges infringement of
United States Patent Nos. 6,076,094 (which we refer to as the
094 patent) and 4,992,066 (which we refer to as the
066 patent). The 094 patent relates to certain
methods and devices for transmitting and receiving data along
with specific formatting information for the data. The 066
patent relates to certain methods and devices for providing the
scrambling circuitry for a pay television system on removable
cards. We examined these patents and believe that they are not
infringed by any of our products or services. Subsequently,
DirecTV and Thomson settled with Broadcast Innovation leaving us
as the only defendant.
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During 2004, the judge issued an order finding the 066
patent invalid. Also in 2004, the Court ruled the 094
patent invalid in a parallel case filed by Broadcast Innovation
against Charter and Comcast. In 2005, the United States
Court of Appeals for the Federal Circuit overturned the
094 patent finding of invalidity and remanded the case
back to the District Court. During June 2006, Charter filed a
reexamination request with the United States Patent and
Trademark Office. The Court has stayed the case pending
reexamination. Our case remains stayed pending resolution of the
Charter case.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off.
Finisar
Corporation
Finisar Corporation, which we refer to as Finisar, obtained a
$100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent
infringement. Finisar alleged that DirecTVs electronic
program guide and other elements of its system infringe United
States Patent No. 5,404,505 (the 505 patent).
In July 2006, ECC, together with NagraStar LLC, filed a
Complaint for Declaratory Judgment in the United States District
Court for the District of Delaware against Finisar that asks the
Court to declare that they and we do not infringe, and have not
infringed, any valid claim of the 505 patent. Trial is not
currently scheduled. The District Court has stayed our action
until the Federal Circuit has resolved DirecTVs appeal.
We and ECC intend to vigorously prosecute this case. In the
event that a Court ultimately determines that we and ECC
infringe any of the patents, we may be subject to an injunction
that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being
indemnified by ECC for any potential liability or damages
resulting from this suit relating to the period prior to the
effective date of the spin-off.
Global
Communications
On April 19, 2007, Global Communications, Inc., which we
refer to as Global, filed a patent infringement action against
ECC in the United States District Court for the Eastern District
of Texas. The suit alleges infringement of United States Patent
No. 6,947,702 (which we refer to as the 702 patent).
This patent, which involves satellite reception, was issued in
September 2005. On October 24, 2007, the United States
Patent and Trademark Office granted ECCs request for
re-examination of the 702 patent and issued an Office
Action finding that all of the claims of the 702 patent
were invalid. Based on the PTOs decision, ECC has asked
the District Court to stay the litigation until the
re-examination proceeding is concluded.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off.
Superguide
During 2000, Superguide Corp., which we refer to as Superguide,
filed suit against ECC, DirecTV, Thomson and others in the
United States District Court for the Western District of North
Carolina, Asheville Division, alleging infringement of United
States Patent Nos. 5,038,211 (which we refer to as the 211
patent), 5,293,357 (which we refer to as the 357 patent)
and 4,751,578 (which we refer to as the 578 patent) which
relate to certain electronic program guide functions, including
the use of electronic program guides to control VCRs. Superguide
sought injunctive and declaratory relief and damages in an
unspecified amount.
On summary judgment, the District Court ruled that none of the
asserted patents were infringed by us. These rulings were
appealed to the United States Court of Appeals for the Federal
Circuit. During 2004, the Federal
87
Circuit affirmed in part and reversed in part the District
Courts findings and remanded the case back to the District
Court for further proceedings. In 2005, Superguide indicated
that it would no longer pursue infringement allegations with
respect to the 211 and 357 patents and those patents
have now been dismissed from the suit. The District Court
subsequently entered judgment of non-infringement in favor of
all defendants as to the 211 and 357 patents and
ordered briefing on Thomsons license defense as to the
578 patent. During December 2006, the District Court found
that there were disputed issues of fact regarding Thomsons
license defense, and ordered a trial solely addressed to that
issue. That trial took place in March 2007. In July 2007, the
District Court ruled in favor of Superguide. As a result,
Superguide will be able to proceed with their infringement
action against us, DirecTV and Thomson.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we infringe the
578 patent, we may be subject to a portion of the final
damages, which may include treble damages
and/or
an
injunction that could require us to materially modify certain
user-friendly electronic programming guide and related features
that we currently offer to consumers. We are being indemnified
by ECC 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.
Tivo
Inc.
During April 2006, a Texas jury concluded that certain of our
digital video recorders, or DVRs, infringed a patent held by
Tivo. The Texas court subsequently issued an injunction
prohibiting us from offering DVR functionality. A Court of
Appeals has stayed that injunction during the pendency of our
appeal.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off. We and ECC believe that we do not infringe any of
the claims asserted against us and ECC.
Trans
Video
In August 2006, Trans Video Electronic, Ltd., which we refer to
as Trans Video, filed a patent infringement action against ECC
in the United States District Court for the Northern District of
California. The suit alleges infringement of United States
Patent Nos. 5,903,621 (which we refer to as the 621
patent) and 5,991,801 (which we refer to as the 801
patent). The patents relate to various methods related to the
transmission of digital data by satellite. On May 14, 2007,
we and ECC reached a settlement which did not have a material
impact on our results of operations.
Other
In addition to the above actions, we are subject to various
other legal proceedings and claims which arise in the ordinary
course of business. In our opinion, the amount of ultimate
liability with respect to any of these actions is unlikely to
materially affect our financial position, results of operations
or liquidity.
88
Directors
and Executive Officers
The following table sets forth certain information as of
December 12, 2007, concerning our directors and executive
officers, including a five-year employment history and any
directorships held in public companies:
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Name
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Age
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Position With the Company
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Charles W. Ergen
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54
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Chairman of the Board and Chief Executive Officer
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R. Stanton Dodge
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39
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Executive Vice President, General Counsel and Secretary
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Michael T. Dugan
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58
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Director
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Steven R. Goodbarn
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50
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Director
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Bernard L. Han
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43
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Executive Vice President and Chief Financial Officer
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Mark W. Jackson
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46
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President
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David K. Moskowitz
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49
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Director
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Tom A. Ortolf
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57
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Director
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Steven B. Schaver
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53
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President -- EchoStar International Corporation
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C. Michael Schroeder
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59
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Director
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Carl E. Vogel
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50
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Director, Vice Chairman of the Board and Advisor
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ECC elected our directors and appointed our executive officers
in October 2007. Each director was elected for a term expiring
at our annual meeting of shareholders to be held in 2008 or
until such directors successor is duly elected and
qualified. At the 2008 annual meeting of shareholders and
thereafter, each director will be elected to a one-year term to
expire at the annual meeting of shareholders for the following
year or until such directors successor is duly elected and
qualified. Seven of our directors, Charles W. Ergen, Michael T.
Dugan, Stephen R. Goodbarn, David K. Moskowitz, Tom A. Ortolf,
C. Michael Schroeder and Carl E. Vogel, currently
serve on ECCs board of directors. Mr. Dugan and
Mr. Schroeder intend to resign from the board of directors
of ECC on the distribution date. In addition, Mr. Ergen and
Mr. Vogel currently serve as the Chairman and Chief
Executive Officer and Vice-Chairman and President of ECC,
respectively. We also expect to share three non-business
executives with ECC: Bernard L. Han, R. Stanton Dodge and Paul
W. Orban, as Executive Vice President and Chief Financial
Officer, Executive Vice President, General Counsel and Secretary
and Senior Vice President and Controller, respectively.
The following sets forth the business experience of each of our
directors and executive officers over the last five years:
Charles W. Ergen.
Mr. Ergen is our
Chairman of the Board and Chief Executive Officer.
Mr. Ergen is also the Chairman of the Board and Chief
Executive Officer of ECC, positions he has held since its
formation. During the past five years he has also held various
executive officer and director positions with ECCs
subsidiaries.
R. Stanton Dodge.
Mr. Dodge serves
as our Executive Vice President, General Counsel and Secretary.
Mr. Dodge also serves in the same capacity for ECC.
Mr. Dodge is responsible for all legal and regulatory
affairs of EHC and ECC. Since joining ECC in November 1996, he
has held various positions in ECCs legal department. Prior
to joining ECC, Mr. Dodge was a law clerk to the Hon. Jose
D.L. Marquez of the Colorado Court of Appeals. He received his
J.D., magna cum laude, from Suffolk University Law School in
1995 and his B.S. in accounting from the University of Vermont
in 1991.
Michael T. Dugan.
Mr. Dugan serves as a
member of our board of directors. He is currently a senior
advisor to ECC and serves as a member of ECCs board of
directors. Until October 2006, Mr. Dugan was ECCs
Chief Technology Officer, and prior to 2004 was its President
and Chief Operating Officer. In that capacity, Mr. Dugan
had been responsible for, among other things, all operations
except legal, finance and accounting at ECC. Until April 2000,
Mr. Dugan had been President of EchoStar
89
Technologies Corporation. Previously, he was the Senior Vice
President of the Consumer Products Division of ECC.
Mr. Dugan has been employed with ECC since 1990.
Mr. Dugan has served as a director of Citizens
Communications Company since October 2006.
Steven R. Goodbarn.
Mr. Goodbarn serves
as a member of our board of directors and is a member of our
Executive Compensation Committee, Nominating Committee, and
Audit Committee, where he serves as our audit committee
financial expert. Mr. Goodbarn has also served as a
member of ECCs board of directors since December 2002, and
is a member of its Executive Compensation Committee, Nominating
Committee, and Audit Committee. Since July 2002,
Mr. Goodbarn has served as director and president of
Secure64 Software Corporation, a company he co-founded.
Mr. Goodbarn was chief financial officer of Janus Capital
Corporation from 1992 until late 2000. During that time, he was
a member of the executive committee and served on the board of
directors of many Janus corporate and investment entities. Until
September 2003, Mr. Goodbarn also served as a director of
Nighthawk Systems. Mr. Goodbarn is a CPA and spent
12 years at Price Waterhouse prior to joining Janus.
Bernard L. Han.
Mr. Han serves as our
Executive Vice President and Chief Financial Officer and is
responsible for all accounting, finance and information
technology functions of the Company. Mr. Han also serves in
the same capacity for ECC, where he was named Executive Vice
President and Chief Financial Officer of ECC in September 2006.
From October 2002 to May 2005, Mr. Han served as Executive
Vice President and Chief Financial Officer of Northwest
Airlines, Inc. Prior to October 2002, he held positions as
Executive Vice President and Chief Financial Officer and Senior
Vice President and Chief Marketing Officer at America West
Airlines, Inc.
Mark W. Jackson.
Mr. Jackson serves as
our President. Until completion of the spin-off,
Mr. Jackson will also continue to serve as President of
EchoStar Technologies Corporation, a position he has held since
2004. Mr. Jackson served as Senior Vice President of ETC
from April 2000 until June 2004 and as Senior Vice President of
Satellite Services from December 1997 until April 2000.
David K. Moskowitz.
Mr. Moskowitz serves
as a member of our board of directors. From March 1990 until
July 1, 2007, Mr. Moskowitz was an Executive Vice
President and the Secretary and General Counsel of ECC, where he
is currently a senior advisor and serves as a member of its
board of directors.
Tom A. Ortolf.
Mr. Ortolf serves as a
member of the board of directors, and is a member of our
Executive Compensation Committee, Nominating Committee, and
Audit Committee. Mr. Ortolf also serves as a member of the
board of directors of ECC, and is a member of its Executive
Compensation Committee, Nominating Committee, and Audit
Committee. Mr. Ortolf has been the President of Colorado
Meadowlark Corp., a privately held investment management firm,
for more then ten years. From 1988 until 1991, Mr. Ortolf
served as ECCs President and Chief Operating Officer.
Steven B. Schaver.
Mr. Schaver is
currently President of EchoStar International Corporation, which
is one of our subsidiaries. He has served in this role for ECC
since April 2000. Mr. Schaver served as ECCs Chief
Financial Officer from February 1996 through August 2000 and
served as ECCs Chief Operating Officer from November 1996
until April 2000.
C. Michael Schroeder.
Mr. Schroeder
serves as a member of our board of directors, and serves on our
Executive Compensation Committee, Nominating Committee, and
Audit Committee. Mr. Schroeder has served on the board of
directors of ECC since November 2003 and is a member of its
Executive Compensation Committee, Nominating Committee, and
Audit Committee. In 1981, Mr. Schroeder founded Consumer
Satellite Systems, Inc. (CSS), which he grew to encompass a
10 state distribution system operating in a region ranging
from Wisconsin to Florida. CSS served retailers selling
satellite systems, televisions and a range of consumer
electronics products. Mr. Schroeder also founded a
programming division of CSS that grew to serve over 400,000
subscribers.
Carl E. Vogel.
Mr. Vogel is currently
Vice-Chairman of our board of directors and is an advisor to us.
Mr. Vogel also serves as Vice-Chairman of ECCs board
of directors and President of ECC. From 2001 until 2005,
Mr. Vogel served as the President and CEO of Charter
Communications Inc., a publicly-traded company providing cable
television and broadband services to approximately six million
90
customers. Prior to joining Charter, Mr. Vogel worked as an
executive officer in various capacities for the companies
affiliated with Liberty Media Corporation. Mr. Vogel was
one of ECCs executive officers from 1994 until 1997,
including serving as ECCs President from 1995 until 1997.
Mr. Vogel has served as a director of Shaw Communications,
Inc. since June 2006.
During the past five years, none of the above persons has had
any involvement in legal proceedings that would be material to
an evaluation of his or her ability or integrity.
Board
Composition
Immediately after the spin-off, Charles W. Ergen, our Chairman
and Chief Executive Officer, will beneficially own approximately
50.0% of our total equity securities and possess approximately
80.0% of the total voting power. Please see Security
Ownership of Certain Beneficial Owners and Management
below. Thus, Mr. Ergen will have the ability to elect a
majority of our directors and to control all other matters
requiring the approval of our stockholders. As a result of
Mr. Ergens voting power, we will be a
controlled company as defined in the Nasdaq listing
rules. Therefore, we will not subject to the Nasdaq listing
requirements that would otherwise require us to have:
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a board of directors comprised of a majority of independent
directors;
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compensation of our executive officers determined by a majority
of the independent directors or a compensation committee
composed solely of independent directors; and
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director nominees selected, or recommended for the Boards
selection, either by a majority of the independent directors or
a nominating committee composed solely of independent directors.
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Nevertheless, we have created an Executive Compensation
Committee, which we refer to as the Compensation
Committee, and a Nominating Committee, in addition to an
Audit Committee, all of which are composed entirely of
independent directors.
Committees
of the Board
Our board of directors has established a Compensation Committee,
an Audit Committee and a Nominating Committee. The membership
and function of each committee is described below.
Compensation Committee.
The Compensation
Committee operates under a Compensation Committee Charter
adopted by the board. The principal functions of the
Compensation Committee are, to the extent the board deems
necessary or appropriate, to:
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make and approve all option grants and other issuances of
EHCs equity securities to EHCs executive officers
and board members other than nonemployee directors;
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approve all other option grants and issuances of EHCs
equity securities, and recommend that the full board make and
approve such grants and issuances;
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establish in writing all performance goals for performance-based
compensation that together with other compensation to senior
executive officers could exceed $1 million annually, other
than standard stock incentive plan options that may be paid to
EHCs executive officers, and certify achievement of such
goals prior to payment; and
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set the compensation of the Chairman and Chief Executive Officer.
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The current members of the Compensation Committee are
Mr. Goodbarn, Mr. Ortolf and Mr. Schroeder. The
board of directors has determined that each of these individuals
meets the independence requirements of Nasdaq and applicable SEC
rules and regulations.
Audit Committee.
Our board of directors has
established a standing Audit Committee in accordance with Nasdaq
rules and Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The Audit Committee operates
91
under an Audit Committee Charter adopted by the board. The
principal functions of the Audit Committee are to:
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select the independent registered public accounting firm and set
its compensation;
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select the internal auditor;
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review and approve managements plan for engaging our
independent registered public accounting firm during the year to
perform non-audit services and consider what effect these
services will have on the independence of our independent
registered public accounting firm;
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review our annual financial statements and other financial
reports that require approval by our board of directors;
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oversee the integrity of our financial statements, our systems
of disclosure and internal controls, and our compliance with
legal and regulatory requirements;
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review the scope of our independent registered public accounting
firms audit plans and the results of their audits; and
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evaluate the performance of our internal audit function and
independent registered public accounting firm.
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The current members of the Audit Committee are
Mr. Goodbarn, Mr. Ortolf and Mr. Schroeder, with
Mr. Goodbarn serving as Chairman of the Committee. Each of
these individuals meets the independence requirements of Nasdaq
and applicable SEC rules and regulations. The board of directors
has determined that each member of our Audit Committee is
financially literate and that Mr. Goodbarn qualifies as an
audit committee financial expert as defined by
applicable SEC rules and regulations.
Nominating Committee.
The Nominating Committee
operates under a Nominating Committee Charter adopted by the
Board. The principal function of the Nominating Committee is to
recommend independent director nominees for selection by the
board of directors. The current members of the Nominating
Committee are Mr. Goodbarn, Mr. Ortolf and
Mr. Schroeder. The board of directors has determined that
each of these individuals meets the independence requirements of
Nasdaq and applicable SEC rules and regulations.
The Nominating Committee will consider candidates suggested by
its members, other directors, senior management and shareholders
as appropriate. No search firms or other advisors were retained
to identify nominees during the past fiscal year. The Nominating
Committee has not adopted a written policy with respect to the
consideration of candidates proposed by security holders or with
respect to nominating anyone to our board of directors other
than nonemployee directors. Director candidates, whether
recommended by the Nominating Committee, other directors, senior
management or shareholders are currently considered by the
Nominating Committee and the board of directors, as applicable,
in light of the entirety of their credentials, including but not
limited to the following factors: (i) their reputation and
character; (ii) their ability and willingness to devote
sufficient time to board duties; (iii) their educational
background; (iv) their business and professional
achievements, experience and industry background; (v) their
independence from management under listing standards and
EHCs governance guidelines; and (vi) the needs of our
board of directors and EHC.
Compensation
Discussion and Analysis
This Compensation Discussion and Analysis
(CD&A) describes the compensation policy
applied by our parent company, ECC, to our named executive
officers (the NEOs) with respect to fiscal 2006,
which is substantially the same as the compensation policy we
will implement after we become an independent public company.
Our NEOs include Messrs. Charles W. Ergen, Bernard L. Han,
Mark W. Jackson, Steven B. Schaver and R. Stanton Dodge. Of
these NEOs, Mr. Ergen and Mr. Han were NEOs of ECC in
2006. Messrs. Jackson and Schaver will be employed by and will
be solely compensated by EHC. Mr. Ergen will be employed and
compensated by both EHC and ECC and each company expects to
follow the compensation policies described below with respect to
Mr. Ergens compensation. In addition, as two separately
traded-public companies, the compensation paid by one company
has no impact on the compensation decisions of the other
company. In
92
respect of EHCs remaining two NEOs, pursuant to the
Management Services Agreement, Mr. Han and Mr. Dodge,
will be employed by, and receive compensation from, ECC, and
will not be directly compensated by us. Under the Management
Services Agreement, we will make payments to ECC based upon a
portion of ECCs personnel costs for these two NEOs (taking
into account salary and fringe benefits) based upon the
anticipated percentages of time to be spent by these NEOs
performing services for us. Incentive compensation for
Messrs. Han and Dodge will be solely the responsibility of
ECC. See Certain Intercompany Agreements
Management Services Agreement. Other than as described
above with respect to Mr. Ergen and in relation to the payments
to be made by EHC to ECC in respect of Messrs. Han and Dodge
pursuant to the Management Services Agreement, there are no NEOs
of EHC who will receive direct compensation from both EHC and
ECC.
Compensation
Philosophy
Historically, ECCs executive compensation program was, and
following the spin-off our executive compensation program will
continue to be, guided by the following principles:
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Attraction, retention and motivation of executive officers over
the long-term; and
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Creation of shareholder value by aligning the interest of
management with that of the shareholders through equity
incentives.
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Compensation
Oversights
Our Compensation Committee will be composed entirely of
independent, outside directors and will operate under a
Compensation Committee Charter adopted by our board of
directors. See Committees of the Board
Compensation Committee above for a more detailed
description of the duties of the Compensation Committee.
General
Compensation Levels
Historically.
The total direct compensation
opportunities, both base salaries and long-term incentives,
offered to ECCs NEOs have been designed to ensure that
they are competitive with market practice, support ECCs
executive recruitment and retention objectives and will
contribute to its long-term success by aligning the interest of
its executive officers and shareholders.
Mr. Ergen recommends to the board of directors, but
ECCs board of directors ultimately approves, the base
compensation of ECCs other NEOs. ECCs compensation
committee has made and approved grants of options and other
equity-based compensation to ECCs NEOs, and established in
writing performance goals for any performance-based compensation
that together with other compensation to any NEO could exceed
$1 million annually. ECCs compensation committee has
also certified achievement of those performance goals prior to
payment of performance-based compensation. In addition to peer
group analysis, as described below, factors considered by
ECCs compensation committee and board of directors have
included their perception of the individuals performance,
the individuals success in achieving ECCs and
individual goals, equity awards previously granted to the
individual and planned changes in responsibilities. ECCs
compensation committee and board of directors have also
considered each of ECCs NEOs individual
extraordinary efforts resulting in tangible increases in
corporate, division or department success when setting base cash
salaries and annual bonuses.
Going Forward.
Following the spin-off, it is
expected that our Compensation Committee and board of directors
will continue to take a similar approach in establishing
compensation levels.
Peer
Group Analysis
Historically.
In connection with making
recommendations for ECCs executive officer compensation,
ECCs board of directors and compensation committee
considered an internally-prepared, informal benchmarking survey
of the compensation components for the NEOs of companies
selected by the compensation committee, as disclosed in their
respective publicly-filed proxy statements. These surveyed
companies included: The
93
DirecTV Group, Inc., Comcast Corporation, Cablevision Systems
Corporation, Cox Communications, Inc., Charter Communications,
Inc., Adelphia Communications Corporation, Liberty Media
Corporation, UnitedGlobalCom, Inc., CenturyTel, Inc., and
Level 3 Communications, Inc. However, the survey was used
merely as an informal and subjective frame of reference for
comparisons to base cash salaries paid to similarly situated
executives. Moreover, the survey was not a conventional
benchmarking survey but rather a table that listed
the compensation components for the named executive officers of
the selected companies, as disclosed in their respective
publicly-filed proxy statements. Neither ECCs compensation
committee nor its board of directors used the survey to
benchmark in the traditional sense, as ECCs
compensation committee and board of directors do not utilize any
kind of formulaic or standard, formalized benchmarking level or
element in tying or otherwise setting ECCs executive
compensation to that of other companies.
Going Forward.
Following the spin-off, it is
expected that our Compensation Committee and board of directors
will take a similar approach to comparing our executive
compensation program against those of other companies comparable
to EHC.
Weighting
and Selection of Elements of Compensation
Historically.
Neither ECCs board of
directors nor its compensation committee has in the past
assigned specific weights to any factors considered by the
ECCs board of directors and its compensation committee in
determining compensation, and none of the factors are more
dispositive than others.
Going Forward.
Following the spin-off, our
board of directors and Compensation Committee anticipate taking
a similar approach to weighting and selection of elements of
compensation.
Elements
of Executive Compensation
Historically.
The primary components of
ECCs executive compensation program have included:
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base cash salary;
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incentive compensation, including conditional
and/or
performance-based cash incentive compensation and long-term
equity incentive compensation in the form of stock options and
restricted stock units offered under ECCs stock incentive
plans;
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401(k) plan; and
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other compensation, including perquisites and personal benefits
and post-termination compensation.
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ECC has not required that a certain percentage of an executive
salary be provided in one form versus another. Each element of
ECCs historical executive compensation and the rationale
for each element is described below.
Going Forward.
Following the spin-off, we
expect to use a similar mix of base cash salary, conditional
and/or
performance based cash bonuses and long-term equity incentives
in our compensation program, as described below.
Base
Cash Salary
Historically.
ECC has traditionally included
salary in its executive compensation package under the belief
that it is appropriate that some portion of the compensation
paid to its executives be provided in a form that is fixed and
liquid occurring over regular intervals. Generally, for the
reasons discussed in Incentive Compensation, ECC has
weighted overall compensation towards equity components as
opposed to base salaries. ECCs compensation committee and
board of directors have traditionally been free to set salary at
any level deemed appropriate and any increases or decreases in
base salary on a year-over-year basis have been dependent on
either the compensation committees or board of
directors respective assessment of ECC, the applicable
business unit and individual performance.
Annual base salaries paid to ECCs executive officers have
historically been at levels below those generally paid to
executive officers with comparable experience and
responsibilities in the telecommunications industry
94
or other similarly-sized companies. In addition, ECC has stated
that it believes the compensation paid to Mr. Ergen has
generally been at a level that is below amounts paid to chief
executive officers at other companies of similar size in
comparable industries. Since 1996, changes in
Mr. Ergens base salary have been set by ECCs
compensation committee.
Going Forward.
Following the spin-off, it is
expected that our Compensation Committee and board of directors
will determine the base salaries of our executive officers in
the same manner and in accordance the same policies and
principles as described above.
Incentive
Compensation
Historically.
ECC has traditionally operated
under the belief that executive officers will be better able to
contribute to its long-term success and help build incremental
shareholder value if they have a stake in that future success
and value. ECC has stated it believes this stake focuses the
executive officers attention on managing ECC as owners
with equity positions in ECC and has aligned their interests
with the long-term interests of ECCs shareholders. Equity
awards therefore have represented an important and significant
component of ECCs compensation program for executive
officers. ECC has attempted to create general incentives with
its standard stock option grants and conditional incentives
through special performance-based conditional awards that may
include payouts in cash or equity.
General
Equity Incentives
Standard awards under ECCs stock incentive plans have
generally included stock options and have been based on a review
of the individual employees performance, years of service,
position and level of responsibility with ECC, long-term
potential contribution to ECC and the number of options and
terms of any other awards previously granted to the employee.
However, the number of options to be granted at any one time has
not been based on any objective criteria. ECC has not assigned
specific weights to these factors, although such employees
position and a subjective evaluation of his or her performance
have been considered most important. To encourage executive
officers to remain in ECCs employ, options granted under
ECCs stock incentive plans generally vest at the rate of
20% per year and have exercise prices not less than the fair
market value of ECCs Class A common stock on the date
of grant. ECCs standard form of option agreement given to
executive officers has included acceleration of vesting upon a
change in control of ECC for those executive officers that do
not continue with ECC or the surviving entity, as applicable.
Practices
Regarding Grant of Equity Incentives
ECC has generally awarded stock options and restricted stock as
of the last day of each calendar quarter and has set exercise
prices, as applicable, of not less than the fair market value of
ECCs Class A common stock on the date of grant.
Stock
Incentive Plan
We have adopted an employee stock incentive plan, which we refer
to as the 2008 Stock Incentive Plan, that will be similar to
ECCs 1999 Stock Incentive Plan. The purpose of the 2008
Stock Incentive Plan will be to provide incentives to attract
and retain executive officers and other key employees. Awards
available to be granted under the 2008 Stock Incentive Plan will
include: (i) stock options; (ii) stock appreciation
rights; (iii) restricted stock and restricted stock units;
(iv) performance awards; (v) dividend equivalents; and
(vi) other stock-based awards. Up to
16 million shares of our Class A common stock
will be available for awards under the 2008 Stock Incentive
Plan. No awards will be granted under the 2008 Stock Incentive
Plan prior to the spin-off.
Class B
CEO Stock Option Plan
We have adopted a Class B CEO stock option plan, which we
refer to as the 2008 Class B CEO Stock Option Plan, that is
similar to ECCs 2002 Class B CEO Stock Option Plan.
The purpose of the 2008 Class B CEO Stock Option Plan is to
promote the interests of EHC and its subsidiaries by aiding in
retaining and
95
incentivizing Charles W. Ergen, the Chairman and Chief
Executive Officer of EHC, whom our board of directors believes
is crucial to assuring our future success, to offer
Mr. Ergen incentives to put forth maximum efforts for our
future success and to afford Mr. Ergen an opportunity to
acquire additional proprietary interests in EHC. Mr. Ergen
abstained from our board of directors vote on this matter.
Awards available to be granted under the 2008 Class B CEO
Stock Option Plan will include nonqualified stock options and
dividend equivalent rights with respect to EHCs
Class B Common Stock. Up to 4 million shares of
EHCs Class B common stock will be available for
awards under the 2008 Class B CEO Stock Option Plan. No
awards will be granted under the 2008 Class B CEO Stock
Option Plan prior to the spin-off.
Employee
Stock Purchase Plan
We have adopted an employee stock purchase plan, which we refer
to as the 2008 ESPP, that is similar to ECCs employee
stock purchase plan. The purpose of the 2008 ESPP will be to
provide our eligible employees with an opportunity to acquire a
proprietary interest in us by the purchase of our Class A
common stock. All full-time employees who will have been
employed by EHC for at least one calendar year quarter will be
eligible to participate in the 2008 ESPP. Employee stock
purchases will be made through payroll deductions. Under the
proposed terms of the 2008 ESPP, employees will not be permitted
to deduct an amount which would permit such employee to purchase
our capital stock under all of our stock purchase plans which
would exceed $25,000 in fair value of capital stock in any one
year. The 2008 ESPP is intended to qualify under
Section 423 of the Internal Revenue Code and thereby
provide participating employees with an opportunity to receive
certain favorable income tax consequences as to stock purchase
rights under the 2008 ESPP. Up to 360,000 Shares of
EHCs Class A common stock will be available for
awards under the 2008 ESPP. No stock purchase rights will
be granted under the 2008 ESPP prior to the spin-off.
Nonemployee
Director Stock Option Plan
We have adopted a non-employee director stock option plan, which
we refer to as the 2008 NEDSOP, that is similar to ECCs
non-employee director stock option plan. The purpose of the 2008
NEDSOP will be to advance our interests through the motivation,
attraction and retention of highly-qualified non-employee
directors. The 2008 NEDSOP will grant our non-employee
directors, upon their initial election or appointment to our
board, an option to acquire a certain number of shares of
EHCs Class A common stock. We may also grant, in our
discretion, any continuing non-employee directors further
options to acquire our shares of Class A common stock in
exchange for their continuing services. Up to
250,000 shares of our Class A common stock will be
available for awards under the 2008 NEDSOP. No options will be
granted under the 2008 NEDSOP prior to the spin-off.
401(k)
Plan
Historically.
ECC has adopted a
defined-contribution tax-qualified 401(k) plan for its
employees, including its executives, to encourage its employees
to save some percentage of their cash compensation for their
eventual retirement. ECCs executives have participated in
the 401(k) plan on the same terms as ECCs other employees.
Under the plan, employees have become eligible for participation
in the 401(k) plan upon completing six months of service with
ECC and reaching age 19. 401(k) plan participants have been
able to contribute up to 50% of their compensation in each
contribution period, subject to the maximum deductible limit
provided by the Internal Revenue Code. ECC may also make a 50%
matching employer contribution up to a maximum of $1,000 per
participant per calendar year. In addition, ECC may also make an
annual discretionary profit sharing or employer stock
contribution to the 401(k) plan with the approval of its
compensation committee and board of directors. 401(k) plan
participants are immediately vested in their voluntary
contributions and earnings on voluntary contributions.
ECCs employer contributions to 401(k) plan
participants accounts vest 20% per year commencing one
year from the employees date of employment.
Going Forward.
Following the spin-off, we
expect to offer a 401(k) plan on similar terms as described
above.
96
Perquisites
and Personal Benefits, Post-Termination Compensation and Other
Compensation
Historically.
ECC has traditionally offered
numerous plans and other benefits to its executive officers on
the same terms as other employees. These plans and benefits have
included medical, vision, and dental insurance, life insurance,
and its employee stock purchase plan as well as discounts on its
services. Relocation benefits may also be reimbursed, but are
individually negotiated when they occur. ECC has also permitted
members of its executive team to use its corporate aircraft for
personal use. ECC has also paid for annual tax preparation costs
for certain executive officers.
ECC has not traditionally had any plans in place to provide
severance benefits to employees. However, certain stock options
and restricted stock units have been granted to its executive
officers subject to accelerated vesting upon a change in control.
Going Forward.
Following the spin-off, we
anticipate benefits and perquisites offered to our NEOs will be
similar to those described above.
Tax
Deductibility
Section 162(m) of the U.S. Internal Revenue Code
places a limit on the tax deduction for compensation in excess
of $1 million paid to certain covered employees
of a publicly held corporation (generally, the
corporations principal executive officer and its next four
most highly compensated executive officers in the year that the
compensation is paid). This limitation applies only to
compensation which is not considered performance-based under the
Section 162(m) rules. ECCs compensation committee
conducts an ongoing review of its compensation practices for
purposes of obtaining the maximum continued deductibility of
compensation paid consistent with ECCs existing
commitments and ongoing competitive needs. However, ECC has
allowed the payment of nondeductible compensation in excess of
this limitation. Following the spin-off, we intend to continue
ECCs policies with respect to the deductibility of our
compensation paid to executive officers.
Executive
Compensation
We have not yet paid any compensation to any of our NEOs. After
the completion of the spin-off, certain of our NEOs will
continue to be employed and compensated by ECC. Pursuant to the
Management Services Agreement between us and ECC, we will share
two non-business NEOs focused on providing legal and accounting
services. Bernard L. Han and R. Stanton Dodge will serve as
our Executive Vice President and Chief Financial Officer and our
Executive Vice President, General Counsel and Secretary,
respectively. As noted above, these NEOs will be employed by ECC
and compensated by ECC as an executive officer or employee of
that company, and will not be directly compensated by EHC. Under
the Management Services Agreement, we will make payments to ECC
based upon a portion of ECCs personnel costs for our NEOs
(taking into account salary and fringe benefits) based upon the
anticipated percentages of time to be spent by our executive
officers performing services for us. Incentive compensation for
Messrs. Han and Dodge will be solely the responsibility of
ECC. See Certain Intercompany Agreements
Management Services Agreement.
Fiscal
2006 Summary Compensation Table
All information included in the following tables reflects
compensation earned by our NEOs in fiscal 2006 for their
services with ECC. All references to stock and stock options
relate to awards of stock and stock options granted by ECC. The
historical compensation set forth below does not necessarily
reflect future compensation to be paid by us to our NEOs
following the spin-off because historical compensation was
determined by ECC
97
and future compensation levels will be determined based on the
compensation polices, programs and procedures to be established
by our compensation committee.
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Change in
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Pension Value
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and
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Nonqualified
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Non-Equity
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Deferred
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Salary
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Bonus
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Awards
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Awards(2)
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Compensation(3)
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Earnings
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Compensation(4)
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Total
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Name and Principal Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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Charles W. Ergen
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2006
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$
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550,000
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$
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$
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$
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1,412,882
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$
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$
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$
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858,171
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$
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2,821,053
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Chairman and Chief Executive Officer
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Bernard L. Han(1)
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2006
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$
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88,077
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$
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$
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|
|
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$
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203,248
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|
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$
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33,250
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|
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$
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$
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$
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324,575
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Executive Vice President
and Chief Financial Officer
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Mark W. Jackson
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2006
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|
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$
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305,769
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$
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$
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|
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$
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800,870
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|
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$
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124,800
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|
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$
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|
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$
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7,775
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|
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$
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1,239,214
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President
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Steven B. Schaver
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2006
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$
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278,668
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$
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$
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|
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$
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282,576
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$
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140,500
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$
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$
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7,485
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|
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$
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709,229
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President, EchoStar
International Corporation
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R. Stanton Dodge
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2006
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$
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216,925
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$
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10,000
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$
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$
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142,753
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$
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60,956
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$
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$
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7,614
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|
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$
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438,248
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|
Executive Vice President,
General Counsel and
Secretary
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(1)
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Mr. Han joined ECC as Executive Vice President and Chief
Financial Officer on September 28, 2006.
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(2)
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Represents the dollar amounts of expense recognized for
financial statement reporting purposes for fiscal 2006, in
accordance with Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment
(SFAS 123R). Assumptions used in the
calculation of these amounts are included in Note 3 to the
audited financial statements for the fiscal year ended
December 31, 2006, included herein.
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(3)
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Represents the dollar amounts earned pursuant to the 2006 Cash
Incentive Plan that will be paid by ECC during 2007.
Mr. Ergen declined to accept any distributions he was
otherwise entitled to receive pursuant to the 2006 Cash
Incentive Plan.
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(4)
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Represents the dollar amounts contributed pursuant to ECCs
401(k) matching program and our profit sharing program.
Mr. Ergens All Other Compensation also
includes tax preparation payments. In addition, with respect to
Mr. Ergen All Other Compensation includes his
personal use of ECC corporate aircraft valued at $821,771. We
calculated the value of Mr. Ergens personal use of
corporate aircraft based upon the incremental cost of such usage
to ECC.
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98
Fiscal
2006 Grant of Plan-Based Awards
The following table sets forth information relating to equity
and non-equity awards granted to our NEOs by ECC under
ECCs plans during Fiscal 2006.
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All Other
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All Other
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Grant
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Stock
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Option
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Date
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Awards:
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Awards:
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Exercise
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Fair
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Estimated Future Payouts
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Estimated Future Payouts Under
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Number of
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Number of
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or Base
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Value of
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Date of
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Under Non-Equity Incentive
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Equity Incentive
|
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Shares of
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Securities
|
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Price of
|
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Stock
|
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Compensation
|
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Plan Awards
|
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Plan Awards
|
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Stock or
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Underlying
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|
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Option
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and
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Grant
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Committee
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Threshold
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Target
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Maximum
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Threshold
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Target (1)
|
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Maximum
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Units
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Options
|
|
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Awards
|
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Option
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Name
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Date
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Approval
|
|
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($)
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|
|
($)
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|
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($)
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(#)
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|
|
(#)
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(#)
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(#)
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(#)
|
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($/sh)
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Awards(2)
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|
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Charles W. Ergen
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|
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3/7/2006
|
|
|
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2/28/06
|
|
|
$
|
|
|
|
$
|
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|
|
$
|
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|
|
|
|
|
|
|
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|
|
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|
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|
125
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$
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|
|
$
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3/8/2006
|
|
|
|
2/28/06
|
|
|
$
|
|
|
|
$
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|
|
|
$
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|
|
|
|
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|
|
|
|
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|
|
147
|
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$
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|
|
|
$
|
|
|
Bernard L. Han
|
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9/30/2006
|
|
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|
9/26/06
|
|
|
$
|
|
|
|
$
|
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|
|
$
|
|
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|
|
|
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30,000
|
|
|
|
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|
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$
|
|
|
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$
|
982,200
|
|
|
|
|
9/30/2006
|
|
|
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9/26/06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
$
|
32.74
|
|
|
$
|
5,432,630
|
|
Mark W. Jackson
|
|
|
3/7/2006
|
|
|
|
2/28/06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
3/8/2006
|
|
|
|
2/28/06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Steven B. Schaver
|
|
|
3/7/2006
|
|
|
|
2/28/06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
3/8/2006
|
|
|
|
2/28/06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
R. Stanton Dodge
|
|
|
3/7/2006
|
|
|
|
2/28/06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
3/8/2006
|
|
|
|
2/28/06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1)
|
|
Represents the amount of stock and/or option awards that will
become exercisable upon achievement of specified long-term
business objectives, as discussed in CD&A above.
|
|
(2)
|
|
Represents the total SFAS 123R fair value of the grant.
|
Each stock option and equity grant with respect to ECC common
stock outstanding as of the distribution date will be adjusted
in connection with the spin-off. In connection with these
adjustments, certain options to acquire shares of our common
stock will be granted. See The Spin-Off
Treatment of ECC Stock Incentive Awards for a discussion
of these adjustments and grants.
99
Outstanding
Equity Awards at Fiscal 2006 Year-End
The following table sets forth information relating to
outstanding equity awards of ECCs common stock held by our
NEOs at fiscal 2006 year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Payout
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Number of
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
Unearned
|
|
|
Shares,
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Shares or
|
|
|
Shares,
|
|
|
Units or
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Units of
|
|
|
Units or
|
|
|
Other
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Stock
|
|
|
Other
|
|
|
Rights
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Stock That
|
|
|
That
|
|
|
Rights
|
|
|
That
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
That Have
|
|
|
Have Not
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Options
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Not Vested
|
|
|
Vested(1)
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
(#)
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
Charles W. Ergen
|
|
|
|
|
|
|
|
|
|
|
400,000
|
(2)
|
|
$
|
6.00
|
|
|
|
2/17/2009
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
40,000
|
|
|
|
40,000
|
(3)
|
|
|
|
|
|
$
|
28.88
|
|
|
|
3/31/2013
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
160,000
|
|
|
|
240,000
|
(4)
|
|
|
|
|
|
$
|
30.75
|
|
|
|
6/30/2014
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
$
|
33.25
|
|
|
|
12/31/2014
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900,000
|
(5)
|
|
$
|
29.57
|
|
|
|
9/30/2015
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Bernard L. Han
|
|
|
|
|
|
|
350,000
|
(6)
|
|
|
90,000
|
(7)
|
|
$
|
32.74
|
|
|
|
9/30/2016
|
|
|
|
|
|
|
$
|
|
|
|
|
30,000
|
(7)
|
|
$
|
1,140,900
|
|
Mark W. Jackson
|
|
|
206,668
|
|
|
|
|
|
|
|
400,000
|
(2)
|
|
$
|
6.00
|
|
|
|
2/17/2009
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
16,000
|
|
|
|
4,000
|
(3)
|
|
|
|
|
|
$
|
28.88
|
|
|
|
3/31/2013
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
120,000
|
|
|
|
80,000
|
(4)
|
|
|
|
|
|
$
|
30.75
|
|
|
|
6/30/2014
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
(8)
|
|
$
|
29.25
|
|
|
|
3/31/2015
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
40,000
|
|
|
|
60,000
|
(9)
|
|
|
|
|
|
$
|
30.16
|
|
|
|
6/30/2015
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
$
|
27.18
|
|
|
|
12/30/2015
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Steven B. Schaver
|
|
|
|
|
|
|
|
|
|
|
400,000
|
(2)
|
|
$
|
6.00
|
|
|
|
2/17/2009
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
16,000
|
|
|
|
4,000
|
(3)
|
|
|
|
|
|
$
|
28.88
|
|
|
|
3/31/2013
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
48,000
|
|
|
|
32,000
|
(4)
|
|
|
|
|
|
$
|
30.75
|
|
|
|
6/30/2014
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
(8)
|
|
$
|
29.25
|
|
|
|
3/31/2015
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
R. Stanton Dodge
|
|
|
|
|
|
|
|
|
|
|
80,000
|
(2)
|
|
$
|
6.00
|
|
|
|
2/17/2009
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
18,440
|
|
|
|
|
|
|
|
|
|
|
$
|
10.20
|
|
|
|
3/31/2009
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
8,000
|
|
|
|
2,000
|
(3)
|
|
|
|
|
|
$
|
28.88
|
|
|
|
3/31/2013
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
6,000
|
|
|
|
4,000
|
(10)
|
|
|
|
|
|
$
|
32.75
|
|
|
|
3/31/2014
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
6,000
|
|
|
|
4,000
|
(4)
|
|
|
|
|
|
$
|
30.75
|
|
|
|
6/30/2014
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
10,000
|
|
|
|
15,000
|
(11)
|
|
|
37,500
|
(8)
|
|
$
|
29.25
|
|
|
|
3/31/2015
|
|
|
|
|
|
|
$
|
|
|
|
|
12,500
|
(8)
|
|
$
|
475,375
|
|
|
|
|
(1)
|
|
Represents the number of unvested, performance-based restricted
stock units multiplied by the closing market price of ECCs
shares of Class A common stock of $38.03 on
December 29, 2006, the last trading day of fiscal 2006.
|
|
(2)
|
|
These options are performance-based awards that do not become
exercisable until achievement of specified long-term business
objectives, as discussed in Compensation Discussion and
Analysis above.
|
|
(3)
|
|
These options were awarded on March 31, 2003 and vest in
20% increments on each of the first five anniversaries of the
date of grant.
|
|
(4)
|
|
These options were awarded on June 30, 2004 and vest in 20%
increments on each of the first five anniversaries of the date
of grant.
|
|
(5)
|
|
These options were awarded on September 30, 2005 and vest
in 20% increments on each of the first five anniversaries of the
date of grant. However, these options are performance-based
awards that do not become exercisable until achievement of
specified long-term business objectives, as discussed in
Compensation Discussion and Analysis above.
|
|
(6)
|
|
These options were awarded on September 30, 2006 and vest
in 20% increments on each of the first five anniversaries of the
date of grant.
|
|
(7)
|
|
These options and restricted stock units were awarded on
September 30, 2006 and vest in 10% increments on each of
the first four anniversaries of the date of grant and then at
the rate of 20% per
|
100
|
|
|
|
|
year thereafter. However, these options are performance-based
awards that do not become exercisable until achievement of
specified long-term business objectives, as discussed in
Compensation Discussion and Analysis above.
|
|
(8)
|
|
These options were awarded on March 31, 2005 and vest in
10% increments on each of the first four anniversaries of the
date of grant and then at the rate of 20% per year thereafter.
However, these options are performance-based awards that do not
become exercisable until achievement of specified long-term
business objectives, as discussed in Compensation
Discussion and Analysis above.
|
|
(9)
|
|
These options were awarded on June 30, 2005 and vest in 20%
increments on each of the first five anniversaries of the date
of grant.
|
|
(10)
|
|
These options were awarded on March 31, 2004 and vest in
20% increments on each of the first five anniversaries of the
date of grant.
|
|
(11)
|
|
These options were awarded on March 31, 2005 and vest in
20% increments on each of the first five anniversaries of the
date of grant.
|
Option
Exercises and Stock Vested in Fiscal 2006
The following table sets forth certain information relating to
exercises and vesting of options for ECCs common stock
during fiscal 2006 by our NEOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
|
Acquired on
|
|
|
Realized on
|
|
|
|
Exercise
|
|
|
Exercise(1)
|
|
|
Vesting
|
|
|
Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
Charles W. Ergen
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Bernard L. Han
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Mark W. Jackson
|
|
|
97,332
|
|
|
$
|
2,846,309
|
|
|
|
|
|
|
$
|
|
|
Steven B. Schaver
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
R. Stanton Dodge
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
(1)
|
|
The value realized on exercise is computed by multiplying the
difference between the exercise price of the stock option and
market price of the shares of ECC Class A common stock on
the date of exercise by the number of shares with respect to
which the option was exercised.
|
Potential
Payments Upon Termination or Change in Control
Except as described below, we will have no employment contracts,
termination of employment agreements or change in control
agreements with any of our NEOs at the time of the spin-off.
As discussed in Compensation Discussion and Analysis
above, ECCs standard form of option agreement given to
executive officers includes acceleration of vesting upon a
change in control of ECC for those executive officers that do
not continue to be employed by ECC or the surviving entity, as
applicable.
Generally a change in control is deemed to occur upon:
(i) a transaction or a series of transactions the result of
which is that any person (other than the principal or a related
party) individually owns more than fifty percent (50%) of the
total equity interests of either (A) ECC or (B) the
surviving entity in any such transaction(s) or a controlling
affiliate of such surviving entity in such transaction(s); and
(ii) the first day on which a majority of the members of
the board of directors of ECC are not continuing directors.
101
Assuming a change in control were to have taken place as of
December 31, 2006, and the executives were no longer to
continue with ECC or the surviving entity at such date, the
estimated benefits that would have been provided are as follows:
|
|
|
|
|
|
|
Maximum
|
|
|
|
Value of
|
|
|
|
Accelerated
|
|
|
|
Vesting of
|
|
Name
|
|
Options(1)
|
|
|
Charles W. Ergen
|
|
$
|
2,113,200
|
|
Bernard L. Han
|
|
|
1,851,500
|
|
Mark W. Jackson
|
|
|
1,091,200
|
|
Steven B. Schaver
|
|
|
269,560
|
|
R. Stanton Dodge
|
|
|
200,240
|
|
|
|
|
(1)
|
|
This amount reflects the intrinsic value (i.e. the amount by
which the $38.03 closing price of a share of ECCs
Class A common stock on the Nasdaq Global Select Market on
December 29, 2006, the last trading day of fiscal 2006, exceeded
the exercise price) of each of the executive officers
unvested stock options that would become vested as a result of a
change in control.
|
Director
Compensation for Fiscal 2006
Historically.
ECCs employee directors
are not compensated for their services as directors. Each
nonemployee director of ECC receives an annual retainer of
$40,000 which is paid in equal quarterly installments on the
last day of each calendar quarter, provided such person is a
member of ECCs board of directors on the last day of the
applicable calendar quarter. ECCs nonemployee directors
also receive $1,000 for each meeting attended in person and $500
for each meeting attended by telephone. Additionally, the
chairperson of each committee of ECCs board of directors
receives a $5,000 annual retainer, which is paid in equal
quarterly installments on the last day of each calendar quarter,
provided such person is the chairperson of the committee on the
last day of the applicable calendar quarter. Furthermore,
ECCs nonemployee directors receive:
(i) reimbursement, in full, of reasonable travel expenses
related to attendance at all meetings of ECCs board of
directors and its committees and (ii) reimbursement of
reasonable expenses related to educational activities undertaken
in connection with service on ECCs board of directors and
its committees.
Upon election to ECCs board of directors, ECCs
nonemployee directors are granted an option to acquire a certain
number of shares of ECCs Class A common stock under
ECCs nonemployee director stock option plan. Options
granted under ECCs nonemployee director plans are 100%
vested upon issuance and have a term of five years. ECC also
currently grants each continuing nonemployee director an option
to acquire shares of ECCs Class A common stock every
year in exchange for their continuing services.
The following table sets forth information relating to the
compensation for Fiscal 2006 awarded by ECC to the individuals
who will act as our nonemployee directors.
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Change in
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Pension Value
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and
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Fees
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Nonqualified
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Earned or
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Non-Equity
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Deferred
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Paid in
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Cash
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Awards
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Awards(1)
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Compensation
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Earnings
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Compensation
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Total
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Name
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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Steven R. Goodbarn
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$
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54,500
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$
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$
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31,509
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$
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$
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$
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|
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$
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86,009
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Tom A. Ortolf
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$
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53,500
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$
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$
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31,509
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$
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$
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$
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$
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85,009
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C. Michael Schroeder
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$
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54,500
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$
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$
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31,509
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$
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|
|
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$
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$
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$
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86,009
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(1)
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Represents the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended December 31,
2006, in accordance with SFAS 123R. Assumptions used in the
calculation of these amounts are included in Note 3 to
ECCs audited financial statements for the fiscal year
ended December 31, 2006, included in ECCs Annual
Report on
Form 10-K/A
filed with the Securities and Exchange Commission on
March 6, 2007. On June 30, 2006, each of ECCs
nonemployee directors was
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102
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granted an option to acquire 5,000 shares of ECC
Class A common stock at an exercise price of $30.81 per
share. Options granted under ECCs nonemployee director
plans are 100% vested upon issuance. Thus, the amount recognized
for financial statement reporting purposes and the full grant
date fair value are the same.
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Nonemployee directors of ECC have been granted the following
options under ECCs nonemployee director plans:
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Option Awards
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Number of
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Securities
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Underlying
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Unexercised
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Option
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Options
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Exercise
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Option
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(#)
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Price
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Expiration
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Name
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Exercisable
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($)
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Date
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Steven R. Goodbarn
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10,000
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$
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22.26
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12/31/2007
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5,000
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$
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34.62
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6/30/2008
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5,000
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$
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31.12
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9/30/2009
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5,000
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$
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30.16
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6/30/2010
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40,000
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$
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27.18
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12/30/2010
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5,000
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$
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30.81
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6/30/2011
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Total Options Outstanding at December 31, 2006
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70,000
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Tom A. Ortolf
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10,000
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$
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30.16
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6/30/2010
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40,000
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$
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27.18
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12/30/2010
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5,000
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$
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30.81
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6/30/2011
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Total Options Outstanding at December 31, 2006
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55,000
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C. Michael Schroeder
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10,000
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$
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33.99
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12/31/2008
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5,000
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$
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31.12
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9/30/2009
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5,000
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$
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30.16
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6/30/2010
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40,000
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$
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27.18
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12/30/2010
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5,000
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$
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30.81
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6/30/2011
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Total Options Outstanding at December 31, 2006
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65,000
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Going Forward.
We expect that our Board of
Directors will adopt similar policies to those listed above.
Compensation
Committee Interlocks and Insider Participation
The Compensation Committee is comprised solely of outside
directors. The Compensation Committee members are
Mr. Goodbarn, Mr. Ortolf and Mr. Schroeder. None
of these individuals will be an officer or employee of EHC at
any time during the 2007 fiscal year. Following the spin-off,
none of our executive officers will serve as a member of the
compensation committee of any entity that has one or more
executive officers serving on our Compensation Committee.
103
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the date hereof, all of our outstanding shares of common
stock are owned by ECC. None of our directors or executive
officers currently owns any shares of our common shares, but
those who own shares of ECC common stock will receive shares of
the same class of our common stock in the distribution on the
same basis as the shares held by other ECC shareholders.
The following table sets forth, to the best of our knowledge,
the anticipated beneficial ownership of EHC voting securities
immediately following the distribution by: (i) each person
known by us to be the beneficial owner of more than 5% of
ECCs voting securities; (ii) each of our directors;
(iii) each officer named in the Summary Compensation Table;
and (iv) all of our directors and executive officers as a
group. We base the share amounts on each persons
beneficial ownership of ECC common stock as of November 30,
2007. Unless otherwise indicated, each person listed in the
following table (alone or with family members) has sole voting
and dispositive power over the shares listed opposite such
persons name.
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Amount and
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|
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Nature of
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Beneficial
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Percentage
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Ownership
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of Class
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Name(1)
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(2)
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(3)
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Class A Common Stock(4):
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Charles W. Ergen(5),(6)
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41,870,946
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50.0
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%
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David K. Moskowitz(7)
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5,403,050
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11.4
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%
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Barclays Global Investors, NA(8)
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4,380,290
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|
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10.4
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%
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Dodge & Cox(9)
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2,930,816
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|
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7.0
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%
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Fairholme Capital Management, L.L.C.(10)
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2,742,728
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6.5
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%
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Harris Associates L.P.(11)
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2,080,690
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5.0
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%
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Michael T. Dugan(12)
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|
|
104,896
|
|
|
|
|
*
|
Mark W. Jackson(13)
|
|
|
82,542
|
|
|
|
|
*
|
Carl E. Vogel(14)
|
|
|
64,083
|
|
|
|
|
*
|
Tom A. Ortolf(15)
|
|
|
24,240
|
|
|
|
|
*
|
Steven B. Schaver(16)
|
|
|
16,216
|
|
|
|
|
*
|
C. Michael Schroeder(17)
|
|
|
17,020
|
|
|
|
|
*
|
Steven R. Goodbarn(18)
|
|
|
14,000
|
|
|
|
|
*
|
Bernard L. Han(19)
|
|
|
14,000
|
|
|
|
|
*
|
R. Stanton Dodge(20)
|
|
|
6,464
|
|
|
|
|
*
|
All Directors and Executive Officers as a Group
(11 persons)(21)
|
|
|
49,189,410
|
|
|
|
58.2
|
%
|
Class B Common Stock:
|
|
|
|
|
|
|
|
|
Charles W. Ergen
|
|
|
41,611,830
|
|
|
|
87.3
|
%
|
Trusts(22)
|
|
|
5,226,180
|
|
|
|
11.0
|
%
|
All Directors and Executive Officers as a Group
(11 persons)(21)
|
|
|
46,838,010
|
|
|
|
98.2
|
%
|
|
|
|
(1)
|
|
Except as otherwise noted below, the address of each such person
is 9601 S. Meridian Blvd., Englewood, Colorado 80112.
|
|
|
|
(2)
|
|
The amounts included in this column represent the shares of our
common stock which will be beneficially owned by the listed
individuals are based on the distribution ratio of one share of
common stock to be received for every five shares of ECC common
stock beneficially owned by such individuals on
November 30, 2007 (unless otherwise specified). Based on
the shares of ECC common stock outstanding on November 30,
2007 and the distribution ratio, there are expected to be
42,012,362 outstanding shares of EHC Class A common stock
and 47,687,042 shares of EHC Class B common stock.
|
104
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|
|
(3)
|
|
Represents the percentage of our common stock which we expect to
be outstanding (based on the expected number of our shares to be
distributed based on the number of ECC shares outstanding on
November 30, 2007). An asterisk indicates that the
percentage of common stock projected to be beneficially owned by
the named individual does not exceed 1% of EHC common stock.
|
|
|
|
(4)
|
|
The following table sets forth, to the best knowledge of EHC
based on the outstanding shares of ECC common stock on
November 30, 2007 and the distribution ratio the expected
ownership of EHCs Class A common stock (including
options exercisable within 60 days) by: (i) each
person expected by EHC to be the beneficial owner of more than
five percent of any class of EHCs voting shares;
(ii) each director of EHC; (iii) each officer named in
the Summary Compensation Table; and (iv) all directors and
executive officers as a group:
|
|
|
|
|
|
|
|
|
|
|
|
Amount and
|
|
|
|
|
Nature of
|
|
|
|
|
Beneficial
|
|
Percentage
|
Name(1)
|
|
Ownership
|
|
of Class
|
|
Class A Common Stock:
|
|
|
|
|
|
|
|
|
Barclays Global Investors, NA
|
|
|
4,380,290
|
|
|
|
10.4
|
%
|
Dodge & Cox
|
|
|
2,930,816
|
|
|
|
7.0
|
%
|
Fairholme Capital Management, L.L.C
|
|
|
2,742,728
|
|
|
|
6.5
|
%
|
Harris Associates L.P
|
|
|
2,080,690
|
|
|
|
5.0
|
%
|
Charles W. Ergen
|
|
|
259,116
|
|
|
|
|
*
|
David K. Moskowitz
|
|
|
176,870
|
|
|
|
|
*
|
Michael T. Dugan
|
|
|
104,896
|
|
|
|
|
*
|
Mark W. Jackson
|
|
|
82,542
|
|
|
|
|
*
|
Carl E. Vogel
|
|
|
64,083
|
|
|
|
|
*
|
Tom A. Ortolf
|
|
|
24,240
|
|
|
|
|
*
|
Steven B. Schaver
|
|
|
16,216
|
|
|
|
|
*
|
C. Michael Schroeder
|
|
|
17,020
|
|
|
|
|
*
|
Steven R. Goodbarn
|
|
|
14,000
|
|
|
|
|
*
|
Bernard L. Han
|
|
|
14,000
|
|
|
|
|
*
|
R. Stanton Dodge
|
|
|
6,464
|
|
|
|
|
*
|
All Directors and Executive Officers as a Group (11 persons)
|
|
|
2,351,400
|
|
|
|
5.5
|
%
|
|
|
|
(5)
|
|
Mr. Ergen is deemed to own beneficially all of the EHC
Class A Shares owned by his spouse, Mrs. Ergen.
Mr. Ergens beneficial ownership includes:
(i) 89,730 EHC Class A Shares; (ii) 3,704 EHC
Class A Shares held in the Companys 401(k) Employee
Savings Plan, (which we refer to as the 401(k) Plan);
(iii) the right to acquire 160,000 EHC Class A Shares
within 60 days upon the exercise of employee stock options;
(iv) 47 EHC Class A Shares held by Mrs. Ergen;
(v) 200 EHC Class A Shares held in the 401(k) Plan
held by Mrs. Ergen; (vi) 5,435 EHC Class A Shares
held as custodian for his children; and (vii) 41,611,830
EHC Class A Shares issuable upon conversion of
Mr. Ergens EHC Class B Shares.
Mr. Ergens beneficial ownership of EHC Class A Shares
excludes 5,226,180 EHC Class A Shares issuable upon
conversion of EHC Class B Shares held by certain trusts
established by Mr. Ergen for the benefit of his family.
|
|
|
|
(6)
|
|
The percentage of total voting power held by Mr. Ergen is
approximately 80% after giving effect to the exercise of
Mr. Ergens options exercisable within 60 days.
|
|
|
|
(7)
|
|
Mr. Moskowitzs beneficial ownership includes:
(i) 24,970 EHC Class A Shares; (ii) 3,542 EHC
Class A Shares held in the 401(k) Plan; (iii) the
right to acquire 140,000 EHC Class A Shares within
60 days upon the exercise of employee stock options;
(iv) 265 EHC Class A Shares held as custodian for his
minor children; (v) 1,636 EHC Class A Shares held as
trustee for Mr. Ergens children; (vi) 6,000 EHC
Class A Shares held by a charitable foundation for which
Mr. Moskowitz is a member of the Board of
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105
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|
|
|
|
Directors; (vii) 457 EHC Class A Shares held in the
employee stock purchase plan; and (viii) 5,226,180 EHC
Class A Shares issuable upon conversion of the EHC
Class B Shares held by certain trusts established by
Mr. Ergen for the benefit of Mr. Ergens family
for which Mr. Moskowitz is trustee.
|
|
|
|
(8)
|
|
The address of Barclays Global Investors, N.A.
(Barclays) is 45 Fremont Street, San Francisco,
California, 94105. The EHC Class A Shares listed as
beneficially owned by Barclays includes 3,459,087 EHC
Class A Shares owned by Barclays Global Investors, N.A., of
which Barclays has sole voting power as to 3,071,779 EHC
Class A Shares, as well as (i) 178,821 EHC
Class A Shares owned by Barclays Global Fund Advisors,
(ii) 488,625 EHC Class A Shares owned by Barclays
Global Investors, LTD., (iii) 49,140 EHC Class A Shares
owned by Barclays Global Investors Japan Trust and Banking
Company Limited and (iv) 204,617 EHC Class A Shares
owned by Barclays Global Investors Japan Limited. This
information is based solely upon a Schedule 13G filed on
May 9, 2007.
|
|
|
|
(9)
|
|
The address of Dodge & Cox is 555 California Street,
40th Floor, San Francisco, California, 94104. Of the EHC
Class A Shares beneficially owned, Dodge & Cox
has sole voting power as to 2,930,816 EHC Class A Shares.
This information is based solely upon a Schedule 13G filed
on February 8, 2007.
|
|
|
|
(10)
|
|
The address of Fairholme Capital Management, L.L.C.
(Fairholme) is 1001 Brickell Bay Drive,
Suite 3112, Miami, Florida, 33131. Of the EHC Class A
Shares beneficially owned, Fairholme has shared voting power as
to 2,136,844 EHC Class A Shares and shared dispositive
power as to all 2,742,728 EHC Class A Shares. This
information is based solely upon a Schedule 13G filed on
February 14, 2007.
|
|
|
|
(11)
|
|
The address of Harris Associates L.P. (Harris) is
Two North LaSalle Street, Suite 500, Chicago, Illinois,
60602. Of the EHC Class A Shares beneficially owned, Harris
has shared voting power as to 2,080,690 EHC Class A Shares
and shared dispositive power as to 1,955,000. This information
is based solely upon a Schedule 13G filed on
February 14, 2007.
|
|
|
|
(12)
|
|
Mr. Dugans beneficial ownership includes: (i) 86
EHC Class A Shares; (ii) 606 EHC Class A Shares
held in the 401(k) Plan; and (iii) the right to acquire
104,204 EHC Class A Shares within 60 days upon the
exercise of employee stock options.
|
|
|
|
(13)
|
|
Mr. Jacksons beneficial ownership includes:
(i) 83 EHC Class A Shares; (ii) 2,459 EHC
Class A Shares held in the 401(k) Plan; and (iii) the
right to acquire 80,000 EHC Class A Shares within
60 days upon the exercise of employee stock options.
|
|
|
|
(14)
|
|
Mr. Vogels beneficial ownership includes:
(i) 2,033 EHC Class A Shares; (ii) 50 EHC
Class A Shares held in the 401(k) Plan; and (iii) the
right to acquire 62,000 EHC Class A Shares within
60 days upon the exercise of employee stock options;
|
|
|
|
(15)
|
|
Mr. Ortolfs beneficial ownership includes:
(i) the right to acquire 12,000 EHC Class A Shares
within 60 days upon the exercise of nonemployee director
stock options; (ii) 40 EHC Class A Shares held in the
name of one of his children; and (iii) 12,200 EHC
Class A Shares held by a partnership of which
Mr. Ortolf is a partner.
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(16)
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Mr. Schavers beneficial ownership includes:
(i) 482 EHC Class A Shares; (ii) 3,334 EHC
Class A Shares held in the 401(k) Plan; and (iii) the
right to acquire 12,400 EHC Class A Shares within
60 days upon the exercise of employee stock options.
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(17)
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Mr. Schroeders beneficial ownership includes:
(i) 3,020 EHC Class A Shares; and (ii) the right
to acquire 14,000 EHC Class A Shares within 60 days
upon the exercise of nonemployee director stock options.
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(18)
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Mr. Goodbarns beneficial ownership includes:
(i) 1,000 EHC Class A Shares; and (ii) the right
to acquire 13,000 EHC Class A Shares within 60 days
upon the exercise of nonemployee director stock options.
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(19)
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Mr. Hans beneficial ownership includes the right to
acquire 14,000 EHC Class A Shares within 60 days upon
the exercise of employee stock options.
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(20)
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Mr. Dodges beneficial ownership includes: (i) 36
EHC Class A Shares; (ii) 428 EHC Class A Shares
held in the 401(k) Plan; and (iii) the right to acquire
6,000 EHC Class A Shares within 60 days upon the
exercise of employee stock options.
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(21)
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Includes: (i) 888,166 EHC Class A Shares;
(ii) 18,119 EHC Class A Shares held in the 401(k)
Plan; (iii) the right to acquire 954,802 EHC Class A
Shares within 60 days upon the exercise of employee stock
options; (iv) 462,200 EHC Class A Shares held in a
partnership; (v) 46,838,010 EHC Class A Shares
issuable upon conversion of EHC Class B Shares;
(vi) 20,312 EHC Class A Shares held in the name of, or
in trust for, children and other family members;
(vii) 6,000 EHC Class A Shares held by a charitable
foundation for which Mr. Moskowitz is a member of its board
of directors; (viii) 20 EHC Class A Shares held by a
spouse; and (ix) 1,781 EHC Class A Shares held in the
employee stock purchase plan. EHC Class A and EHC
Class B common stock beneficially owned by both Mr. and
Mrs. Ergen is only included once in calculating the
aggregate number of shares owned by directors and executive
officers as a group.
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(22)
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Held by certain trusts established by Mr. Ergen for the
benefit of Mr. Ergens family of which
Mr. Moskowitz is trustee.
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We expect that our Board will adopt a written policy for the
review and approval of transactions involving related parties,
such as directors, executive officers and their immediate family
members, which policy will cover transactions between us and
ECC. In order to survey these transactions, we plan to
distribute questionnaires to our officers and directors on a
quarterly basis. Our General Counsel will direct the appropriate
review of all potential related-party transactions and schedule
their presentation at the next regularly-scheduled meetings of
the Audit Committee and the board of directors. Both the Audit
Committee and the board of directors must approve these
transactions, with all interested parties abstaining from the
vote. Once each calendar year, the Audit Committee and the board
of directors will undertake a review of all recurring potential
related-party transactions. Both the Audit Committee and the
board of directors must approve the continuation of each such
transaction, with all interested parties abstaining.
In March of 2000, ECC purchased Kelly Broadcasting Systems, Inc.
(KBS). At that time, Michael Kelly, one of our
officers, was a shareholder of KBS and served as its President.
Certain assets and liabilities of KBS will be distributed to us
in connection with the spin-off. Title to certain assets
purchased in the acquisition have been transferred, and payments
of as much as approximately $2 million may be due to
Mr. Kelly in accordance with the terms of the purchase
agreement. No changes to the purchase agreement occurred during
2006 and no assets or payments were exchanged during 2006.
During 2006, ECC entered into a routine mutual release with
Mr. Kelly in connection with certain KBS transactions.
The brother of Mark Jackson, our President, earned approximately
$80,000 during 2006 as an employee of a non-public company that
provides programming content to ECC. Affiliates of that company
also supply us with parts used in the manufacture of our
satellite receivers and related equipment. Neither us or ECC,
nor any of our or ECCs directors or executive officers has
any ownership or other personal financial interest in that
company. We and our contract manufacturers paid that company and
its affiliates a total of approximately $180 million during
2006, representing approximately 48% of their total revenues.
108
CERTAIN
INTERCOMPANY AGREEMENTS
Agreements
with ECC
Following the spin-off, our company and ECC will operate
independently, and neither will have any ownership interest in
the other. In order to govern certain of the ongoing
relationships between our company and ECC after the spin-off and
to provide mechanisms for an orderly transition, we and ECC are
entering into certain agreements pursuant to which we will
obtain certain services and rights from ECC, ECC will obtain
certain services and rights from us, and we and ECC will
indemnify each other against certain liabilities arising from
our respective businesses. The following is a summary of the
terms of the material agreements we are entering into or we
expect to enter into with ECC. We anticipate entering into these
agreements shortly before the distribution date on
January 1, 2008.
Broadcast
Agreement
It is anticipated that we will enter into a broadcast agreement
with a subsidiary of ECC, whereby ECC will receive broadcast
services including teleport services such as transmission and
downlinking, channel origination services, and channel
management services from us thereby enabling ECC to deliver
satellite television programming to subscribers. Additionally,
ECC will have the right, but not the obligation, to have us
purchase certain equipment on ECCs behalf at an agreed
upon margin. The broadcast agreement will have a term of two
years; however, ECC will have the right, but not the obligation,
to extend the agreement annually for successive one-year periods
for up to two additional years. ECC may terminate channel
origination services and channel management services for any
reason and without any liability upon sixty days written notice
to us. If ECC terminates teleport services for a reason other
than our breach, ECC shall pay us a sum equal to the aggregate
amount of the remainder of the expected cost of providing the
teleport service. The fees for the services to be provided under
the broadcast agreement will be cost plus an agreed upon margin,
which is believed to be fair market value pricing.
Employee
Matters Agreement
We will enter into an employee matters agreement with ECC,
providing for our respective obligations to our employees.
Pursuant to the agreement, we will establish a defined
contribution plan for the benefit of our eligible employees in
the United States (including our employees that transferred to
us prior to the spin-off). Subject to any adjustments required
by applicable law, it is our and ECCs present intent that
the assets and liabilities of the ECC 401(k) Employee Savings
Plan attributable to transferring employees, other than certain
employees whose employment has terminated prior to the
distribution date, be transferred to and assumed by a defined
contribution plan established by us. In addition, we intend to
establish, on, or as soon as practicable following, the
distribution date, welfare plans for the benefit of our eligible
employees and their respective eligible dependents that are
substantially similar to the welfare plans maintained by ECC. We
will also establish a stock incentive plan and an employee stock
purchase plan as described in Management Performance-Based
Conditional Cash Incentives. There are no payments
expected under the employee matters agreement except for the
reimbursement of certain expenses in connection with these
employee benefit plans and potential indemnification payments in
accordance with the separation agreement. The employee matters
agreement is non-terminable and will survive for the applicable
statute of limitations.
The employee matters agreement also addresses the treatment of
ECC stock options and restricted stock unit awards in connection
with the spin-off. For a discussion of the treatment of these
stock incentive awards in the spin-off, please see The
Spin-Off Treatment of ECC Stock Incentive
Awards.
Installation
Services Agreement
We will enter into an installation services agreement with ECC
whereby we will have the right but not the obligation to engage
ECC and its network of installation service providers to provide
installation services in respect of various types of equipment
we provide to our customers. For the provision of these
services, we
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will pay ECC fees that reflect the fair market value of the
installation services that we purchase from ECC. The term of the
installation services agreement will be one year.
Furthermore, we may not generally solicit any installer of ECC
for employment during the agreement and for a period of one year
thereafter.
Intellectual
Property Matters Agreement
We expect to enter into an intellectual property matters
agreement with ECC and certain of its subsidiaries in connection
with the spin-off. The intellectual property matters agreement
will govern our relationship with ECC with respect to patents,
trademarks and other intellectual property. Pursuant to the
intellectual property matters agreement ECC and certain of its
subsidiaries will irrevocably assign to us all right, title and
interest in certain patents, trademarks and other intellectual
property necessary for the operation of our set-top box
business. In addition, the agreement will permit us to use, in
the operation of our set-top box business, certain other
intellectual property currently owned or licensed by ECC and its
subsidiaries.
We will grant to ECC and its subsidiaries a non-exclusive,
non-transferable, worldwide license to use the name
EchoStar and a portion of the assigned intellectual
properties as trade names and trademarks for a limited period of
time in connection with ECCs continued operation of the
consumer business. The purpose of such license is to eliminate
confusion on the part of customers and others during the period
following the spin-off. After the transitional period, ECC and
its subsidiaries may not use the EchoStar name as
trademarks. Similarly, the intellectual property matters
agreement will provide that we will not make any use of the name
or trademark DISH Network or any other trademark
owned by ECC or its subsidiaries. There are no payments expected
under the intellectual property matters agreement and it will
continue in perpetuity.
Real
Estate Lease Agreements
We anticipate entering into the following lease agreements with
ECC so that ECC can continue to operate out of these properties,
which will be contributed to us in the spin-off. In each case we
will charge ECC annual rent that we believe is fair market value
for the premises, and ECC will be responsible for their portion
of the taxes, insurance, utilities and maintenance of the
premises.
Inverness Lease Agreement.
The lease for
90 Inverness Circle East in Englewood, Colorado will be for
a period of no longer than two years.
Meridian Lease Agreement.
The lease for
9601 S. Meridian Blvd. in Englewood, Colorado will be
for a period of two years with annual renewal options for up to
three additional years.
Santa Fe Lease Agreement.
The lease for
5701 S. Santa Fe Dr. in Littleton, Colorado will
be for a period of two years with annual renewal options for up
to three additional years.
Management
Services Agreement
In connection with the spin-off, we will enter into a management
services agreement with ECC pursuant to which ECC will make
certain of its officers available to provide services (which are
primarily legal and accounting services) to EHC. Specifically,
Bernard L. Han, R. Stanton Dodge and Paul W. Orban will remain
employed by ECC, but will serve as EHCs Executive Vice
President and Chief Financial Officer, Executive Vice President
and General Counsel, and Senior Vice President and Controller,
respectively. In addition, Carl E. Vogel will remain employed by
ECC but will provide services to EHC as an advisor. We will make
payments to ECC based upon an allocable portion of the personnel
costs and expenses incurred by ECC with respect to such ECC
officers (taking into account wages and fringe benefits). These
allocations will be based upon the anticipated percentages of
time to be spent by the ECC executive officers performing
services for us under the management services agreement. We will
also reimburse ECC for direct out-of-pocket costs incurred by
ECC for management services provided to us. We and ECC will
evaluate all charges for reasonableness at least annually and
make any adjustments to these charges as we and ECC mutually
agree upon.
110
The management services agreement will continue in effect until
the first anniversary of the spin-off, and will be renewed
automatically for successive one-year periods thereafter, unless
earlier terminated (1) by us at any time upon at least
30 days prior written notice, (2) by ECC at the
end of any renewal term, upon at least 180 days prior
notice; and (3) by ECC upon written notice to us, following
certain changes in control.
Packout
Services Agreement
We will enter into a packout services agreement, whereby we will
have the right, but not the obligation, to engage an ECC
subsidiary to package and ship satellite receivers to customers
that are not associated with ECC or its subsidiaries. The fees
charged by ECC for the services provided under the packout
services agreement will be at cost plus an agreed upon margin,
which is believed to be fair market value pricing. This
agreement is designed to allow us time to develop our own
packaging and shipping function. The packout services agreement
will have a term of one year unless terminated earlier. We may
terminate this agreement for any reason upon sixty days prior
written notice to ECC. In the event of an early termination of
this agreement, we will be entitled to a refund of any unearned
fees paid to ECC for the services.
Product
Support Agreement
Following the spin-off, ECC will need us to provide product
support (including engineering and technical support services
and IPTV functionality) for all receivers and related
accessories that our subsidiaries have sold and will sell to
ECC. As a result, we will enter into a product support
agreement, under which ECC will have the right, but not the
obligation, to receive product support services in respect of
such receivers and related accessories. The fees for the
services to be provided under the product support agreement will
be cost plus an agreed upon margin, which is believed to be fair
market value pricing. The term of the product support agreement
will be for the life of such receivers and related accessories
unless terminated earlier. ECC may terminate the product support
agreement for any reason upon sixty days prior written notice.
In the event of an early termination of this agreement, ECC
shall be entitled to a refund of any unearned fees paid to us
for the services.
Receiver
Agreement
It is anticipated that we will continue to design, develop and
distribute receivers, antennae and other digital equipment for
the DISH Network following the spin-off. ECC will need assurance
that the DISH Network will be able to acquire receivers and
accessories needed to operate its business following the
spin-off. Our subsidiaries will enter into a receiver agreement
for the sale of receivers and other satellite television
programming accessories to ECC. Under the receiver agreement, an
ECC subsidiary will have the right but not the obligation to
purchase receivers and accessories from us for a two year
period. Additionally, we will provide ECC with standard
manufacturer warranties for the goods sold under the receiver
agreement. ECC may terminate the receiver agreement for any
reason upon sixty days written notice We may also terminate this
agreement if certain entities were to acquire ECC. ECC will have
the right, but not the obligation, to extend the receiver
agreement annually for up to two years. The receiver agreement
will allow ECC to purchase receivers and accessories from us at
cost plus an agreed upon margin, which is believed to be fair
market value pricing. The receiver agreement will also include
an indemnification provision, whereby the parties will indemnify
each other for certain intellectual property issues.
Remanufactured
Receiver Agreement
It is anticipated that we will enter into a remanufactured
receiver agreement under which we have the right to purchase
remanufactured receivers, services and accessories from ECC for
a two year period. Under the remanufactured receiver agreement
we may purchase remanufactured receivers and accessories from
ECC at cost plus an agreed upon margin, which is believed to be
fair market value pricing. We may terminate the remanufactured
receiver agreement for any reason upon sixty days written
notice. ECC may also terminate this agreement if certain
entities were to acquire us.
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Satellite
Capacity Agreements
It is anticipated that we will enter into satellite capacity
agreements, whereby an ECC subsidiary, on a transitional basis,
will lease satellite capacity on satellites owned by us
and/or
slots
licensed by us. Certain DISH Network subscribers currently point
their satellite antenna at these slots and this agreement is
designed to facilitate the separation of us and ECC by allowing
a period of time for these DISH Network subscribers to be moved
to satellites owned by ECC
and/or
to
slots that will be licensed to ECC following the spin-off. The
fees for the services to be provided under the satellite
capacity agreements will be at fair market value. Generally, the
satellite capacity agreements will terminate upon the earlier
of: (a) the end of life or replacement of the satellite;
(b) the date the satellite fails; (c) the date that
the transponder on which service is being provided under the
agreement fails; or (d) two years.
Satellite
Procurement Agreement
We will enter into a satellite procurement agreement, whereby
ECC will have the right, but not the obligation, to engage us to
manage the process of procuring new satellite capacity for ECC.
The satellite procurement agreement will have a term of two
years. The fees for the services to be provided under the
satellite procurement agreement will be cost plus an agreed upon
margin, which is believed to be fair market value pricing. ECC
may terminate the satellite procurement agreement for any reason
upon sixty days written notice.
Separation
Agreement
The separation agreement will govern the contribution to us of
ECCs set-top box business and the other assets to be
transferred to us in the spin-off (the distributed
assets), the subsequent distribution of shares of our
common stock to ECC stockholders and other matters related to
ECCs relationship with us.
The Contribution.
To effect the contribution,
ECC will, or will cause its subsidiaries to, transfer or agree
to transfer all of the distributed assets to us as described in
this information statement (which assets may include stock or
other equity interests of ECC subsidiaries). We will assume, or
agree to assume, and will agree to perform and fulfill all of
the liabilities (including contingent liabilities) of the
distributed assets in accordance with their respective terms,
except for certain liabilities to be retained by ECC, including
the intellectual property liabilities relating to the
distributed assets for acts or events occurring on or before the
distribution date. ECC will not make any representation or
warranty as to the assets or liabilities transferred or assumed
as part of the contribution or sale or as to any consents which
may be required in connection with the transfers. Except as
expressly set forth in the separation agreement or in any other
ancillary agreements, all assets will be transferred on an
as is, where is basis.
If it is not practicable to transfer specified assets and
liabilities on the separation date, the agreement provides that
these assets
and/or
liabilities will be transferred after the separation date. If
another ancillary agreement expressly provides for the transfer
of an asset or an assumption of a liability, the terms of the
other ancillary agreement will determine the manner of the
transfer and assumption. The parties agree to use reasonable
best efforts to obtain any required consents, substitutions or
amendments required to novate or assign all rights and
obligations under any contracts to be transferred in connection
with the contribution.
The Distribution.
The separation agreement
will provide that on the distribution date (which will be
determined by ECC), ECC will distribute all of its shares of our
common stock to its stockholders of record as of the record date
(which also will be determined by ECC). ECC will have the sole
and absolute discretion to determine (and change) the terms of,
and whether to proceed with, the distribution and, to the extent
it determines to so proceed, to determine the date of the
distribution. The separation agreement will provide that the
distribution may be abandoned at any time, or may be accelerated
or delayed, in ECCs discretion. In addition to ECCs
discretion to determine not to proceed with the distribution,
ECCs agreement to consummate the distribution also is
subject to the satisfaction or waiver of a number of conditions,
including the following:
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the registration statement for our common stock into which
information from this information statement is incorporated by
reference has been declared effective by the SEC;
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a definitive Schedule 14C information statement relating to
amendments to the Articles of Incorporation of ECC that provide
for (i) the change of ECCs name to DISH Network
Corporation, and (ii) the elimination of certain
corporate opportunities provisions; will be filed with the SEC
and mailed to ECC stockholders;
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our common stock has been accepted for listing on the Nasdaq
Global Select Market;
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there is no legal restraint or prohibition preventing the
consummation of the contribution or distribution or any other
transaction related to the spin-off being in effect;
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ECCs receipt of an opinion of White & Case LLP
on the distribution date substantially to the effect that the
spin-off, together with certain related transactions, will
qualify as reorganizations under Section 355 and
368(a)(1)(D) of the Code, in form and substance satisfactory to
ECC;
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the contribution shall have become effective in accordance with
the separation agreement and the ancillary agreements;
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any consents and governmental approvals, necessary to consummate
the separation and distribution shall have been obtained and be
in full force and effect; and
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no other events or developments shall have occurred that, in the
judgment of the ECC board of directors, would result in the
separation or the distribution having a material adverse effect
on ECC, its stockholders, the consumer business or the
non-consumer receiver business.
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The separation agreement will provide that we and ECC will use
our reasonable best efforts to consummate the distribution,
including to use such efforts to file a registration statement
and any subsequent amendments or supplements thereto with the
SEC regarding our common stock, take such actions as may be
necessary under state blue-sky laws and prepare and mail to ECC
stockholders such other materials as ECC determines necessary or
desirable and required under law. In addition, the separation
agreement will provide that prior to the distribution, we will
agree to prepare, file and use our reasonable best efforts to
make effective an application for listing our stock on the
Nasdaq Global Select Market.
Exchange of Information.
We and ECC will agree
to provide each other with information reasonably necessary to
comply with reporting, disclosure or filing requirements of
governmental authorities, for use in judicial, regulatory,
administrative and other proceedings and to satisfy audit,
accounting, claims, litigation or similar requests, whether
business or legal related. We and ECC also will agree to certain
record retention and production procedures and agree to
cooperate in any litigation as described below. After the
spin-off, each party will agree to maintain at its own cost and
expense adequate systems and controls for its business to the
extent reasonably necessary to allow the other party to satisfy
its reporting, accounting, audit and other obligations. Each
party also will agree to provide to the other party all
financial and other data and information that the requesting
party determines necessary or advisable in order to prepare its
financial statements and reports or filings. Each party will
agree to use its reasonable best efforts to make available to
the other party its current, former and future directors,
officers, employees and other personnel or agents who may be
used as witnesses and books, records and other documents which
may reasonably be required in connection with legal,
administrative or other proceedings.
Cooperation in Obtaining New Agreements.
ECC
will agree, at our request, to facilitate introductions with
third parties from whom our business has derived benefits under
agreements and relationships which are not being assigned or
transferred to us in connection with the contribution. ECC also
will agree to provide reasonable assistance to us so that we may
enter into agreements or relationships with such third parties
under substantially equivalent terms and conditions that apply
to ECC.
Limitation on Damages.
We and ECC will agree
to waive, and neither we nor ECC will be able to seek,
consequential, special, indirect or incidental damages or
punitive damages.
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Dispute Resolution.
If a dispute arises with
ECC under the separation agreement or any ancillary agreement
(unless otherwise provided in any such agreement), we will agree
to the following procedures:
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the dispute generally will be submitted to senior executives of
both parties, one appointed by each of us and ECC;
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if resolution through the senior executives does not settle the
dispute, the parties must generally make a good faith attempt to
settle the dispute through mediation before resorting to binding
arbitration; and
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if resolution through the mediation fails, the parties can
resort to binding arbitration.
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Termination.
The separation agreement and any
of the ancillary agreements may be terminated or the
distribution may be amended, modified or abandoned, in each
case, at any time prior to the effective time by and in the sole
and absolute discretion of ECC, without our approval. In the
event of such termination, neither party shall have any
liability of any kind to the other party.
Services
Agreement
We anticipate entering into a services agreement with ECC under
which ECC will have the right, but not the obligation, to
receive logistics, procurement and quality assurance services
from us. This agreement will have a term of no longer than two
years, and the fees for the services provided under this
agreement will be cost plus an agreed upon margin, which is
believed to be fair market value pricing. This limited-term
agreement is designed to facilitate the separation of us and ECC
by allowing a period of time for ECC to provide these services
for its own behalf. ECC may terminate the services agreement
with respect to a particular service for any reason upon sixty
days prior written notice.
Tax
Sharing Agreement
Prior to the spin-off date, we will enter into a tax sharing
agreement with ECC which will govern our and ECCs
respective rights, responsibilities and obligations after the
spin-off with respect to taxes for the periods ending on or
before the spin-off. Generally, all pre-spin-off taxes,
including any taxes that are incurred as a result of
restructuring activities undertaken to implement the spin-off,
will be borne by ECC, and ECC will indemnify us for such taxes.
However, ECC will not be liable for and will not indemnify us
for any taxes that are incurred as a result of the spin-off or
certain related transactions failing to qualify as tax-free
distributions pursuant to any provision of Section 355 or
Section 361 of the Code because of (i) a direct or
indirect acquisition of any of our stock, stock options or
assets (ii) any action that we take or fail to take or
(iii) any action that we take that is inconsistent with the
information and representations furnished to the IRS in
connection with the request for the private letter ruling, or to
counsel in connection with any opinion being delivered by
counsel with respect to the spin-off or certain related
transactions. In such case, we will be solely liable for, and
will indemnify ECC 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.
Transition
Services Agreement
We anticipate entering into a transition services agreement with
ECC pursuant to which ECC, or one of its subsidiaries, will
provide certain transitional services to us. Under such
transition services agreement, we will have the right, but not
the obligation, to receive the following services from ECC or
one of its subsidiaries: finance, information technology,
benefits administration, travel and event coordination, human
resources, human resources development (training), program
management, internal audit and corporate quality, legal,
accounting and tax, and other support services.
We anticipate that the transition services agreement will have a
term of no longer than two years and that the fees for the
services provided under such agreement will be at cost plus an
agreed upon margin, which is believed to be fair market value
pricing. We may terminate the transition services agreement with
respect to a particular service for any reason upon thirty days
prior written notice. This limited-term agreement is designed to
smooth our transition to a stand-alone public company.
114
TT&C
Agreement
Following the spin-off, ECC or its subsidiaries will need us to
provide telemetry, tracking and control (TT&C)
services to support ECCs satellite fleet. As a result, we
will enter into a TT&C agreement under which we will
provide TT&C services to ECC or its subsidiaries. The
TT&C agreement will have a term of two years. However, ECC
will have the right, but not the obligation, to extend the
agreement annually for up to an additional two years. The fees
for the services to be provided under the TT&C agreement
will be cost plus an agreed upon margin, which is believed to be
fair market value pricing. ECC may terminate the TT&C
agreement for any reason upon sixty days prior written notice.
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DESCRIPTION
OF OUR CAPITAL STOCK
The following information reflects our certificate of
incorporation and bylaws as these documents will be in effect at
the time of the spin-off.
General
Upon the completion of the distribution, we will be authorized
to issue the following capital stock:
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4,000,000,000 shares of common stock, of which
1,600,000,000 shares are designated Class A common
stock, 800,000,000 shares are designated Class B
common stock, 800,000,000 shares are designated
Class C common stock and 800,000,000 shares are
designated Class D common stock; and
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20,000,000 shares of preferred stock.
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A summary of the powers, preferences and rights of the shares of
each class of common stock and preferred stock is described
below.
Our
Class A Common Stock
Each holder of Class A common stock is entitled to one vote
for each share owned of record on all matters submitted to a
vote of stockholders. Except as otherwise required by law, the
Class A common stock votes together with the Class B
common stock, the Class C common stock and the preferred
stock on all matters submitted to a vote of stockholders.
Subject to the preferential rights of any outstanding series of
preferred stock and to any restrictions on the payment of
dividends imposed under the terms of our indebtedness, the
holders of Class A common stock are entitled to such
dividends as may be declared from time to time by our board of
directors from legally available funds and, together with the
holders of the Class B common stock and the Class C
common stock, are entitled, after payment of all prior claims,
to receive pro rata all of our assets upon a liquidation.
Holders of Class A common stock have no redemption,
conversion or preemptive rights.
Our
Class B Common Stock
Each holder of Class B common stock is entitled to ten
votes for each share of Class B common stock on all matters
submitted to a vote of stockholders. Except as otherwise
required by law, the Class B common stock votes together
with the Class A common stock, the Class C common
stock and the preferred stock on all matters submitted to a vote
of the stockholders. Each share of Class B common stock is
convertible, at the option of the holder, into one share of
Class A common stock. The conversion ratio is subject to
adjustment from time to time upon the occurrence of certain
events, including: (i) dividends or distributions on
Class A common stock payable in Class A common stock
or certain other capital stock; (ii) subdivisions,
combinations or certain reclassifications of Class A common
stock; and (iii) issuances of rights, warrants or options
to purchase Class A common stock at a price per share less
than the fair market value of the Class A common stock.
Each share of Class B common stock is entitled to receive
dividends and distributions upon liquidation on a basis
equivalent to that of the Class A common stock and
Class C common stock.
Our
Class C Common Stock
Each holder of Class C common stock is entitled to one vote
for each share of Class C common stock on all matters
submitted to a vote of stockholders, except in the event of a
change in control, in which case each Class C holder is
entitled to ten votes per share. Except as otherwise required by
law, the Class C common stock votes together with the
Class A common stock, the Class B common stock and the
preferred stock on all matters submitted to a vote of
stockholders. Each share of Class C common stock is
convertible into Class A common stock on the same terms as
the Class B common stock. Each share of Class C common
stock is entitled to receive dividends and distributions upon
liquidation on a basis equivalent to that of the Class A
common stock and Class B common stock. We do not currently
intend to issue any shares of Class C common stock.
116
Our
Class D Common Stock
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.
We do not currently intend to issue any shares of Class D
common stock.
Our
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.
Provisions
of Our Articles of Incorporation Relating to Related-Party
Transactions and Corporate Opportunities
In order to address potential conflicts of interest between us
and ECC, our articles of incorporation contain provisions
regulating and defining the conduct of our affairs as they may
involve ECC and its officers and directors, and our powers,
rights, duties and liabilities and those of our officers,
directors and shareholders in connection with our relationship
with ECC. In general, these provisions recognize that we and ECC
may engage in the same or similar business activities and lines
of business, have an interest in the same areas of corporate
opportunities and will continue to have contractual and business
relations with each other, including officers and directors or
both of ECC serving as our officers or directors or both.
If one of our directors or officers who is also a director or
officer of ECC learns of a potential transaction or matter that
may be a corporate opportunity for both us and ECC, our amended
and restated articles of incorporation provides that such
director or officer is required to first present the opportunity
to us only if (A) we have expressed an interest in such
corporate opportunity as evidenced by resolutions appearing in
the minutes of our board of directors; (B) such potential
corporate opportunity was expressly offered to one of our
directors or officers solely in his or her capacity as a
director or officer of us or as a director or officer of any
subsidiary of us; and (C) such opportunity relates to a
line of business in which we or any subsidiary of us is then
directly engaged.
For purposes of our articles of incorporation, corporate
opportunities include, but are not limited to, business
opportunities that we are financially able to undertake, that
are, from their nature, in our line of business, are of
practical advantage to us and are ones in which we would have an
interest or a reasonable expectancy.
The corporate opportunity provisions in our articles of
incorporation will expire on the date that no person who is a
director or officer of us is also a director or officer of ECC.
By becoming a shareholder in us, you will be deemed to have
notice of and have consented to the provisions of our articles
of incorporation related to corporate opportunities that are
described above.
Nevada
Law and Limitations on Changes in Control
The Nevada Revised Statutes prevent an interested
stockholder defined generally as a person owning 10% or
more of a corporations outstanding voting stock, from
engaging in a combination with a Nevada corporation
for three years following the date such person became an
interested stockholder unless, before such person became an
interested stockholder, the board of directors of the
corporation approved the transaction in which the interested
stockholder became an interested stockholder or approves the
combination.
The provisions authorizing our board of directors to issue
preferred stock without stockholder approval and the provisions
of the Nevada Revised Statutes relating to combinations with
interested stockholders could have the effect of delaying,
deferring or preventing a change in our control or the removal
of our existing management.
117
LIMITATION
OF LIABILITY AND INDEMNIFICATION MATTERS
Chapter 78.7502(1) of the Nevada Revised Statutes allows
EHC to indemnify any person made or threatened to be made a
party to any action (except an action by or in the right of EHC,
a derivative action), by reason of the fact that he
is or was a director, officer, employee or agent of EHC, or is
or was serving at the request of EHC as a director, officer,
employee or agent of another corporation, against expenses
including attorneys fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in a
good faith manner which he reasonably believed to be in or not
opposed to the best interests of EHC, and, with respect to any
criminal proceeding, had no reasonable cause to believe that his
conduct was unlawful. Under chapter 78.7502(2), a similar
standard of care applies to derivative actions, except that
indemnification is limited solely to expenses (including
attorneys fees) incurred in connection with the defense or
settlement of the action and court approval of the
indemnification is required where the person is seeking advance
payment of indemnifiable expenses prior to final disposition of
the proceeding in question. Under chapter 78.751, decisions
as to the payment of indemnification are made by a majority of
the Board of Directors at a meeting at which quorum of
disinterested director is present, or by written opinion of
special legal counsel, or by the stockholders.
Provisions relating to liability and indemnification of officers
and directors of EHC for acts by such officers and directors are
contained in Article IX of our Articles of Incorporation,
which will be filed by amendment as Exhibit 3.1 hereto, and
Article IX of our Bylaws, which will be filed by amendment
as Exhibit 3.2 hereto, which are incorporated by reference.
These provisions state, among other things, that, consistent
with and to the extent allowable under Nevada law, and upon the
decision of a disinterested majority of EHCs Board of
Directors, or a written opinion of outside legal counsel, or our
stockholders: (1) EHC shall indemnify any person who was or
is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative and
whether formal or informal (other than an action by or in the
right of EHC) by reason of the fact that he is or was a
director, officer, employee, fiduciary or agent of EHC, or is or
was serving at the request of EHC as a director, employee,
fiduciary or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys fees), judgments,
fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or
proceeding, if he conducted himself in good faith and in a
manner he reasonably believed to be in or not opposed to the
best interests of EHC, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct
was unlawful; and (2) EHC shall indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the
right of EHC to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, fiduciary
or agent of EHC, or is or was serving at the request of EHC as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or
other enterprise against expenses (including attorneys
fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of EHC and except that no
indemnification shall be made in respect to any claim, issue or
matter as to which such person shall have adjudged to be liable
for negligence or misconduct in the performance of his duty to
EHC unless and only to the extent that the court in which such
action or suit was brought shall determine upon application that
despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall
deem proper.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
Nasdaq
Listing
We have applied to list our Class A common stock on the
Nasdaq Global Select Market under the symbol
[ ].
118
WHERE
YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form 10 with the
SEC with respect to the shares of our common stock being
distributed as contemplated by this information statement. This
information statement is a part of, and does not contain all of
the information set forth in, the registration statement and the
exhibits and schedules to the registration statement. For
further information with respect to our company and our common
stock, please refer to the registration statement, including its
exhibits and schedules. Statements made in this information
statement relating to any contract or other document are not
necessarily complete, and you should refer to the exhibits
attached to the registration statement for copies of the actual
contract or document. You may review a copy of the registration
statement, including its exhibits and schedules, at the
SECs public reference room, located at 100 F Street,
N.E., Washington, D.C. 20549, as well as on the Internet
website maintained by the SEC at www.sec.gov. Information
contained on any website referenced in this information
statement is not incorporated by reference in this information
statement.
As a result of the distribution, we will become subject to the
information and reporting requirements of the Securities
Exchange Act of 1934 and, in accordance with the Exchange Act,
we will file periodic reports, proxy statements and other
information with the SEC.
You may request a copy of any of our filings with the SEC at no
cost, by writing or telephoning the office of:
Investor Relations
EchoStar Holding Corporation
90 Inverness Circle E.
Englewood, Colorado 80112
Telephone:
(303) 723-1000
We intend to furnish holders of our common stock with annual
reports containing combined financial statements prepared in
accordance with U.S. generally accepted accounting
principles and audited and reported on, with an opinion
expressed, by an independent public accounting firm.
You should rely only on the information contained in this
information statement or to which we have referred you. We have
not authorized any person to provide you with different
information or to make any representation not contained in this
information statement.
119
INDEX
TO FINANCIAL TABLES OF ECHOSTAR HOLDING CORPORATION
|
|
|
|
|
Page
|
|
Combined Financial Statements of EchoStar Holding
Corporation:
|
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
EchoStar Communications Corporation
EchoStar Holding Corporation:
We have audited the accompanying combined balance sheets of
EchoStar Holding Corporation (the Company) as of
December 31, 2006 and 2005, and the related combined
statements of operations and comprehensive income (loss),
statements of net investment and cash flows for each of the
years in the three-year period ended December 31, 2006.
These combined financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these combined financial statements 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 audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of EchoStar Holding Corporation as of December 31,
2006 and 2005, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed in note 3 to the accompanying combined
financial statements, effective January 1, 2006, the
Company adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment.
/s/ KPMG LLP
Denver, Colorado
November 6, 2007
F-2
ECHOSTAR
HOLDING CORPORATION
COMBINED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except
|
|
|
|
per share amounts)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,734
|
|
|
$
|
29,621
|
|
|
$
|
16,242
|
|
Marketable investment securities
|
|
|
497,019
|
|
|
|
293,955
|
|
|
|
89,867
|
|
Trade accounts receivable, net of allowance for doubtful
accounts of $347 (unaudited), $823, and $243, respectively
|
|
|
38,511
|
|
|
|
19,062
|
|
|
|
18,963
|
|
Inventories, net
|
|
|
13,055
|
|
|
|
2,726
|
|
|
|
507
|
|
Other current assets
|
|
|
10,215
|
|
|
|
2,329
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
592,534
|
|
|
|
347,693
|
|
|
|
126,698
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
1,581
|
|
Property and equipment, net
|
|
|
187,217
|
|
|
|
70,510
|
|
|
|
26,290
|
|
FCC authorizations
|
|
|
42,873
|
|
|
|
42,873
|
|
|
|
42,874
|
|
Intangible assets, net
|
|
|
11,037
|
|
|
|
11,919
|
|
|
|
13,096
|
|
Investment in affiliates
|
|
|
81,391
|
|
|
|
40,254
|
|
|
|
18,853
|
|
Other noncurrent assets, net
|
|
|
4,572
|
|
|
|
4,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
919,624
|
|
|
$
|
517,821
|
|
|
$
|
229,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS EQUITY (DEFICIT)
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
31,384
|
|
|
$
|
3,095
|
|
|
$
|
2,171
|
|
Accrued expenses and other
|
|
|
24,171
|
|
|
|
12,152
|
|
|
|
9,594
|
|
Current portion of mortgage
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
55,555
|
|
|
|
15,247
|
|
|
|
11,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage, net of current portion
|
|
|
|
|
|
|
|
|
|
|
390
|
|
Deferred tax liabilities
|
|
|
301
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations, net of current portion
|
|
|
301
|
|
|
|
291
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,856
|
|
|
|
15,538
|
|
|
|
12,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in EHC (Owners Equity (Deficit)):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock of EHC, $.001 par value,
20,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC Class A common stock, $.001 par value,
1,600,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC Class B common stock, $.001 par value,
800,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC Class C common stock, $.001 par value,
800,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
EHC Class D common stock, $.001 par value,
800,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
103,863
|
|
|
|
63,805
|
|
|
|
4,063
|
|
Owners net investment
|
|
|
759,905
|
|
|
|
438,478
|
|
|
|
213,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment in EHC (Owners equity (deficit))
|
|
|
863,768
|
|
|
|
502,283
|
|
|
|
217,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net investment in EHC (Owners equity
(deficit))
|
|
$
|
919,624
|
|
|
$
|
517,821
|
|
|
$
|
229,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-3
ECHOSTAR
HOLDING CORPORATION
COMBINED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and other sales ECC
|
|
$
|
1,019,729
|
|
|
$
|
948,683
|
|
|
$
|
1,288,691
|
|
|
$
|
1,295,861
|
|
|
$
|
1,543,513
|
|
Equipment sales
|
|
|
163,039
|
|
|
|
184,216
|
|
|
|
236,629
|
|
|
|
217,830
|
|
|
|
176,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,182,768
|
|
|
|
1,132,899
|
|
|
|
1,525,320
|
|
|
|
1,513,691
|
|
|
|
1,720,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment and other sales
|
|
|
1,121,067
|
|
|
|
1,065,216
|
|
|
|
1,440,178
|
|
|
|
1,438,629
|
|
|
|
1,650,775
|
|
Research and development
|
|
|
40,634
|
|
|
|
39,093
|
|
|
|
56,451
|
|
|
|
45,928
|
|
|
|
39,809
|
|
General and administrative (Note 12)
|
|
|
56,844
|
|
|
|
43,973
|
|
|
|
60,106
|
|
|
|
56,366
|
|
|
|
65,059
|
|
Depreciation and amortization
|
|
|
4,391
|
|
|
|
4,593
|
|
|
|
6,032
|
|
|
|
5,832
|
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,222,936
|
|
|
|
1,152,875
|
|
|
|
1,562,767
|
|
|
|
1,546,755
|
|
|
|
1,760,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(40,168
|
)
|
|
|
(19,976
|
)
|
|
|
(37,447
|
)
|
|
|
(33,064
|
)
|
|
|
(40,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,861
|
|
|
|
568
|
|
|
|
831
|
|
|
|
252
|
|
|
|
349
|
|
Interest expense, net of amounts capitalized (Note 12)
|
|
|
(785
|
)
|
|
|
(785
|
)
|
|
|
(1,059
|
)
|
|
|
(1,088
|
)
|
|
|
(1,123
|
)
|
Other
|
|
|
782
|
|
|
|
188
|
|
|
|
6,588
|
|
|
|
(10,109
|
)
|
|
|
(1,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,858
|
|
|
|
(29
|
)
|
|
|
6,360
|
|
|
|
(10,945
|
)
|
|
|
(2,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(37,310
|
)
|
|
|
(20,005
|
)
|
|
|
(31,087
|
)
|
|
|
(44,009
|
)
|
|
|
(42,809
|
)
|
Income tax (provision) benefit, net
|
|
|
(2,633
|
)
|
|
|
(481
|
)
|
|
|
(3,075
|
)
|
|
|
(931
|
)
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(39,943
|
)
|
|
$
|
(20,486
|
)
|
|
$
|
(34,162
|
)
|
|
$
|
(44,940
|
)
|
|
$
|
(43,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
694
|
|
|
|
(873
|
)
|
|
|
(1,430
|
)
|
|
|
1,227
|
|
|
|
(948
|
)
|
Unrealized holding gains (losses) on available-for-sale
securities
|
|
|
42,412
|
|
|
|
14,895
|
|
|
|
61,206
|
|
|
|
(11,769
|
)
|
|
|
1,218
|
|
Recognition of previously unrealized (gains) losses on
available-for-sale securities included in net income (loss)
|
|
|
(3,048
|
)
|
|
|
(135
|
)
|
|
|
(34
|
)
|
|
|
(30,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
115
|
|
|
$
|
(6,599
|
)
|
|
$
|
25,580
|
|
|
$
|
(86,438
|
)
|
|
$
|
(42,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
ECHOSTAR
HOLDING CORPORATION
COMBINED
STATEMENTS OF NET INVESTMENT IN ECHOSTAR HOLDING
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Net
|
|
|
|
|
|
|
Comprehensive
|
|
|
Investment
|
|
|
|
|
|
|
Income (Loss)
|
|
|
in EHC
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2003
|
|
$
|
45,291
|
|
|
$
|
184,731
|
|
|
$
|
230,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
(43,237
|
)
|
|
|
(43,237
|
)
|
Advances from owner
|
|
|
|
|
|
|
71,398
|
|
|
|
71,398
|
|
Foreign currency translation
|
|
|
(948
|
)
|
|
|
|
|
|
|
(948
|
)
|
Change in unrealized holding gains (losses) on
available-for-sale securities, net
|
|
|
1,218
|
|
|
|
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$
|
45,561
|
|
|
$
|
212,892
|
|
|
$
|
258,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
(44,940
|
)
|
|
|
(44,940
|
)
|
Advances from owner
|
|
|
|
|
|
|
45,117
|
|
|
|
45,117
|
|
Foreign currency translation
|
|
|
1,227
|
|
|
|
|
|
|
|
1,227
|
|
Change in unrealized holding gains (losses) on
available-for-sale securities, net
|
|
|
(42,725
|
)
|
|
|
|
|
|
|
(42,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
4,063
|
|
|
$
|
213,069
|
|
|
$
|
217,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
(34,162
|
)
|
|
|
(34,162
|
)
|
Advances from owner
|
|
|
|
|
|
|
256,411
|
|
|
|
256,411
|
|
Stock-based compensation, net of tax
|
|
|
|
|
|
|
3,160
|
|
|
|
3,160
|
|
Foreign currency translation
|
|
|
(1,430
|
)
|
|
|
|
|
|
|
(1,430
|
)
|
Change in unrealized holding gains (losses) on
available-for-sale securities, net
|
|
|
61,172
|
|
|
|
|
|
|
|
61,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
63,805
|
|
|
$
|
438,478
|
|
|
$
|
502,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
(39,943
|
)
|
|
|
(39,943
|
)
|
Advances from owner
|
|
|
|
|
|
|
358,505
|
|
|
|
358,505
|
|
Stock-based compensation, net of tax
|
|
|
|
|
|
|
2,865
|
|
|
|
2,865
|
|
Foreign currency translation
|
|
|
694
|
|
|
|
|
|
|
|
694
|
|
Change in unrealized holding gains (losses) on
available-for-sale securities, net
|
|
|
39,364
|
|
|
|
|
|
|
|
39,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007 (unaudited)
|
|
$
|
103,863
|
|
|
$
|
759,905
|
|
|
$
|
863,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-5
ECHOSTAR
HOLDING CORPORATION
COMBINED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(39,943
|
)
|
|
$
|
(20,486
|
)
|
|
$
|
(34,162
|
)
|
|
$
|
(44,940
|
)
|
|
$
|
(43,237
|
)
|
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,391
|
|
|
|
4,593
|
|
|
|
6,032
|
|
|
|
5,832
|
|
|
|
5,071
|
|
Equity in losses (earnings) of affiliates
|
|
|
(478
|
)
|
|
|
(697
|
)
|
|
|
(1,953
|
)
|
|
|
(5,315
|
)
|
|
|
(9,537
|
)
|
Realized losses (gains) on investments
|
|
|
(4,533
|
)
|
|
|
(2,032
|
)
|
|
|
(8,706
|
)
|
|
|
8,482
|
|
|
|
|
|
Non-cash, stock-based compensation recognized
|
|
|
2,865
|
|
|
|
2,440
|
|
|
|
3,160
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit)
|
|
|
10
|
|
|
|
10
|
|
|
|
291
|
|
|
|
(247
|
)
|
|
|
|
|
Other, net
|
|
|
850
|
|
|
|
(977
|
)
|
|
|
(890
|
)
|
|
|
3,681
|
|
|
|
2,651
|
|
Change in noncurrent assets
|
|
|
|
|
|
|
(100
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
2,183
|
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(18,972
|
)
|
|
|
10,041
|
|
|
|
(679
|
)
|
|
|
18,965
|
|
|
|
(14,875
|
)
|
Allowance for doubtful accounts
|
|
|
(477
|
)
|
|
|
421
|
|
|
|
580
|
|
|
|
(297
|
)
|
|
|
78
|
|
Inventories
|
|
|
(10,329
|
)
|
|
|
(10,396
|
)
|
|
|
(2,219
|
)
|
|
|
5,708
|
|
|
|
(2,755
|
)
|
Other current assets
|
|
|
(7,968
|
)
|
|
|
(750
|
)
|
|
|
(1,211
|
)
|
|
|
671
|
|
|
|
(20,664
|
)
|
Trade accounts payable
|
|
|
28,288
|
|
|
|
(884
|
)
|
|
|
925
|
|
|
|
(6,028
|
)
|
|
|
3,455
|
|
Accrued expenses and other
|
|
|
12,020
|
|
|
|
15,037
|
|
|
|
2,558
|
|
|
|
(705
|
)
|
|
|
(1,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
(34,276
|
)
|
|
|
(3,780
|
)
|
|
|
(36,374
|
)
|
|
|
(14,193
|
)
|
|
|
(78,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(120,076
|
)
|
|
|
(19,586
|
)
|
|
|
(32,769
|
)
|
|
|
(4,250
|
)
|
|
|
(5,935
|
)
|
Change in restricted cash
|
|
|
|
|
|
|
(33,321
|
)
|
|
|
1,581
|
|
|
|
119
|
|
|
|
(177
|
)
|
Purchase of technology-based intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,000
|
)
|
|
|
|
|
Purchases of non-marketable investments
|
|
|
(40,000
|
)
|
|
|
19,541
|
|
|
|
19,541
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(160
|
)
|
|
|
(3,505
|
)
|
|
|
4,052
|
|
|
|
1,431
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(160,236
|
)
|
|
|
(75,953
|
)
|
|
|
(54,781
|
)
|
|
|
(16,700
|
)
|
|
|
(5,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in advances from owner
|
|
|
198,625
|
|
|
|
91,555
|
|
|
|
105,030
|
|
|
|
39,933
|
|
|
|
71,281
|
|
Repayment of mortgage
|
|
|
|
|
|
|
(379
|
)
|
|
|
(496
|
)
|
|
|
(151
|
)
|
|
|
(1,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
198,625
|
|
|
|
91,176
|
|
|
|
104,534
|
|
|
|
39,782
|
|
|
|
69,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
4,113
|
|
|
|
11,443
|
|
|
|
13,379
|
|
|
|
8,889
|
|
|
|
(14,820
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
29,621
|
|
|
|
16,242
|
|
|
|
16,242
|
|
|
|
7,353
|
|
|
|
22,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
33,734
|
|
|
$
|
27,685
|
|
|
$
|
29,621
|
|
|
$
|
16,242
|
|
|
$
|
7,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
138
|
|
|
$
|
72
|
|
|
$
|
1,114
|
|
|
$
|
1,030
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received for interest
|
|
$
|
974
|
|
|
$
|
561
|
|
|
$
|
830
|
|
|
$
|
253
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
91
|
|
|
$
|
380
|
|
|
$
|
2,525
|
|
|
$
|
|
|
|
$
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-6
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED) AND
THE YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2005
|
|
1.
|
Organization
and Business Activities
|
On September 25, 2007, EchoStar Communications Corporation
(ECC) announced its intention to separate its
technology and certain infrastructure assets into a separate
publicly-traded company. We were incorporated in Nevada on
October 12, 2007 to effect the separation. We will have no
material assets or activities as a separate corporate entity
until the contribution to us by ECC, prior to the completion of
the spin-off, of the businesses and assets described in this
information statement. Our historical combined financial
statements reflect the historical financial position and results
of operations of entities included in consolidated financial
statements of ECC, representing almost exclusively ECCs
set-top box business, using the historical results of operations
and historical bases of assets and liabilities of this business.
However, our historical combined financial statements do not
include certain satellites, uplink and satellite transmission
assets, real estate and other assets and related liabilities
that will be contributed to us by ECC in the spin-off. These
assets and liabilities, which will primarily comprise our fixed
satellite services business. The financial condition and results
of operations of our fixed satellite services business have not
been included in our historical combined financial statements
because our fixed satellite services business was operated as an
integral part of ECCs subscription television business and
did not constitute a business in the historical
financial statements of ECC. Our historical financial data also
does not include financial information of Sling Media, Inc.,
which was recently acquired by ECC and will be contributed to us
in the spin-off.
Organization
and Legal Structure
The following table summarizes our significant affiliates
included in our combined financial statements as of
September 30, 2007:
|
|
|
|
|
|
|
Referred to
|
Legal Entity
|
|
Herein As
|
|
EchoStar Holding Corporation
|
|
|
EHC
|
|
EchoStar Technologies Corporation
|
|
|
ETC
|
|
EchoStar Technology Holdings Corporation
|
|
|
ETH
|
|
EchoStar Data Networks Corporation
|
|
|
EDN
|
|
EchoStar International Corporation
|
|
|
EIC
|
|
EchoStar Asia Holdings Corporation
|
|
|
EAH
|
|
EchoStar Asia Satellite Corporation
|
|
|
EAS
|
|
EchoStar UK Holdings, Ltd.
|
|
|
EUK
|
|
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The combined financial statements, which are discussed below,
reflect the historical financial position, results of operations
and cash flows of the entities included in the consolidated
financial statements and accounting records of ECC, principally
representing the digital set-top box and other related products
segment, using the historical results of operations and the
historical basis of assets and liabilities of our business. The
historical combined financial statements do not include
ECCs infrastructure assets and operations to be
contributed to us as part of the spin-off such as certain
satellites, uplink and satellite transmission assets, real
estate and other assets and related liabilities. All significant
intercompany transactions and accounts have been eliminated.
Earnings per share has not been presented in these combined
financial statements.
F-7
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
The combined statements of operations include expense
allocations for certain corporate functions historically
provided to us by ECC, including, among other things, treasury,
tax, accounting and reporting, risk management, legal, internal
audit, human resources, investor relations and information
technology. In certain cases, these allocations were made on a
specific identification basis. Otherwise, the expenses related
to services provided to us by ECC were allocated to us based on
the relative percentages, as compared to ECCs other
businesses, of headcount or other appropriate methods depending
on the nature of each item of cost to be allocated. Pursuant to
transition services agreements we will enter into with ECC prior
to the spin-off, ECC will continue to provide us with certain of
these services at prices agreed upon by ECC and us for a period
of two years from the date of the spin-off at cost plus an
agreed upon margin, which is believed to be fair market value
pricing. We will arrange to procure other services pursuant to
arrangements with third parties.
We believe the assumptions underlying the combined financial
statements are reasonable. However, the combined financial
statements included herein will not reflect our future results
of operations, financial position and cash flows or reflect what
our results of operations, financial position and cash flows
would have been had we been a separate, stand-alone company
during the periods presented. Our fixed satellite services
assets and Sling Media acquisition are not reflected in our
historical financial statements included herein because they
were not historically operated as part of the business of ECC.
Unaudited
Interim Financial Information
The accompanying unaudited combined financial statements as of
September 30, 2007 and for the nine months ended
September 30, 2007 and 2006 have been prepared in
accordance with accounting principles generally accepted in the
United States (U.S.) and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
The unaudited combined financial statements as of
September 30, 2007 and for the nine month periods ended
September 30, 2007 and 2006 have been prepared on the same
basis as the combined financial statements as of
December 31, 2006 and 2005 and for each of the years in the
three year period ended December 31, 2006 included herein,
and in the opinion of management, reflect all adjustments,
consisting only of normal and recurring accruals, considered
necessary to present fairly our combined financial position as
of September 30, 2007 and the combined results of
operations and cash flows for the nine month periods ended
September 30, 2007 and 2006. The combined results of
operations for the nine months ended September 30, 2007 are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2007 or for any other
period.
Principles
of Consolidation/Combination
We have included in the combined financial statements all
majority owned subsidiaries and investments in entities in which
we have controlling influence. Non-majority owned investments
are accounted for using the equity method when we have the
ability to significantly influence the operating decisions of
the issuer. When we do not have the ability to significantly
influence the operating decisions of an issuer, the cost method
is used. For entities that are considered variable interest
entities we apply the provisions of Financial Accounting
Standards Board (FASB) Interpretation
No. 46-R,
Consolidation of Variable Interest Entities An
Interpretation of ARB No. 51
(FIN 46-R).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
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
expenses for each reporting period. Estimates are used in
accounting for, among other things, allowances for uncollectible
accounts, inventory allowances, warranty reserve
F-8
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
obligations, self-insurance obligations, deferred taxes and
related valuation allowances, loss contingencies, fair values of
financial instruments, fair value of options granted under our
stock-based compensation plans, fair value of assets and
liabilities acquired in business combinations, asset
impairments, useful lives of property, equipment and intangible
assets, and royalty obligations. Actual results may differ from
previously estimated amounts, and such differences may be
material to the Combined Financial Statements. Estimates and
assumptions are reviewed periodically, and the effects of
revisions are reflected prospectively beginning in the period
they occur.
Foreign
Currency Translation
The functional currency of the majority of our 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 miscellaneous
income and expense. Net transaction gains (losses) during 2006,
2005 and 2004 were not significant.
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 September 30, 2007 and December 31,
2006 and 2005 consist of money market funds. The cost of these
investments approximates their fair value.
Marketable
and Non-Marketable Investment Securities and Restricted
Cash
We currently classify all marketable investment securities as
available-for-sale. 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 owners equity
(deficit), net of related deferred income tax. Declines in
the fair value of a marketable investment security which are
estimated to be other than temporary are recognized
in the Combined 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. Generally, absent specific
factors to the contrary, declines in the fair value of
investments below cost basis for a continuous period of less
than six months are considered to be temporary. Declines in the
fair value of investments for a continuous period of six to nine
months are evaluated on a case by case basis to determine
whether any company or market-specific factors exist which would
indicate that such declines are other than temporary. Declines
in the fair value of investments below cost basis for a
continuous period greater than nine months are considered other
than temporary and are recorded as charges to earnings, absent
specific factors to the contrary.
As of September 30, 2007 and December 31, 2006, we had
gains net of related tax effect of $104.5 million and
$65.2 million as a part of Accumulated other
comprehensive income (loss) within Total
owners equity (deficit), respectively. During the
nine months ended September 30, 2007 and 2006, we did not
record any charge to earnings for other than temporary declines
in the fair value of our marketable investment securities. In
addition, during the nine months ended September 30, 2007
and 2006, we recognized in our Combined
F-9
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Statements of Operations and Comprehensive Income (Loss)
realized and net gains on marketable investment securities of
$5.0 million and $2.0 million, respectively. During
the nine months ended September 30, 2007, our strategic
investments have experienced and continue to experience
volatility. If the fair value of our strategic marketable
investment securities portfolio does not remain above cost basis
or if we become aware of any market or company specific factors
that indicate that the carrying value of certain of our
securities is impaired, we may be required to record charges to
earnings in future periods equal to the amount of the decline in
fair value.
The fair value of our strategic marketable investment securities
aggregated $497.0 million and $294.0 million as of
September 30, 2007 and December 31, 2006,
respectively. These investments are highly speculative and are
concentrated in a small number of companies. During the nine
months ended September 30, 2007, our strategic investments
have experienced and continue to experience volatility. If the
fair value of our strategic marketable investment securities
portfolio does not remain above cost basis or if we become aware
of any market or company specific factors that indicate that the
carrying value of certain of our securities is impaired, we may
be required to record charges to earnings in future periods
equal to the amount of the decline in fair value.
Non-Marketable
Investments
We also have several strategic investments in certain
non-marketable equity securities which are included in
Investment in affiliates on our Combined Balance
Sheets. 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 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. As of September 30, 2007 and
December 31, 2006, we had $81.4 million and
$40.3 million aggregate carrying amount of non-marketable
and unconsolidated strategic equity investments, respectively,
of which $60.4 million and $19.5 million are accounted
for under the cost method, respectively. During the nine months
ended September 30, 2007 and 2006, we did not record any
impairment charges with respect to these investments.
Our ability to realize value from our strategic investments in
companies that are not publicly-traded is dependent on the
success of their business 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.
Restricted
Cash
As of December 31, 2005, restricted cash included amounts
set aside as collateral for the construction of a new facility.
Inventories
Inventories are 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 set-top boxes and related
F-10
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
components. Manufactured inventories include materials, labor,
freight-in, royalties and manufacturing overhead.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
5,682
|
|
|
$
|
945
|
|
|
$
|
1,191
|
|
Raw materials
|
|
|
137
|
|
|
|
81
|
|
|
|
81
|
|
Work-in-process
|
|
|
72
|
|
|
|
1,661
|
|
|
|
67
|
|
Consignment
|
|
|
7,613
|
|
|
|
488
|
|
|
|
78
|
|
Inventory allowance
|
|
|
(449
|
)
|
|
|
(449
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
13,055
|
|
|
$
|
2,726
|
|
|
$
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Long-Lived
Assets
We account for impairments of long-lived assets in accordance
with the provisions of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).
We review our long-lived assets and identifiable intangible
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. For assets which are held and used in
operations, the asset would be impaired if the carrying value of
the asset (or asset group) 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.
Goodwill,
Intangible Assets and FCC Authorizations
We account for our goodwill and intangible assets in accordance
with the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142), which requires
goodwill and intangible assets with indefinite useful lives not
be amortized, but to be tested for impairment annually or
whenever indicators of impairments arise. Intangible assets that
have finite lives continue to be amortized over their estimated
useful lives.
We have determined that our FCC licenses have indefinite useful
lives and evaluate impairment in accordance with the guidance of
EITF Issue
No. 02-7,
Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets
(EITF 02-7).
In conducting our annual impairment testing, we determined that
the estimated fair value of our FCC licenses, calculated using
the discounted cash flow analysis, exceeded their carrying
amount.
F-11
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2007 and December 31, 2006 and
2005, our identifiable intangibles subject to amortization
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
|
Contract-based
|
|
$
|
140
|
|
|
$
|
(89
|
)
|
|
$
|
140
|
|
|
$
|
(82
|
)
|
|
$
|
140
|
|
|
$
|
(72
|
)
|
Technology-based
|
|
|
14,000
|
|
|
|
(3,014
|
)
|
|
|
14,000
|
|
|
|
(2,139
|
)
|
|
|
14,000
|
|
|
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,140
|
|
|
$
|
(3,103
|
)
|
|
$
|
14,140
|
|
|
$
|
(2,221
|
)
|
|
$
|
14,140
|
|
|
$
|
(1,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of these intangible assets, recorded on a straight
line basis over an average finite useful life primarily ranging
from approximately twelve to fourteen years, was
$0.9 million for the nine months ended September 30,
2007 and $1.2 million and $0.9 million for the years
ended December 31, 2006 and 2005, respectively.
Estimated future amortization of our identifiable intangible
assets as of September 30, 2007 is as follows
(in thousands):
|
|
|
|
|
For the Years Ending December 31,
|
|
|
|
|
2007 (remaining three months)
|
|
$
|
294
|
|
2008
|
|
|
1,177
|
|
2009
|
|
|
1,177
|
|
2010
|
|
|
1,177
|
|
2011
|
|
|
1,177
|
|
2012
|
|
|
1,175
|
|
Thereafter
|
|
|
4,860
|
|
|
|
|
|
|
Total
|
|
$
|
11,037
|
|
|
|
|
|
|
Sales
Taxes
In accordance with the guidance of EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement
(EITF 06-3),
we account for sales taxes imposed on our goods and services on
a net basis in our Combined 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
in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires that
deferred tax assets or liabilities be recorded for the estimated
future tax effects of differences that exist between the book
and tax bases of assets and liabilities. Deferred tax assets are
offset by valuation allowances in accordance with SFAS 109,
when we believe it is more likely than not that such net
deferred tax assets will not be realized.
SFAS No. 109 specifies that the amount of current and
deferred tax expense for an income tax return group shall be
allocated among the members of that group when those members
issue separate financial statements. For purposes of the
financial statements, EHC income tax expense has been recorded
as if it filed a consolidated tax return separate from ECC,
notwithstanding that a majority of the operations were
historically
F-12
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
included in the U.S. consolidated income tax return filed
by ECC. EHCs valuation allowance was also determined on
the separate tax return basis. Additionally, EHCs tax
attributes (i.e. net operating losses) have been determined
based on U.S. consolidated tax rules describing the
apportioning of these items upon departure (i.e. spin off) from
the ECC consolidated group.
ECC manages its tax position for the benefit of its entire
portfolio of businesses. ECCs tax strategies are not
necessarily reflective of the tax strategies that EHC would have
followed or will follow as a stand-alone company, nor were they
necessarily strategies that optimized EHCs stand-alone
position. As a result, EHCs effective tax rate as a
stand-alone entity may differ significantly from those
prevailing in historical periods.
Fair
Value of Financial Instruments
As of December 31, 2006 and 2005, the book value
approximates fair value for cash and cash equivalents, trade
accounts receivable, net of allowance for doubtful accounts, and
current liabilities due to their short-term nature. Also, the
book value is equal to fair value for marketable securities as
of December 31, 2006 and 2005.
Revenue
Recognition
We recognize revenue when an arrangement exists, prices are
determinable, collectibility is reasonably assured and the goods
or services have been delivered.
Cost
of Equipment and Other Sales
Cost of equipment sales associated with set-top boxes and
related components includes materials, labor, freight-in,
royalties and manufacturing overhead. ETC and EIC have designed
and developed digital set-top boxes, antennae and other
equipment for ECC and international satellite service providers
and other international customers. Historically, digital set-top
boxes and related components were sold to ECC at cost.
New
Accounting Pronouncements
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, and
prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
In addition to filing federal income tax returns, we and one or
more of our subsidiaries file income tax returns in all states
that impose an income tax and a small number of foreign
jurisdictions where we have operations. We are subject to
U.S. federal, state and local income tax examinations by
tax authorities for the years beginning in 1996 due to the
carryover of previously incurred net operating losses. As of
September 30, 2007, no taxing authority has proposed any
significant adjustments to our tax positions. We have no
significant current tax examinations in process.
As a result of the implementation of FIN 48, we recognized
no adjustment to Accumulated earnings (deficit). We
have $8.7 million in unrecognized tax benefits that, if
recognized, would affect the effective tax rate. We do not
expect that the unrecognized tax benefit will change
significantly within the next 12 months.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. No. 157, Fair Value
Measurements (SFAS 157) which defines
fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and
expands disclosures about fair value
F-13
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
measurements. This pronouncement applies to other accounting
standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value
measurement. This statement is effective for fiscal years
beginning after November 15, 2007, and interim periods
within that fiscal year. We are currently evaluating the impact
the adoption of SFAS 157 will have on our financial
position and results of operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS 159), which permits entities to choose to
measure financial instruments and certain other items at fair
value. This statement is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. We are currently evaluating the impact
the adoption of SFAS 159 will have on our financial
position and results of operations.
|
|
3.
|
Stock-Based
Compensation
|
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123R (As Amended),
Share-Based Payment (SFAS 123R)
which (i) revises Statement of Financial Accounting
Standards No. 123, Accounting and Disclosure of
Stock-Based Compensation, (SFAS 123) to
eliminate both the disclosure only provisions of that statement
and the alternative to follow the intrinsic value method of
accounting under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
interpretations, and (ii) requires the cost resulting from
all share-based payment transactions with employees be
recognized in the results of operations over the period during
which an employee provides the requisite service in exchange for
the award and establishes fair value as the measurement basis of
the cost of such transactions. Effective January 1, 2006,
we adopted SFAS 123R under the modified prospective method.
Prior to January 1, 2006, we applied the intrinsic value
method of accounting under APB 25 and applied the disclosure
only provisions of SFAS 123. Pro forma information
regarding net income and earnings per share was required by
SFAS 123 and has been determined as if we had accounted for
our stock-based compensation plans using the fair value method
prescribed by that statement. For purposes of pro forma
disclosures, the estimated fair value of the options was
amortized to expense over the options vesting period on a
straight-line basis. We accounted for forfeitures as they
occurred. Compensation previously recognized was reversed in the
event of forfeitures of unvested options. The following table
illustrates the effect on net income (loss) as if we had
accounted for our stock-based compensation plans using the fair
value method under SFAS 123:
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(44,940
|
)
|
|
$
|
(43,237
|
)
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effect
|
|
|
(4,208
|
)
|
|
|
(4,003
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
(49,148
|
)
|
|
$
|
(47,240
|
)
|
|
|
|
|
|
|
|
|
|
Stock
Incentive Plans
EHC participates in ECCs stock incentive plans to attract
and retain officers, directors and key employees. Awards under
these plans include both performance and non-performance based
equity incentives. As of September 30, 2007, we had options
to acquire 4.4 million shares of ECCs Class A
common stock and 61,666 restricted stock awards outstanding
under these plans. In general, stock options granted through
September 30, 2007 have included exercise prices not less
than the market value of ECC Class A common stock at the
date of grant and a maximum term of ten years. While
historically ECCs board of directors has issued options
that vest at the rate of 20% per year, some option grants have
immediately vested. As of
F-14
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
September 30, 2007, ECC had 66.6 million shares of its
Class A common stock available for future grant under the
stock incentive plans.
A summary of ECC stock option activity (including performance
and non-performance based options) related to EHC employees for
the nine months ended September 30, 2007 and the years
ended December 31, 2006, 2005, and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
For the Years
|
|
|
|
Ended September 30,
|
|
|
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options outstanding, beginning of period
|
|
|
4,619,622
|
|
|
$
|
20.86
|
|
|
|
5,024,137
|
|
|
$
|
19.52
|
|
|
|
3,800,561
|
|
|
$
|
15.11
|
|
|
|
3,508,902
|
|
|
$
|
12.05
|
|
Granted
|
|
|
234,500
|
|
|
|
43.43
|
|
|
|
208,500
|
|
|
|
30.93
|
|
|
|
1,522,000
|
|
|
|
29.04
|
|
|
|
575,500
|
|
|
|
31.16
|
|
Exercised
|
|
|
(372,113
|
)
|
|
|
22.61
|
|
|
|
(367,015
|
)
|
|
|
11.85
|
|
|
|
(170,124
|
)
|
|
|
5.99
|
|
|
|
(250,237
|
)
|
|
|
5.76
|
|
Forfeited and Cancelled
|
|
|
(43,392
|
)
|
|
|
7.60
|
|
|
|
(246,000
|
)
|
|
|
15.37
|
|
|
|
(128,300
|
)
|
|
|
19.91
|
|
|
|
(33,604
|
)
|
|
|
40.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period
|
|
|
4,438,617
|
|
|
|
22.89
|
|
|
|
4,619,622
|
|
|
|
20.86
|
|
|
|
5,024,137
|
|
|
|
19.52
|
|
|
|
3,800,561
|
|
|
|
15.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,284,839
|
|
|
|
27.93
|
|
|
|
1,227,566
|
|
|
|
24.43
|
|
|
|
1,305,469
|
|
|
|
19.80
|
|
|
|
1,254,939
|
|
|
|
15.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC received all cash proceeds and realized all tax benefits
related to the exercise of stock options by EHC employees during
all periods presented. A portion of the tax benefit was
allocated to EHC based on the EHC employees who participate in
the ECC stock option plan. Based on the average market value of
ECCs Class A common stock for the nine months ended
September 30, 2007, the aggregate intrinsic value for the
options outstanding was $94.3 million. Of that amount,
options with an aggregate intrinsic value of $22.4 million
were exercisable at the end of the period.
Exercise prices for ECC options outstanding and exercisable as
of December 31, 2006 for EHC employees are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Weighted-
|
|
|
Number
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
as of
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable as of
|
|
|
Remaining
|
|
|
Average
|
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
2006
|
|
|
Life
|
|
|
Price
|
|
|
2006
|
|
|
Life
|
|
|
Price
|
|
|
$ 2.13 - $ 6.00
|
|
|
1,744,358
|
|
|
|
2.11
|
|
|
$
|
5.96
|
|
|
|
304,358
|
|
|
|
2.04
|
|
|
$
|
5.77
|
|
$ 6.01 - $20.00
|
|
|
258,564
|
|
|
|
2.28
|
|
|
|
11.45
|
|
|
|
178,564
|
|
|
|
2.29
|
|
|
|
12.01
|
|
$20.01 - $29.00
|
|
|
389,600
|
|
|
|
7.53
|
|
|
|
27.94
|
|
|
|
185,326
|
|
|
|
6.65
|
|
|
|
28.41
|
|
$29.01 - $31.00
|
|
|
1,782,100
|
|
|
|
8.17
|
|
|
|
29.67
|
|
|
|
300,307
|
|
|
|
7.85
|
|
|
|
30.33
|
|
$31.01 - $40.00
|
|
|
348,000
|
|
|
|
6.78
|
|
|
|
35.07
|
|
|
|
206,011
|
|
|
|
5.63
|
|
|
|
36.53
|
|
$40.01 - $79.00
|
|
|
97,000
|
|
|
|
3.19
|
|
|
|
72.76
|
|
|
|
53,000
|
|
|
|
3.24
|
|
|
|
79.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.13 - $79.00
|
|
|
4,619,622
|
|
|
|
5.29
|
|
|
|
20.86
|
|
|
|
1,227,566
|
|
|
|
4.85
|
|
|
|
24.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2007 and December 31, 2006 and
2005, the grant date fair value of ECCs restricted stock
awards outstanding for EHC employees was as follows. Vesting of
these restricted performance units is contingent upon meeting a
long-term goal which ECCs management has determined is not
probable as of September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
For the Years
|
|
|
|
Ended September 30,
|
|
|
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant
|
|
|
Restricted
|
|
|
Grant
|
|
|
Restricted
|
|
|
Grant
|
|
|
|
Share
|
|
|
Date Fair
|
|
|
Share
|
|
|
Date Fair
|
|
|
Share
|
|
|
Date Fair
|
|
|
|
Units
|
|
|
Value
|
|
|
Units
|
|
|
Value
|
|
|
Units
|
|
|
Value
|
|
|
Restricted Share Units outstanding, beginning of period
|
|
|
95,666
|
|
|
$
|
29.72
|
|
|
|
90,000
|
|
|
$
|
29.25
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
833
|
|
|
|
43.43
|
|
|
|
18,999
|
|
|
|
31.63
|
|
|
|
95,000
|
|
|
|
29.25
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(34,833
|
)
|
|
|
29.25
|
|
|
|
(13,333
|
)
|
|
|
29.25
|
|
|
|
(5,000
|
)
|
|
|
29.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Share Units outstanding, end of period
|
|
|
61,666
|
|
|
|
29.53
|
|
|
|
95,666
|
|
|
|
29.72
|
|
|
|
90,000
|
|
|
|
29.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Performance-Based Plans
In February 1999, ECC adopted a long-term, performance-based
stock incentive plan (the 1999 LTIP) within the
terms of its 1995 Stock Incentive Plan. The 1999 LTIP provided
stock options to key employees which vest over five years at the
rate of 20% per year. Exercise of the options is also contingent
on ECC achieving an industry-related subscriber goal prior to
December 31, 2008.
In January 2005, ECC adopted a long-term, performance based
stock incentive plan (the 2005 LTIP) within the
terms of its 1999 Stock Incentive Plan. The 2005 LTIP provides
stock options and restricted performance units, either alone or
in combination, which vest over seven years at the rate of 10%
per year during the first four years, and at the rate of 20% per
year thereafter. Exercise of the options is also contingent on
achieving an ECC specific subscriber goal within the ten-year
term of each award issued under the 2005 LTIP.
Contingent compensation related to the 1999 LTIP and the 2005
LTIP will not be recorded in our financial statements unless and
until ECCs management concludes achievement of the
corresponding goal is probable. Given the competitive nature of
ECCs business, small variations in subscriber churn, gross
subscriber addition rates and certain other factors can
significantly impact subscriber growth. Consequently, while
ECCs management did not believe achievement of either of
the goals was probable as of September 30, 2007, that
assessment could change with respect to either goal at any time.
In accordance SFAS 123R, if all of the awards under each
plan were vested and each goal had been met, we would have
recorded total non-cash, stock-based compensation expense of
$9.2 million and $16.0 million under the 1999 LTIP and
the 2005 LTIP, respectively. If the goals are met and there are
unvested options at that time, the vested amounts would be
expensed immediately in our Combined Statements of Operations
and Comprehensive Income (Loss), with the unvested portion
recognized ratably over the remaining vesting period. As of
September 30, 2007, if ECCs management had determined
each goal was probable, we would have expensed $9.2 million
for the 1999 LTIP and $3.9 million for the 2005 LTIP.
Of the 4.4 million ECC options outstanding for EHC
employees under ECCs stock incentive plans as of
September 30, 2007, options to purchase 1.4 million
shares and 1.0 million shares were outstanding pursuant to
the 1999 LTIP and the 2005 LTIP, respectively. These options
were granted with exercise prices at least equal to the market
value of the underlying shares on the dates they were issued.
The weighted-average exercise price of these options is $8.18
under the 1999 LTIP and $29.29 under the 2005 LTIP. The fair
value
F-16
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
of options granted during the nine months ended
September 30, 2007 pursuant to the 2005 LTIP, estimated at
the date of the grant using a Black-Scholes option pricing
model, was $18.94 per option share. Further, pursuant to the
2005 LTIP, there were also 61,666 outstanding restricted
performance units as of September 30, 2007 with a
weighted-average grant date fair value of $29.53.
Stock-Based
Compensation
Total non-cash, stock-based compensation expense, net of related
tax effect, is shown in the following table for the nine months
ended September 30, 2007 and 2006 and the year ended
December 31, 2006, and was allocated to the same expense
categories as the base compensation for EHC employees who
participate in the ECC stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
For the
|
|
|
|
Months Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Research and development
|
|
$
|
788
|
|
|
$
|
605
|
|
|
$
|
889
|
|
General and administrative
|
|
|
986
|
|
|
|
905
|
|
|
|
1,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,774
|
|
|
$
|
1,510
|
|
|
$
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, total unrecognized compensation
for EHC employees related to ECCs non-performance based
unvested stock options was $9.1 million. This cost is based
on an assumed future forfeiture rate of approximately 6.5% per
year and will be recognized over a weighted-average period of
approximately three years. Share-based compensation expense is
recognized based on awards ultimately expected to vest and is
reduced for estimated forfeitures. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. Changes in the estimated forfeiture rate
can have a significant effect on share-based compensation
expense since the effect of adjusting the rate is recognized in
the period the forfeiture estimate is changed.
The fair value of each option grant for the nine months ended
September 30, 2007 and 2006 and the years ended
December 31, 2006, 2005, and 2004 was estimated at the date
of the grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
For the Years
|
|
|
|
Ended September 30,
|
|
|
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
4.50
|
%
|
|
|
4.74
|
%
|
|
|
4.68
|
%
|
|
|
4.09
|
%
|
|
|
3.69
|
%
|
Volatility factor
|
|
|
20.20
|
%
|
|
|
25.09
|
%
|
|
|
24.99
|
%
|
|
|
26.12
|
%
|
|
|
33.23
|
%
|
Expected term of options in years
|
|
|
6.0
|
|
|
|
6.2
|
|
|
|
6.2
|
|
|
|
6.4
|
|
|
|
5.4
|
|
Weighted-average fair value of options granted
|
|
$
|
13.68
|
|
|
$
|
11.38
|
|
|
$
|
11.66
|
|
|
$
|
10.39
|
|
|
$
|
11.64
|
|
During December 2004, ECC paid a one-time dividend of $1 per
outstanding share of its Class A and Class B common
stock. ECC does not currently plan to pay additional dividends
on its common stock, and therefore the dividend yield percentage
is set at zero for all periods. The Black-Scholes option
valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and
are fully transferable. Consequently, our estimate of fair value
may differ from other valuation models. Further, the
Black-Scholes model requires the input of highly subjective
assumptions. Changes in the subjective input assumptions can
materially affect the fair value estimate. Therefore, the
existing models do not provide as reliable of a single measure
of the fair value of stock-based compensation awards as a
market-based model would. Changes in the intervals of ECCs
regular historical price observations from daily to monthly
contributed to the 2005 reduction in the estimated volatility
factor.
F-17
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
We will continue to evaluate the assumptions used to derive the
estimated fair value of options for ECCs stock as new
events or changes in circumstances become known.
|
|
4.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable
|
|
|
As of
|
|
|
|
Life
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
(In Years)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Furniture, fixtures, equipment and other
|
|
|
1-10
|
|
|
$
|
34,222
|
|
|
$
|
31,793
|
|
|
$
|
30,043
|
|
Buildings and improvements
|
|
|
1-40
|
|
|
|
17,089
|
|
|
|
17,077
|
|
|
|
18,050
|
|
Land
|
|
|
|
|
|
|
2,509
|
|
|
|
2,579
|
|
|
|
2,579
|
|
Construction in progress
|
|
|
|
|
|
|
165,547
|
|
|
|
47,707
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
|
$
|
219,367
|
|
|
$
|
99,156
|
|
|
$
|
50,675
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(32,150
|
)
|
|
|
(28,646
|
)
|
|
|
(24,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
187,217
|
|
|
$
|
70,510
|
|
|
$
|
26,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress includes progress amounts
for satellite construction, including launch costs.
Depreciation and amortization expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Furniture, fixtures, equipment and other
|
|
$
|
3,149
|
|
|
$
|
3,348
|
|
|
$
|
4,378
|
|
|
$
|
4,359
|
|
|
$
|
4,659
|
|
Identifiable intangible assets subject to amortization
|
|
|
883
|
|
|
|
883
|
|
|
|
1,176
|
|
|
|
982
|
|
|
|
10
|
|
Buildings and improvements
|
|
|
359
|
|
|
|
362
|
|
|
|
478
|
|
|
|
491
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
4,391
|
|
|
$
|
4,593
|
|
|
$
|
6,032
|
|
|
$
|
5,832
|
|
|
$
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Satellite Assets.
We account for
impairments of long-lived satellite assets in accordance with
the provisions of Statement of Financial Accounting Standards
No. 144,
Accounting for the Impairment or Disposal
of Long-Lived Assets
(SFAS 144).
SFAS 144 requires a long-lived asset or asset group to be
tested for recoverability whenever events or changes in
circumstance indicate that its carrying amount may not be
recoverable.
F-18
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
The components of pretax income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(34,010
|
)
|
|
$
|
(47,166
|
)
|
|
$
|
(41,889
|
)
|
Foreign
|
|
|
2,923
|
|
|
|
3,157
|
|
|
|
(920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(31,087
|
)
|
|
$
|
(44,009
|
)
|
|
$
|
(42,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the (provision for) benefit from income taxes
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Current (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(2,784
|
)
|
|
|
(1,178
|
)
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,784
|
)
|
|
|
(1,178
|
)
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
311
|
|
|
|
(10,212
|
)
|
|
|
16,400
|
|
State
|
|
|
1,895
|
|
|
|
1,455
|
|
|
|
1,206
|
|
Foreign
|
|
|
(291
|
)
|
|
|
247
|
|
|
|
|
|
Decrease (increase) in valuation allowance
|
|
|
(2,206
|
)
|
|
|
8,757
|
|
|
|
(17,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(291
|
)
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit (provision)
|
|
$
|
(3,075
|
)
|
|
$
|
(931
|
)
|
|
$
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual tax provisions for 2006, 2005 and 2004 reconcile to
the amounts computed by applying the statutory Federal tax rate
to income before taxes as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
% of pre-tax (income)/loss
|
|
|
Statutory rate
|
|
|
35.0
|
|
|
|
35.0
|
|
|
|
35.0
|
|
State income taxes, net of Federal benefit
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
2.8
|
|
Foreign taxes and income not U.S. taxable
|
|
|
(9.0
|
)
|
|
|
(0.8
|
)
|
|
|
(3.4
|
)
|
Stock option compensation
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
Intercompany adjustment
|
|
|
(33.2
|
)
|
|
|
(59.5
|
)
|
|
|
5.7
|
|
Cumulative change in state tax rate, net of Federal benefit
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in valuation allowance
|
|
|
(7.1
|
)
|
|
|
19.9
|
|
|
|
(41.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit (provision) for income taxes
|
|
|
(9.9
|
)
|
|
|
(2.1
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All or a portion of the current valuation allowance is expected
to be reversed on the effective date of the spin-off since we
are expected to realize sufficient profit to utilize our
deferred tax benefits as a result of the commercial and
transitional agreements with ECC.
F-19
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
The temporary differences, which give rise to deferred tax
assets and liabilities as of December 31, 2006 and 2005,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL, credit and other carryforwards
|
|
$
|
29,039
|
|
|
$
|
30,613
|
|
Unrealized (gains) losses on investments
|
|
|
51,916
|
|
|
|
50,360
|
|
Accrued expenses
|
|
|
1,399
|
|
|
|
452
|
|
Stock compensation
|
|
|
7,811
|
|
|
|
8,334
|
|
Research and development credit
|
|
|
2,225
|
|
|
|
2,225
|
|
State taxes net of federal effect
|
|
|
5,358
|
|
|
|
4,479
|
|
Other
|
|
|
812
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
98,560
|
|
|
|
97,261
|
|
Valuation allowance
|
|
|
(72,135
|
)
|
|
|
(93,773
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset after valuation allowance
|
|
|
26,425
|
|
|
|
3,488
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Equity method investments
|
|
|
625
|
|
|
|
635
|
|
Depreciation and amortization
|
|
|
973
|
|
|
|
1,348
|
|
Other
|
|
|
291
|
|
|
|
|
|
Other comprehensive income
|
|
|
24,827
|
|
|
|
1,505
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
26,716
|
|
|
|
3,488
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(291
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of net deferred tax asset (liability)
|
|
$
|
|
|
|
$
|
|
|
Noncurrent portion of net deferred tax asset (liability)
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset (liability)
|
|
$
|
(291
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
EHCs deferred tax assets included net operating losses
(NOL) and credits of $29.0 million and
$30.6 million as of December 31, 2006 and 2005,
respectively. The NOLs and credits represent the amounts
that would be apportioned to these entities in accordance with
the Internal Revenue Code and Treasury Regulations should EHC be
legally separated from ECC. The NOLs and credits decreased
$1.6 million for the year ended December 31, 2006 to
correspond to the apportionment of ECCs consolidated tax
groups tax attributes as adjusted for the 2006 utilization
of NOLs in consolidation. The impact of these allocation
rules on the tax attributes determined on a separate company
basis is reflected as an intercompany adjustment in the
statutory income tax rate reconciliation above. The federal NOL
carryforwards begin to expire in 2020, state NOLs begin to
expire in 2019, and the credits will begin to expire in the year
2010.
Overall, EHCs net deferred tax assets are offset by a
valuation allowance of $72.1 million and $93.8 million
as of December 31, 2006 and 2005, respectively. The
valuation allowance was decreased by $21.6 million for the
year ended December 31, 2006. EHC 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, 2006 and 2005.
F-20
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006 and 2005, the Federal NOL includes
amounts related to tax deductions for exercised options that
have been allocated directly to contributed capital for
exercised stock options totaling $3.6 million and
$3.1 million, respectively.
Stock option compensation expenses for which an estimated
deferred tax benefit was previously recorded exceeded the actual
tax deductions allowed during 2006 and 2005. Tax charges
associated with the reversal of the prior tax benefit have been
reported in Net investment in EHC in accordance with
APB 25 and SFAS 123R. During 2006 and 2005, charges of
$0.5 million and $0.8 million, respectively, were made
to Net investment in EHC.
|
|
6.
|
Employee
Benefit Plans
|
Employee
Stock Purchase Plan
EHC employees participate in ECCs employee stock purchase
plan (the ESPP). During 2006, this plan was amended
for the purpose of registering an additional
1,000,000 shares of Class A common stock and was
approved by the stockholders at ECCs Annual Meeting held
on May 11, 2006 by the requisite vote of stockholders.
Under the ESPP, ECC is now authorized to issue a total of
1,800,000 shares of Class A common stock.
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
ECCs capital stock under all of ECCs 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 ECCs 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 2006, 2005 and 2004 our
employees purchased approximately 20,700, 17,600 and
13,300 shares of ECCs Class A common stock
through the ESPP, respectively.
401(k)
Employee Savings Plan
EHC participates in ECCs 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
ECC, subject to a maximum annual contribution of $1,000 per
employee. Forfeitures of unvested participant balances which are
retained by the 401(k) Plan may be used to fund matching and
discretionary contributions. Expense recognized related to
matching 401(k) contributions, net of forfeitures, totaled
$0.2 million and $.02 million during the years ended
December 31, 2006 and 2005, respectively. We did not
recognize any expense related to matching 401(k) contributions
during the year ended December 31, 2004, as 401(k) Plan
forfeitures were sufficient to fund all of the matching
contributions.
ECC may also make an annual discretionary contribution to the
plan with approval by its 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 ECCs stock. Discretionary stock contributions, net of
forfeitures, for our employees were $1.9 million,
$1.7 million and $1.5 million relating to the 401(k)
Plan years ended December 31, 2006, 2005 and 2004,
respectively.
F-21
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Commitments
and Contingencies
|
Commitments
Future maturities of our contractual obligations are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Satellite-related obligations
|
|
$
|
98,270
|
|
|
$
|
79,530
|
|
|
$
|
18,740
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
4,003
|
|
|
|
879
|
|
|
|
906
|
|
|
|
933
|
|
|
|
961
|
|
|
|
324
|
|
|
|
|
|
Purchase obligations
|
|
|
614,978
|
|
|
|
614,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
717,251
|
|
|
$
|
695,387
|
|
|
$
|
19,646
|
|
|
$
|
933
|
|
|
$
|
961
|
|
|
$
|
324
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite-Related
Obligations
Satellites under Construction.
Future
commitments related to the satellites on the historical balance
sheets are included in the table above under
Satellite-related obligations. CMBStar, an S-band
satellite, is scheduled to be completed during the second
quarter of 2008. If the required regulatory approvals are
obtained and contractual conditions are satisfied, the
transponder capacity of that satellite will be leased to a Hong
Kong joint venture, which in turn will sublease a portion of the
transponder capacity to an affiliate of a Chinese regulatory
entity.
Purchase
Obligations
Our 2007 purchase obligations primarily consist of binding
purchase orders for set-top box and related components.
Rent
Expense
For the nine months ended September 30, 2007 and the years
ended December 31, 2006, 2005, and 2004, total rent expense
for operating leases approximated $1.0 million,
$1.1 million, $1.1 million, and $0.9 million,
respectively.
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 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 patents 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 system. We cannot be certain that
these persons do not own the rights they claim, that our
products do not infringe on these rights, that we would be able
to obtain licenses from these persons on commercially reasonable
terms or, if we were unable to obtain such licenses, that we
would be able to redesign our products to avoid infringement.
F-22
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Contingencies
Acacia
During 2004, Acacia Media Technologies, which we refer to as
Acacia, filed a lawsuit against us and ECC in the United States
District Court for the Northern District of California. The suit
also named DirecTV, Comcast, Charter, Cox and a number of
smaller cable companies as defendants. Acacia is an intellectual
property holding company which seeks to license the patent
portfolio that it has acquired. The suit alleges infringement of
United States Patent Nos. 5,132,992 (the 992 patent),
5,253,275 (the 275 patent), 5,550,863 (the 863
patent), 6,002,720 (the 720 patent) and 6,144,702 (the
702 patent). The 992, 863, 720 and
702 patents have been asserted against us.
The patents relate to various systems and methods related to the
transmission of digital data. The 992 and 702
patents have also been asserted against several Internet content
providers in the United States District Court for the Central
District of California. During 2004 and 2005, the Court issued
Markman rulings which found that the 992 and 702
patents were not as broad as Acacia had contended, and that
certain terms in the 702 patent were indefinite. In April
2006, ECC and other defendants asked the Court to rule that the
claims of the 702 patent are invalid and not infringed.
That motion is pending. In June and September 2006, the Court
held Markman hearings on the 992, 863, 720 and
275 patents, and issued a ruling during December 2006.
Acacias various patent infringement cases have been
consolidated for pre-trial purposes in the United States
District Court for the Northern District of California.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off.
Broadcast
Innovation, L.L.C.
In 2001, Broadcast Innovation, L.L.C., which we refer to as
Broadcast Innovation filed a lawsuit against ECC, DirecTV,
Thomson Consumer Electronics and others in Federal District
Court in Denver, Colorado. The suit alleges infringement of
United States Patent Nos. 6,076,094 (which we refer to as the
094 patent) and 4,992,066 (which we refer to as the
066 patent). The 094 patent relates to certain
methods and devices for transmitting and receiving data along
with specific formatting information for the data. The 066
patent relates to certain methods and devices for providing the
scrambling circuitry for a pay television system on removable
cards. We examined these patents and believe that they are not
infringed by any of our products or services. Subsequently,
DirecTV and Thomson settled with Broadcast Innovation leaving us
as the only defendant.
During 2004, the judge issued an order finding the 066
patent invalid. Also in 2004, the Court ruled the 094
patent invalid in a parallel case filed by Broadcast Innovation
against Charter and Comcast. In 2005, the United States
Court of Appeals for the Federal Circuit overturned the
094 patent finding of invalidity and remanded the case
back to the District Court. During June 2006, Charter filed a
reexamination request with the United States Patent and
Trademark Office. The Court has stayed the case pending
reexamination. Our case remains stayed pending resolution of the
Charter case.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off.
F-23
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Finisar
Corporation
Finisar Corporation, which we refer to as Finisar, obtained a
$100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent
infringement. Finisar alleged that DirecTVs electronic
program guide and other elements of its system infringe United
States Patent No. 5,404,505 (the 505 patent).
In July 2006, ECC, together with NagraStar LLC, filed a
Complaint for Declaratory Judgment in the United States District
Court for the District of Delaware against Finisar that asks the
Court to declare that they and we do not infringe, and have not
infringed, any valid claim of the 505 patent. Trial is not
currently scheduled. The District Court has stayed our action
until the Federal Circuit has resolved DirecTVs appeal.
We and ECC intend to vigorously prosecute this case. In the
event that a Court ultimately determines that we and ECC
infringe any of the patents, we may be subject to an injunction
that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being
indemnified by ECC for any potential liability or damages
resulting from this suit relating to the period prior to the
effective date of the spin-off.
Global
Communications
On April 19, 2007, Global Communications, Inc., which we
refer to as Global, filed a patent infringement action against
ECC in the United States District Court for the Eastern District
of Texas. The suit alleges infringement of United States Patent
No. 6,947,702 (which we refer to as the 702 patent).
This patent, which involves satellite reception, was issued in
September 2005. On October 24, 2007, the United States
Patent and Trademark Office granted our request for
re-examination of the 702 patent and issued an Office
Action finding that all of the claims of the 702 patent
were invalid. Based on the PTOs decision, we have asked
the District Court to stay the litigation until the
re-examination proceedings is concluded.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off.
Superguide
During 2000, Superguide Corp., which we refer to as Superguide,
filed suit against ECC, DirecTV, Thomson and others in the
United States District Court for the Western District of North
Carolina, Asheville Division, alleging infringement of United
States Patent Nos. 5,038,211 (which we refer to as the 211
patent), 5,293,357 (which we refer to as the 357 patent)
and 4,751,578 (which we refer to as the 578 patent) which
relate to certain electronic program guide functions, including
the use of electronic program guides to control VCRs. Superguide
sought injunctive and declaratory relief and damages in an
unspecified amount.
On summary judgment, the District Court ruled that none of the
asserted patents were infringed by us. These rulings were
appealed to the United States Court of Appeals for the Federal
Circuit. During 2004, the Federal Circuit affirmed in part and
reversed in part the District Courts findings and remanded
the case back to the District Court for further proceedings. In
2005, Superguide indicated that it would no longer pursue
infringement allegations with respect to the 211 and
357 patents and those patents have now been dismissed from
the suit. The District Court subsequently entered judgment of
non-infringement in favor of all defendants as to the 211
and 357 patents and ordered briefing on Thomsons
license defense as to the 578 patent. During December
2006, the District Court found that there were disputed issues
of fact regarding Thomsons license defense, and ordered a
trial solely addressed to that issue. That trial took place in
March 2007. In July 2007, the District
F-24
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Court ruled in favor of Superguide. As a result, Superguide will
be able to proceed with their infringement action against us,
DirecTV and Thomson.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we infringe the
578 patent, we may be subject to a portion of the final
damages, which may include treble damages
and/or
an
injunction that could require us to materially modify certain
user-friendly electronic programming guide and related features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off. We cannot predict with any degree of certainty the
outcome of this suit.
Tivo
Inc.
During April 2006, a Texas jury concluded that certain of our
digital video recorders, or DVRs, infringed a patent held by
Tivo. The Texas court subsequently issued an injunction
prohibiting us from offering DVR functionality. A Court of
Appeals has stayed that injunction during the pendency of our
appeal.
We and ECC intend to vigorously defend this case. In the event
that a Court ultimately determines that we and ECC infringe any
of the patents, we may be subject to an injunction that could
require us to materially modify certain user-friendly features
that we currently offer to consumers. We are being indemnified
by ECC for any potential liability or damages resulting from
this suit relating to the period prior to the effective date of
the spin-off. We and ECC believe that we do not infringe any of
the claims asserted against us and ECC.
Trans
Video
In August 2006, Trans Video Electronic, Ltd., which we refer to
as Trans Video filed a patent infringement action against us and
ECC in the United States District Court for the Northern
District of California. The suit alleges infringement of United
States Patent Nos. 5,903,621 (which we refer to as the 621
patent) and 5,991,801 (which we refer to as the 801
patent). The patents relate to various methods related to the
transmission of digital data by satellite. On May 14, 2007,
we and ECC reached a settlement with Trans Video which did not
have a material impact on our results of operations.
Other
In addition to the above actions, we are subject to various
other legal proceedings and claims which arise in the ordinary
course of business. In our opinion, the amount of ultimate
liability with respect to any of these actions is unlikely to
materially affect our financial position, results of operations
or liquidity.
|
|
8.
|
Geographic
Information and Transactions with Major Customers
|
Geographic
Information
We currently operate in one reportable segment: the design,
development and distribution of digital set-top boxes and
related components.
F-25
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
The following table summarizes total long-lived assets and
revenue attributed to foreign locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
States
|
|
|
Europe
|
|
|
Asia
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Long-lived assets, including FCC authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
$
|
65,028
|
|
|
$
|
12,818
|
|
|
$
|
47,456
|
|
|
$
|
125,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005
|
|
$
|
67,961
|
|
|
$
|
14,299
|
|
|
$
|
|
|
|
$
|
82,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
1,446,926
|
|
|
$
|
78,394
|
|
|
$
|
|
|
|
$
|
1,525,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,456,276
|
|
|
$
|
57,415
|
|
|
$
|
|
|
|
$
|
1,513,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
1,660,525
|
|
|
$
|
59,566
|
|
|
$
|
|
|
|
$
|
1,720,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is attributed to geographic regions based upon the
location where the sale originated. United States revenue
includes transactions with both United States and customers
abroad. International revenue includes transactions with
customers in Europe, Africa, South America and the Middle East.
Transactions
with Major Customers
During the nine months ended September 30, 2007 and 2006
and the years ended December 31, 2006, 2005 and 2004,
United States revenue in the table above primarily included
sales to two major customers. The following table summarizes
sales to each customer and its percentage of total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC
|
|
$
|
1,019,729
|
|
|
$
|
948,683
|
|
|
$
|
1,288,691
|
|
|
$
|
1,295,861
|
|
|
$
|
1,543,513
|
|
Bell ExpressVu
|
|
|
118,170
|
|
|
|
164,680
|
|
|
|
186,387
|
|
|
|
173,168
|
|
|
|
125,313
|
|
Other
|
|
|
44,869
|
|
|
|
19,536
|
|
|
|
50,242
|
|
|
|
44,662
|
|
|
|
51,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,182,768
|
|
|
$
|
1,132,899
|
|
|
$
|
1,525,320
|
|
|
$
|
1,513,691
|
|
|
$
|
1,720,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECC
|
|
|
86.2
|
%
|
|
|
83.7
|
%
|
|
|
84.5
|
%
|
|
|
85.6
|
%
|
|
|
89.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell ExpressVu
|
|
|
10.0
|
%
|
|
|
14.5
|
%
|
|
|
12.2
|
%
|
|
|
11.4
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Valuation
and Qualifying Accounts
|
Our valuation and qualifying accounts as of December 31,
2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
End of
|
|
|
|
of Year
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Year
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
243
|
|
|
$
|
660
|
|
|
$
|
(80
|
)
|
|
$
|
823
|
|
December 31, 2005
|
|
$
|
540
|
|
|
$
|
(83
|
)
|
|
$
|
(214
|
)
|
|
$
|
243
|
|
December 31, 2004
|
|
$
|
462
|
|
|
$
|
48
|
|
|
$
|
30
|
|
|
$
|
540
|
|
Reserve for inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
910
|
|
|
$
|
187
|
|
|
$
|
(648
|
)
|
|
$
|
449
|
|
December 31, 2005
|
|
$
|
1,648
|
|
|
$
|
542
|
|
|
$
|
(1,280
|
)
|
|
$
|
910
|
|
December 31, 2004
|
|
$
|
245
|
|
|
$
|
1,547
|
|
|
$
|
(144
|
)
|
|
$
|
1,648
|
|
|
|
10.
|
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)
|
|
|
|
(Unaudited)
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
447,763
|
|
|
$
|
330,589
|
|
|
$
|
404,416
|
|
|
|
N/A
|
|
Operating income (loss)
|
|
$
|
(17,972
|
)
|
|
$
|
(13,489
|
)
|
|
$
|
(8,707
|
)
|
|
|
N/A
|
|
Net income (loss)
|
|
$
|
(18,504
|
)
|
|
$
|
(14,789
|
)
|
|
$
|
(6,650
|
)
|
|
|
N/A
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
365,509
|
|
|
$
|
390,107
|
|
|
$
|
377,283
|
|
|
$
|
392,421
|
|
Operating income (loss)
|
|
$
|
(6,101
|
)
|
|
$
|
1,891
|
|
|
$
|
(15,766
|
)
|
|
$
|
(17,471
|
)
|
Net income (loss)
|
|
$
|
(6,940
|
)
|
|
$
|
4,616
|
|
|
$
|
(18,162
|
)
|
|
$
|
(13,676
|
)
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
401,598
|
|
|
$
|
335,651
|
|
|
$
|
380,103
|
|
|
$
|
396,339
|
|
Operating income (loss)
|
|
$
|
(7,849
|
)
|
|
$
|
(11,533
|
)
|
|
$
|
(7,782
|
)
|
|
$
|
(5,900
|
)
|
Net income (loss)
|
|
$
|
(7,858
|
)
|
|
$
|
(12,060
|
)
|
|
$
|
(9,588
|
)
|
|
$
|
(15,434
|
)
|
|
|
11.
|
Investments
in Affiliates Accounted for Using the Equity Method
|
We own 50% of NagraStar L.L.C. (NagraStar), a joint
venture that is our exclusive 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.
F-27
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Summarized financial information of NagraStar for the periods in
which we used the equity method to account for NagraStar is as
follows:
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
84,426
|
|
|
$
|
43,890
|
|
Noncurrent assets
|
|
|
854
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
85,280
|
|
|
$
|
44,830
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Owners Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current and total liabilities
|
|
$
|
44,470
|
|
|
$
|
7,774
|
|
Owners equity (deficit)
|
|
|
40,810
|
|
|
|
37,056
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity (deficit)
|
|
$
|
85,280
|
|
|
$
|
44,830
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
57,640
|
|
|
$
|
126,651
|
|
|
$
|
126,119
|
|
Operating, selling, general administrative expenses, net
|
|
|
56,278
|
|
|
|
116,677
|
|
|
|
113,102
|
|
Depreciation and amortization
|
|
|
245
|
|
|
|
335
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,117
|
|
|
|
9,639
|
|
|
|
12,499
|
|
Other income (expense)
|
|
|
2,447
|
|
|
|
855
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,564
|
|
|
$
|
10,494
|
|
|
$
|
12,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Related
Party Transactions
|
Related
Party Transactions with NagraStar
During the nine months ended September 30, 2007 and the
years ended December 31, 2006, 2005 and 2004, we purchased
security access devices from NagraStar of $46.6 million,
$55.8 million, $121.4 million and $123.8 million,
respectively. As of September 30, 2007 and
December 31, 2006 and 2005, amounts payable to NagraStar
totaled $6.2 million, $3.3 million and
$3.9 million, respectively. Additionally, as of
September 30, 2007, we were committed to purchase
$22.8 million of security access devices from NagraStar.
Related
Party Transactions with ECC
The Combined Statements of Operations and Comprehensive Income
(Loss) include service costs and expense allocations for certain
corporate functions historically provided to EHC by ECC. In
certain cases, these allocations were made on a specific
identification basis. Otherwise, the expenses related to
services provided to EHC by ECC were allocated to EHC based on
relative percentages, as compared to ECCs other
businesses, of headcount or other appropriate methods depending
on the nature of each item of cost to be allocated.
Charges for functions historically provided to EHC by ECC are
primarily attributable to ECCs performance of many shared
services that EHC benefits from such as, among other things,
treasury, tax, accounting and reporting, mergers and
acquisitions, risk management, legal, internal audit, human
resources, investor relations
F-28
ECHOSTAR
HOLDING CORPORATION
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
and information technology. EHC also participates in certain ECC
insurance, benefit and incentive plans. The Combined Statements
of Operations and Comprehensive Income (Loss) reflect charges
from ECC and its affiliates for these services of
$35.6 million and $30.1 million for the nine months
ended September 30, 2007 and 2006, respectively, and
$40.4 million, $36.6 million and $37.4 million
for the years ended December 31, 2006, 2005 and 2004,
respectively. Certain of these services will continue to be
provided subsequent to the Distribution for varying periods.
Included in the charges above are amounts recognized for
employee benefit expenses (Note 6).
In addition, during the nine months ended September 30,
2007 and 2006 and the years ended December 31, 2006, 2005
and 2004, we sold set-top boxes and other services to ECC. The
Combined Statements of Operation and Comprehensive Income (Loss)
reflect revenue from ECC and its affiliates for equipment and
other sales of $1.020 billion and $948.7 million for
the nine months ended September 30, 2007 and 2006,
respectively, and $1.289 billion, $1.296 billion and
$1.544 billion for the years ended December 31, 2006,
2005 and 2004, respectively. For the nine months ended
September 30, 2007 and 2006, income before taxes was
$(0.04) million and $0.2 million, respectively, and
for the years ended December 31, 2006, 2005 and 2004
$(0.3) million, $0.3 million and zero for the years
ended December 31, 2006, 2005 and 2004, respectively.
On October 19, 2007, we acquired Sling Media, Inc., a
privately-held digital lifestyle products company. As of
December 31, 2006, Sling Media had total assets of
$49.8 million and a net loss of $20.9 million. The
transaction values Sling Media at approximately
$380.0 million and was paid in cash and EchoStar options.
During October 2007, the Board of Directors of EHC authorized a
stock buy back of up to $1.0 billion of our Class A
common stock.
F-29
INDEX
TO STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS CORPORATION
|
|
|
|
|
|
|
Page
|
|
|
Statement of Net Assets to be Contributed by EchoStar
Communications Corporation (ECC):
|
|
|
|
|
|
|
|
F-31
|
|
|
|
|
F-32
|
|
|
|
|
F-33
|
|
F-30
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
EchoStar Communications Corporation:
We have audited the accompanying statement of net assets to be
contributed by EchoStar Communications Corporation as of
September 30, 2007. This statement of net assets to be
contributed is the responsibility of EchoStar Communications
Corporations management. Our responsibility is to express
an opinion on the statement of net assets to be contributed
based on our audit.
We conducted our audit in accordance with the auditing standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the statement
of net assets to be contributed is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement
of net assets to be contributed by EchoStar Communications
Corporation, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the statement of net assets to be
contributed. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement was prepared to present the net
assets to be contributed by EchoStar Communications Corporation
to EchoStar Holding Corporation in connection with the proposed
spin-off transaction referred to in note 1, and is not
intended to be a complete presentation of EchoStar
Communications Corporations assets and liabilities.
In our opinion, the accompanying statement of net assets to be
contributed by EchoStar Communications Corporation presents
fairly, in all material respects, the net assets to be
contributed by EchoStar Communications Corporation as of
September 30, 2007 to EchoStar Holding Corporation, in
connection with the proposed spin-off transaction referred to in
Note 1, in conformity with U.S. generally accepted
accounting principles.
Denver, Colorado
December 12, 2007
F-31
STATEMENT
OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS CORPORATION
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
Cash
|
|
$
|
1,000,000
|
|
Trade accounts receivable, net of allowance for doubtful
accounts of $319
|
|
|
2,692
|
|
Current deferred tax assets
|
|
|
4,816
|
|
Other current assets
|
|
|
6,025
|
|
|
|
|
|
|
Total current assets
|
|
|
1,013,533
|
|
Restricted cash and marketable investment securities
|
|
|
3,150
|
|
Property and equipment, net
|
|
|
1,281,682
|
|
FCC authorizations (Note 2)
|
|
|
83,121
|
|
Intangible assets, net
|
|
|
147,374
|
|
Other noncurrent assets, net
|
|
|
21,254
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,550,114
|
|
|
|
|
|
|
|
LIABILITIES
|
Current Liabilities:
|
|
|
|
|
Accrued expenses
|
|
$
|
14,535
|
|
Current portion of capital lease obligations, mortgages and
notes payable
|
|
|
38,167
|
|
|
|
|
|
|
Total current liabilities
|
|
|
52,702
|
|
|
|
|
|
|
Long-term obligations, net of current portion:
|
|
|
|
|
Capital lease obligations, mortgages and notes payable, net of
current portion
|
|
|
349,590
|
|
Deferred tax liabilities
|
|
|
237,079
|
|
|
|
|
|
|
Total long-term obligations, net of current portion
|
|
|
586,669
|
|
|
|
|
|
|
Total liabilities
|
|
|
639,371
|
|
|
|
|
|
|
Net assets to be contributed
|
|
$
|
1,910,743
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement of
net assets to be contributed.
F-32
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS CORPORATION
|
|
1.
|
Overview
of Proposed Transaction and Assets to be Contributed and Basis
of Presentation
|
On September 25, 2007, EchoStar Communications Corporation
(ECC) announced its intention to separate its
technology and certain infrastructure assets into a separate
publicly-traded company. Pursuant to the spin-off, certain
assets of ECC, consisting of satellites, uplink and satellite
transmission assets and certain real estate and other assets and
related liabilities will be contributed to EchoStar Holding
Corporation (EHC). The net assets to be contributed
by ECC historically were an integral part of ECCs
historical satellite television business. These net assets are
expected to be used by EHC primarily to comprise its fixed
satellite service business as an independent publicly-traded
company.
This Statement of Net Assets to be Contributed by ECC has been
prepared in order to set forth those assets and related
liabilities that will be contributed by ECC to EHC, but which do
not comprise part of the historical combined financial
statements of EHC. These assets and related liabilities are
reflected in this Statement of Net Assets to be Contributed by
ECC rather than in the historical combined financial statements
of EHC and no Statement of Revenues and Direct Expenses has been
included herein because these assets have been dedicated to and
were an integral part of the ECCs DISH Network business, were
not operated as a separate business within ECC and do not
constitute a separate business under
EITF 98-3,
Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or of a Business.
The accounting policies described herein are the same accounting
policies historically applied by ECC in the preparation of its
Consolidated Financial Statements. The net assets to be
contributed by ECC are shown at ECCs historical basis.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of the Statement of Net Assets to be Contributed
by ECC in conformity with accounting principles generally
accepted in the United States (GAAP) requires ECC 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.
Estimates are used in accounting for, among other things,
allowances for uncollectible accounts, deferred income taxes and
related valuation allowances, fair values of financial
instruments, fair value of assets and liabilities acquired in
business combinations, capital leases, asset impairments, and
useful lives of property, equipment and intangible assets.
Actual results may differ from previously estimated amounts, and
such differences may be material to the Statement of Net Assets
to be Contributed by ECC. Additionally, upon contribution of
these net assets to EHC, EHC will be required to make its own
estimates and assumptions. These estimates and assumptions may
be different from those made by ECC and may have a significant
affect on the reported amounts. Estimates and assumptions are
reviewed periodically, and the effects of revisions are
reflected prospectively beginning in the period they occur.
Cash
and Restricted Cash and Marketable Investment
Securities
The Statement of Net Assets to be Contributed includes
$1.0 billion of cash to be contributed by ECC upon
consummation of the spin-off.
As of September 30, 2007, restricted cash and marketable
investment securities included letters of credit for FCC
authorizations.
Property
and Equipment
Property and equipment are stated at historical cost. The cost
of satellites under construction, including certain amounts
prepaid under our satellite service agreements, are 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.
F-33
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS
CORPORATION (Continued)
The amount of any such loss would be reduced to the extent of
insurance proceeds estimated to be received, if any.
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.
Long-Lived
Assets
ECC accounts for impairments of long-lived assets in accordance
with the provisions of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).
ECC reviews its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Based on the guidance under SFAS 144,
ECC evaluates its satellite fleet for recoverability as one
asset group. For assets which are held and used in operations,
the asset would be impaired if the carrying value of the asset
(or asset group) 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. ECC considers
relevant cash flow, estimated future operating results, trends
and other available information in assessing whether the
carrying value of assets are recoverable.
FCC
Authorizations and Intangible Assets
ECC accounts for its intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(SFAS 142), which requires intangible assets
with indefinite useful lives not be amortized, but to be tested
for impairment annually or whenever indicators of impairment
arise. Intangible assets that have finite lives continue to be
amortized over their estimated useful lives.
ECC has determined that its FCC licenses have indefinite useful
lives and evaluates impairment in accordance with the guidance
of EITF Issue
No. 02-7,
Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets
(EITF 02-7).
In our most recent annual impairment testing, ECC determined
that the estimated fair value of the FCC licenses, calculated
using the discounted cash flow analysis, exceeded their carrying
amount.
As of September 30, 2007, our identifiable intangibles
subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Contract based
|
|
$
|
189,928
|
|
|
$
|
(57,480
|
)
|
|
$
|
132,448
|
|
Technology-based
|
|
|
20,500
|
|
|
|
(5,574
|
)
|
|
|
14,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
210,428
|
|
|
$
|
(63,054
|
)
|
|
$
|
147,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2007, ECC
participated in an FCC Auction for licenses in the 1.4 GHz
band and was the winning bidder for several licenses with total
winning bids of $57.4 million. This amount is included in
FCC authorizations in the Statement of Net Assets to
be Contributed by ECC.
Income
Taxes
ECC establishes a provision for income taxes currently payable
or receivable and for income tax amounts deferred to future
periods in accordance with Statement of Financial Accounting
Standards No. 109,
Accounting for Income
Taxes
(SFAS 109). SFAS 109
requires that deferred tax assets and liabilities be recorded
for the estimated future tax effects of differences that exist
between the book and tax bases of assets
F-34
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS
CORPORATION (Continued)
and liabilities. Deferred tax assets are offset by valuation
allowances in accordance with SFAS 109, when ECC believes
it is more likely than not that such net deferred tax assets
will not be realized.
Fair
Value of Financial Instruments
As of September 30, 2007, the book value approximates fair
value for cash, trade accounts receivable, net of allowance for
doubtful accounts, current liabilities and mortgages and
satellite vendor financing due to their short-term nature.
Pursuant to Statement of Financial Accounting Standards
No. 107
Disclosures about Fair Value of Financial
Instruments,
disclosures regarding fair value of
capital leases is not required.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157) which defines fair value,
establishes a framework for measuring fair value in accordance
with generally accepted accounting principles and expands
disclosures about fair value measurements. This pronouncement
applies to other accounting standards that require or permit
fair value measurements. Accordingly, this statement does not
require any new fair value measurement. This statement is
effective for fiscal years beginning after November 15,
2007, and interim periods within that fiscal year. ECC is
currently evaluating the impact if any, of the adoption of
SFAS 157 will have on the net assets to be contributed.
|
|
3.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
Depreciable
|
|
As of
|
|
|
|
Life
|
|
September 30,
|
|
|
|
(In Years)
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
Land
|
|
|
|
$
|
24,155
|
|
Buildings and improvements
|
|
1-10
|
|
|
175,670
|
|
Furniture, fixtures, equipment and other
|
|
1-7
|
|
|
511,367
|
|
Satellites:
|
|
|
|
|
|
|
EchoStar III
|
|
12
|
|
|
234,083
|
|
EchoStar IV fully depreciated
|
|
N/A
|
|
|
78,511
|
|
EchoStar VI
|
|
12
|
|
|
245,022
|
|
EchoStar VIII
|
|
12
|
|
|
175,801
|
|
EchoStar IX
|
|
12
|
|
|
127,376
|
|
EchoStar XII
|
|
10
|
|
|
190,051
|
|
Satellites acquired under capital leases
|
|
10
|
|
|
551,628
|
|
Construction in process
|
|
|
|
|
104,101
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
$
|
2,417,765
|
|
Accumulated depreciation
|
|
|
|
|
(1,136,083
|
)
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
1,281,682
|
|
|
|
|
|
|
|
|
Construction in progress includes progress amounts
for satellite construction, including launch costs.
Satellites
ECC is contributing nine of its satellites to EHC, six of which
are owned and three are leased. Each of the owned satellites had
an original minimum useful life of at least 12 years. Two
of the leased satellites are accounted for as capital leases
pursuant to Statement of Financial Accounting Standards
No. 13, Accounting
F-35
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS
CORPORATION (Continued)
for Leases (SFAS 13) and are depreciated
over the ten-year terms of the satellite service agreements.
While ECC believes that overall these satellites are generally
in good condition, during 2007 and prior periods, certain of
these satellites have experienced anomalies, some of which have
had a significant adverse impact on their commercial operation.
EchoStar III.
EchoStar III was launched
during October 1997 and currently operates at the 61.5 degree
orbital location. The satellite was originally designed to
operate a maximum of 32 transponders at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230
watts per channel, and was equipped with a total of 44
transponders to provide redundancy. Prior to 2006, traveling
wave tube amplifiers (TWTA) anomalies caused 22
transponders to fail. During April and October 2006, further
TWTA anomalies caused the failure of four additional
transponders. As a result, a maximum of 18 transponders are
currently available for use on EchoStar III, but due to
redundancy switching limitations and specific channel
authorizations, we can only operate on 15 of the 30 FCC
authorized frequencies we have the right to utilize at the 61.5
degree location. While we do not expect a large number of
additional TWTAs to fail in any year, and the failures have not
reduced the original minimum
12-year
design life of the satellite, it is likely that additional TWTA
failures will occur from time to time in the future, and those
failures will further impact commercial operation of the
satellite.
EchoStar IV.
EchoStar IV was launched
during May 1998 and currently operates at the 77 degree orbital
location, which is licensed by the government of Mexico to a
venture in which we hold a minority interest. The satellite was
originally designed to operate a maximum of 32 transponders at
approximately 120 watts per channel, switchable to 16
transponders operating at over 230 watts per channel. As a
result of past TWTA failures, only six transponders are
currently available for use and the satellite has been fully
depreciated. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not
occur in the immediate future.
EchoStar VI.
EchoStar VI was launched during
July 2000 and is currently stationed at the 110 degree orbital
location as an in-orbit spare. The satellite was originally
equipped with 108 solar array strings, approximately 102 of
which are required to assure full power availability for the
original minimum
12-year
design life of the satellite. Prior to 2006, EchoStar VI
experienced anomalies resulting in the loss of 15 solar array
strings. During 2006, two additional solar array strings failed,
reducing the number of functional solar array strings to 91.
While the design life of the satellite has not been affected,
commercial operability has been reduced. The satellite was
designed to operate 32 transponders at approximately 125 watts
per channel, switchable to 16 transponders operating at
approximately 225 watts per channel. The power reduction
resulting from the solar array failures limits us to operation
of a maximum of 26 transponders in standard power mode, or 13
transponders in high power mode currently. The number of
transponders to which power can be provided is expected to
continue to decline in the future at the rate of approximately
one transponder every three years. See discussion of evaluation
of impairment in
Long-Lived Assets
below.
EchoStar VIII.
EchoStar VIII was launched
during August 2002 and currently operates at the 110 degree
orbital location. The satellite was designed to operate 32
transponders at approximately 120 watts per channel, switchable
to 16 transponders operating at approximately 240 watts per
channel. EchoStar VIII also includes spot-beam technology. This
satellite has experienced several anomalies since launch, but
none have reduced the
12-year
estimated useful life of the satellite. However, there can be no
assurance that future anomalies will not cause further losses
which could materially impact its commercial operation, or
result in a total loss of the satellite.
EchoStar IX.
EchoStar IX was launched during
August 2003 and currently operates at the 121 degree orbital
location. The satellite was designed to operate 32 FSS
transponders operating at approximately 110 watts per channel,
along with transponders that can provide services in the
Ka-Band
(a
Ka-band
payload). The satellite also includes a C-band payload
which is owned by a third party. During 2006, EchoStar IX
experienced the loss of one of its three momentum wheels, two of
which are utilized during normal
F-36
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS
CORPORATION (Continued)
operations. A spare wheel was switched in at the time and the
loss did not reduce the
12-year
estimated useful life of the satellite. During September 2007,
the satellite experienced anomalies resulting in the loss of
three solar array strings. An investigation of the anomalies is
continuing. The anomalies have not impacted commercial operation
of the satellite to date. The design life of the satellite is
not expected to be impacted since the satellite is equipped with
a total of 288 solar array strings, only approximately 276 of
which are required to assure full power availability for the
design life of the satellite. However, there can be no assurance
future anomalies will not cause further losses, which could
impact the remaining life or commercial operation of the
satellite.
EchoStar XII.
EchoStar XII was launched during
July 2003 and currently operates at the 61.5 degree orbital
location. The satellite was designed to operate 13 transponders
at 270 watts per channel, in CONUS mode, or 22 spot beams
using a combination of 135 and 65 watt TWTAs. We currently
operate the satellite in CONUS mode. EchoStar XII has a total of
24 solar array circuits, approximately 22 of which are required
to assure full power for the original minimum
12-year
design life of the satellite. Since late 2004, eight solar array
circuits on EchoStar XII have experienced anomalous behavior
resulting in both temporary and permanent solar array circuit
failures. The cause of the failures is still being investigated.
The design life of the satellite has not been affected. However,
these temporary and permanent failures have resulted in a
reduction in power to the satellite which will preclude us from
using the full complement of transponders on EchoStar XII for
the
12-year
design life of the satellite. The extent of this impact has not
yet been determined. There can be no assurance future anomalies
will not cause further losses, which could further impact
commercial operation of the satellite or its useful life. See
discussion of evaluation of impairment in
Long-Lived
Assets
below.
Long-Lived Satellite Assets.
ECC
accounts for impairments of long-lived satellite assets in
accordance with the provisions of Statement of Financial
Accounting Standards No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
(SFAS 144). SFAS 144 requires a
long-lived asset or asset group to be tested for recoverability
whenever events or changes in circumstance indicate that its
carrying amount may not be recoverable. Based on the guidance
under SFAS 144, ECC evaluates its satellite fleet for
recoverability as one asset group. While certain of the
anomalies discussed above, and previously disclosed, may be
considered to represent a significant adverse change in the
physical condition of an individual satellite, based on the
redundancy designed within each satellite and considering the
asset grouping, these anomalies (none of which caused a loss of
service to subscribers for an extended period) are not
considered to be significant events that would require
evaluation for impairment recognition pursuant to the guidance
under SFAS 144. Unless and until a specific satellite is
abandoned or otherwise determined to have no service potential,
the net carrying amount related to the satellite would not be
written off.
Upon contribution of these satellites, EHC will be required to
perform its own analysis of each satellite for recoverability.
EHCs conclusion regarding the recoverability of each
satellite may be different from the conclusion reached by ECC.
F-37
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS
CORPORATION (Continued)
Capital
Lease Obligations, Mortgages and Notes Payable
Capital lease obligations, mortgages and notes payable consist
of the following:
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2007
|
|
|
|
(In thousands)
|
|
|
Satellites financed under capital lease obligations
|
|
$
|
379,280
|
|
8% note payable for EchoStar IX satellite vendor financing,
payable over 14 years from launch
|
|
|
8,139
|
|
8% mortgage due in installments through 2015
|
|
|
338
|
|
|
|
|
|
|
Total
|
|
$
|
387,757
|
|
Less current portion
|
|
|
(38,167
|
)
|
|
|
|
|
|
Capital lease obligations, mortgages and other notes payable,
net of current portion
|
|
$
|
349,590
|
|
|
|
|
|
|
Capital
Lease Obligations
Three of the in-orbit satellites that ECC currently leases will
be contributed to EHC. Two of these satellites, discussed below,
are accounted for as capital leases pursuant to SFAS 13 and
are depreciated over the ten-year terms of the satellite service
agreements.
AMC-15.
AMC-15, an FSS satellite, commenced
commercial operation during January 2005. This lease will be
renewable by us on a year to year basis following the initial
term, and will provide us with certain rights to replacement
satellites.
AMC-16.
AMC 16, an FSS satellite, commenced
commercial operation during February 2005. This lease is
renewable by us on a year to year basis following the initial
term, and will provide us with certain rights to replacement
satellites.
F-38
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS
CORPORATION (Continued)
As of September 30, 2007, ECC had $551.6 million
capitalized for the estimated fair value of satellites acquired
under capital leases included in Property and equipment,
net, with related accumulated depreciation of
$149.9 million. Future minimum lease payments under these
capital lease obligations, together with the present value of
the net minimum lease payments as of September 30, 2007 are
as follows:
|
|
|
|
|
For the Years Ending December 31,
|
|
|
|
|
2007 (remaining three months)
|
|
$
|
21,588
|
|
2008
|
|
|
86,351
|
|
2009
|
|
|
86,351
|
|
2010
|
|
|
86,351
|
|
2011
|
|
|
86,351
|
|
Thereafter
|
|
|
254,373
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
621,365
|
|
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
|
|
|
(107,221
|
)
|
|
|
|
|
|
Net minimum lease payments
|
|
|
514,144
|
|
Less: Amount representing interest
|
|
|
(134,864
|
)
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
379,280
|
|
Less: Current portion
|
|
|
(37,574
|
)
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
$
|
341,706
|
|
|
|
|
|
|
In addition to its lease of the AMC-15 and AMC-16 satellites,
ECC will also contribute satellite service agreements to lease
all of the capacity on other satellites discussed below.
AMC-2.
AMC-2 is an FSS satellite positioned at
the 85 degree orbital location. ECCs lease of this
satellite is expected to continue through 2007 and has been
accounted for as an operating lease.
AMC-14.
AMC-14 is a DBS satellite, which is
currently expected to launch in early 2008 and commence
commercial operation at an orbital location to be determined at
a future date. The initial ten-year lease for all of the
capacity on the satellite will be accounted for as a capital
lease.
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 Statement of Net
Assets to be Contributed by ECC. We followed the guidelines set
forth in SFAS 109 regarding the recoverability of any tax
assets recorded on the Statement of Net Assets to be Contributed
by ECC and provided any necessary valuation allowances. In
accordance with SFAS 109, we periodically evaluate our need
for a valuation allowance. Determining necessary valuation
allowances requires us to make assessments about historical
financial information as well as the timing of future events,
including the probability of expected future taxable income and
available tax planning opportunities.
F-39
NOTES TO
STATEMENT OF NET ASSETS TO BE CONTRIBUTED BY
ECHOSTAR COMMUNICATIONS
CORPORATION (Continued)
The temporary differences, which give rise to significant
deferred tax assets and liabilities as of September 30,
2007, are as follows:
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
Accrued expenses
|
|
$
|
4,444
|
|
|
|
|
|
|
Other
|
|
|
248
|
|
Total deferred tax assets
|
|
$
|
4,692
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(219,013
|
)
|
State taxes net of federal effect
|
|
|
(17,942
|
)
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(236,955
|
)
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(232,263
|
)
|
|
|
|
|
|
Current portion of net deferred tax asset (liability)
|
|
$
|
4,816
|
|
Noncurrent portion of net deferred tax asset (liability)
|
|
|
(237,079
|
)
|
|
|
|
|
|
Total net deferred tax asset (liability)
|
|
$
|
(232,263
|
)
|
|
|
|
|
|
F-40
INDEX
TO FINANCIAL TABLES OF SLING MEDIA, INC.
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements of Sling Media, Inc.:
|
|
|
|
|
|
|
|
F-42
|
|
|
|
|
F-43
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
F-41
Report
of Independent Registered Public Accounting Firm
The Board of EchoStar Communications Corporation, Inc.:
We have audited the consolidated financial statements of Sling
Media, Inc. and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations and
other comprehensive income (loss), shareholders equity and
cash flows for each of the years then ended and the period from
inception (June 14, 2004) to December 31, 2004.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
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 audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Sling Media, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended and the
period from inception (June 14, 2004) to
December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2(l) to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004),
Share-Based Payment
,
applying the prospective method.
/s/ KPMG LLP
San Francisco, California
November 5, 2007
F-42
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and
|
|
|
|
per-share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,763
|
|
|
$
|
24,382
|
|
|
$
|
4,827
|
|
Short-term investments
|
|
|
|
|
|
|
73
|
|
|
|
3,805
|
|
Accounts receivable
|
|
|
7,276
|
|
|
|
11,987
|
|
|
|
6,067
|
|
Inventories
|
|
|
6,446
|
|
|
|
5,657
|
|
|
|
1,881
|
|
Prepaid expenses
|
|
|
1,451
|
|
|
|
2,156
|
|
|
|
271
|
|
Other current assets
|
|
|
656
|
|
|
|
337
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,592
|
|
|
|
44,592
|
|
|
|
16,985
|
|
Property and equipment, net
|
|
|
3,877
|
|
|
|
1,585
|
|
|
|
197
|
|
Intangible assets, net
|
|
|
2,597
|
|
|
|
2,818
|
|
|
|
77
|
|
Restricted cash
|
|
|
400
|
|
|
|
400
|
|
|
|
|
|
Other assets
|
|
|
728
|
|
|
|
434
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
31,194
|
|
|
$
|
49,829
|
|
|
$
|
17,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
3,643
|
|
|
$
|
8,869
|
|
|
$
|
878
|
|
Accrued expenses
|
|
|
4,674
|
|
|
|
2,644
|
|
|
|
978
|
|
Accrued employee benefits
|
|
|
630
|
|
|
|
950
|
|
|
|
94
|
|
Notes payable
|
|
|
1,380
|
|
|
|
297
|
|
|
|
4,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,327
|
|
|
|
12,760
|
|
|
|
6,263
|
|
Deferred revenue
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
2,701
|
|
|
|
1,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,028
|
|
|
|
14,040
|
|
|
|
6,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Series A preferred stock,$0.0001 par
value. Authorized 8,400,000 shares; outstanding
7,759,082 shares respectively; aggregate liquidation
preference of $11,574,999
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Convertible Series B preferred stock,$0.0001 par
value. Authorized 7,930,000 shares; outstanding 7,695,271,
7,695,271 and 0 shares, respectively; aggregate liquidation
preference of $46,374,501
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Common stock, $0.0001 par value. Authorized 30,670,000,
30,670,000 and 26,600,000 shares, respectively; issued and
outstanding 10,015,923, 9,910,681 and 8,755,763 shares,
respectively
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
70,298
|
|
|
|
61,094
|
|
|
|
15,594
|
|
Warrants
|
|
|
533
|
|
|
|
347
|
|
|
|
194
|
|
Accumulated deficit
|
|
|
(56,763
|
)
|
|
|
(25,665
|
)
|
|
|
(4,733
|
)
|
Accumulated other comprehensive income
|
|
|
95
|
|
|
|
10
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
14,166
|
|
|
|
35,789
|
|
|
|
11,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
31,194
|
|
|
$
|
49,829
|
|
|
$
|
17,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-43
Consolidated
Statements of Operations and Other Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(June 14,
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per-share data)
|
|
|
Net revenues
|
|
$
|
21,233
|
|
|
|
13,280
|
|
|
|
29,055
|
|
|
|
10,929
|
|
|
|
|
|
Cost of sales
|
|
|
15,408
|
|
|
|
10,430
|
|
|
|
20,191
|
|
|
|
4,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,825
|
|
|
|
2,850
|
|
|
|
8,864
|
|
|
|
6,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
13,078
|
|
|
|
4,012
|
|
|
|
6,515
|
|
|
|
2,343
|
|
|
|
668
|
|
Sales and marketing
|
|
|
19,695
|
|
|
|
11,205
|
|
|
|
18,555
|
|
|
|
5,114
|
|
|
|
164
|
|
General and administrative
|
|
|
3,932
|
|
|
|
3,272
|
|
|
|
5,573
|
|
|
|
1,665
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
36,705
|
|
|
|
18,489
|
|
|
|
30,643
|
|
|
|
9,122
|
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(30,880
|
)
|
|
|
(15,639
|
)
|
|
|
(21,779
|
)
|
|
|
(3,099
|
)
|
|
|
(1,141
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
378
|
|
|
|
1,168
|
|
|
|
1,478
|
|
|
|
210
|
|
|
|
20
|
|
Interest expense
|
|
|
(493
|
)
|
|
|
(510
|
)
|
|
|
(512
|
)
|
|
|
(659
|
)
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(115
|
)
|
|
|
658
|
|
|
|
921
|
|
|
|
(488
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(30,995
|
)
|
|
|
(14,981
|
)
|
|
|
(20,858
|
)
|
|
|
(3,587
|
)
|
|
|
(1,121
|
)
|
Provision for income taxes
|
|
|
103
|
|
|
|
68
|
|
|
|
74
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,098
|
)
|
|
|
(15,049
|
)
|
|
|
(20,932
|
)
|
|
|
(3,612
|
)
|
|
|
(1,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
85
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(31,013
|
)
|
|
|
(15,049
|
)
|
|
|
(20,935
|
)
|
|
|
(3,599
|
)
|
|
|
(1,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, (basic and diluted)
|
|
|
8,098,947
|
|
|
|
5,535,044
|
|
|
|
5,853,470
|
|
|
|
3,451,019
|
|
|
|
1,362,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share (basic and diluted)
|
|
$
|
(3.84
|
)
|
|
|
(2.72
|
)
|
|
|
(3.58
|
)
|
|
|
(1.05
|
)
|
|
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-44
SLING
MEDIA, INC.
Consolidated
Statements of Shareholders
Equity (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Convertible A
|
|
|
Convertible B
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
|
(In thousands, except share and per-share data)
|
|
|
Net loss
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,121
|
)
|
|
$
|
|
|
|
$
|
(1,121
|
)
|
Exercise of employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Issuance of preferred stock
|
|
|
7,759
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,496
|
|
|
|
|
|
|
|
|
|
|
|
11,497
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
1
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004
|
|
|
7,759
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
7,906
|
|
|
|
1
|
|
|
|
|
|
|
|
11,584
|
|
|
|
(1,121
|
)
|
|
|
|
|
|
|
10,465
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,612
|
)
|
|
|
|
|
|
|
(3,612
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
13
|
|
Exercise of employee stock options, net of share repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Beneficial conversion feature related to convertible notes
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Issuance of preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005
|
|
|
7,759
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
8,756
|
|
|
|
1
|
|
|
|
194
|
|
|
|
15,594
|
|
|
|
(4,733
|
)
|
|
|
13
|
|
|
|
11,070
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,932
|
)
|
|
|
|
|
|
|
(20,932
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Issue of common stock for patent purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
1,312
|
|
|
|
|
|
|
|
|
|
|
|
1,312
|
|
Issue of preferred stock and preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
7,028
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
42,374
|
|
|
|
|
|
|
|
|
|
|
|
42,528
|
|
Conversion of note payable to preferred stock
|
|
|
|
|
|
|
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Adjustment of beneficial conversion feature related to
convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,277
|
)
|
Employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
1,014
|
|
Exercise of employee stock options, net of share repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2006
|
|
|
7,759
|
|
|
|
1
|
|
|
|
7,695
|
|
|
|
1
|
|
|
|
9,911
|
|
|
|
1
|
|
|
|
347
|
|
|
|
61,094
|
|
|
|
(25,665
|
)
|
|
|
10
|
|
|
|
35,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,098
|
)
|
|
|
|
|
|
|
(31,098
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
85
|
|
Issue of preferred stock and preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
Beneficial conversion feature related to convertible notes
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
4,096
|
|
Exercise of employee stock options, net of share repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of September 30, 2007 (unaudited)
|
|
|
7,759
|
|
|
$
|
1
|
|
|
|
7,695
|
|
|
$
|
1
|
|
|
|
10,041
|
|
|
$
|
1
|
|
|
$
|
533
|
|
|
$
|
70,298
|
|
|
$
|
(56,763
|
)
|
|
$
|
95
|
|
|
$
|
14,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-45
SLING
MEDIA, INC.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(June 14,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
2004) to
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,098
|
)
|
|
$
|
(15,049
|
)
|
|
$
|
(20,932
|
)
|
|
$
|
(3,612
|
)
|
|
$
|
(1,121
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,119
|
|
|
|
181
|
|
|
|
366
|
|
|
|
70
|
|
|
|
8
|
|
Accretion of debt discounts
|
|
|
397
|
|
|
|
415
|
|
|
|
415
|
|
|
|
502
|
|
|
|
|
|
Stock-based compensation
|
|
|
4,096
|
|
|
|
271
|
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,651
|
|
|
|
818
|
|
|
|
(5,860
|
)
|
|
|
(6,067
|
)
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
669
|
|
|
|
(516
|
)
|
|
|
(2,149
|
)
|
|
|
(408
|
)
|
|
|
(43
|
)
|
Inventories
|
|
|
(789
|
)
|
|
|
(1,588
|
)
|
|
|
(3,777
|
)
|
|
|
(1,881
|
)
|
|
|
|
|
Other assets
|
|
|
(516
|
)
|
|
|
(689
|
)
|
|
|
(759
|
)
|
|
|
28
|
|
|
|
(52
|
)
|
Accounts payable, trade
|
|
|
(5,225
|
)
|
|
|
3,293
|
|
|
|
7,991
|
|
|
|
758
|
|
|
|
120
|
|
Accrued expenses
|
|
|
1,701
|
|
|
|
1,079
|
|
|
|
1,732
|
|
|
|
581
|
|
|
|
274
|
|
Accrued employee benefits
|
|
|
(320
|
)
|
|
|
236
|
|
|
|
857
|
|
|
|
74
|
|
|
|
49
|
|
Deferred revenue
|
|
|
4,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(21,245
|
)
|
|
|
(11,549
|
)
|
|
|
(21,102
|
)
|
|
|
(9,955
|
)
|
|
|
(765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,608
|
)
|
|
|
(573
|
)
|
|
|
(553
|
)
|
|
|
(233
|
)
|
|
|
(18
|
)
|
Purchases of intangible assets
|
|
|
|
|
|
|
(1,500
|
)
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
(101
|
)
|
Deposits received
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (purchase) of short-term investments
|
|
|
73
|
|
|
|
5
|
|
|
|
3,732
|
|
|
|
(3,805
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
(1,397
|
)
|
|
|
(2,068
|
)
|
|
|
1,679
|
|
|
|
(4,038
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible promissory note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,004
|
|
|
|
|
|
Proceeds from (repayments of) senior loan
|
|
|
5,000
|
|
|
|
(4,000
|
)
|
|
|
(4,000
|
)
|
|
|
4,000
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of capital lease
|
|
|
(630
|
)
|
|
|
(44
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock, net of issuance costs
|
|
|
|
|
|
|
42,528
|
|
|
|
42,528
|
|
|
|
|
|
|
|
11,498
|
|
Proceeds from issuance of common stock
|
|
|
124
|
|
|
|
97
|
|
|
|
542
|
|
|
|
121
|
|
|
|
89
|
|
Issuance costs, Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
|
5,938
|
|
|
|
38,581
|
|
|
|
38,981
|
|
|
|
8,106
|
|
|
|
11,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign exchange on cash
|
|
|
85
|
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(16,619
|
)
|
|
|
24,957
|
|
|
|
19,555
|
|
|
|
(5,874
|
)
|
|
|
10,701
|
|
Cash and cash equivalents at beginning of period
|
|
|
24,382
|
|
|
|
4,827
|
|
|
|
4,827
|
|
|
|
10,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,763
|
|
|
$
|
29,784
|
|
|
$
|
24,382
|
|
|
$
|
4,827
|
|
|
$
|
10,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
106
|
|
|
$
|
76
|
|
|
$
|
121
|
|
|
$
|
47
|
|
|
$
|
|
|
Income taxes
|
|
|
84
|
|
|
|
63
|
|
|
|
84
|
|
|
|
6
|
|
|
|
|
|
Disclosure of material non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for purchase of intangible assets
|
|
$
|
|
|
|
|
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of stock options early exercised
|
|
|
45
|
|
|
|
9
|
|
|
|
465
|
|
|
|
98
|
|
|
|
14
|
|
Conversion of notes to Series B preferred stock and
preferred stock warrants
|
|
|
|
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital lease
|
|
|
1,584
|
|
|
|
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-46
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2007 and 2006
(unaudited) and
the Years Ended December 31, 2006 and 2005 and the
period from
inception (June 14, 2004) to December 31,
2004
Amounts in thousands except share and per-share data
|
|
(a)
|
Description
of Business
|
Sling Media, Inc. (the Company), incorporated in the
state of Delaware on June 14, 2004, manufactures consumer
electronic products that enable users to watch and interact with
their subscription television through an internet connected
computer or mobile device.
|
|
(b)
|
Basis
of Presentation
|
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Sling Media
Private Limited, Sling Media Pte, Limited, Sling Media UK
Limited and Sling Media Ireland Limited. The consolidated
financial statements include accounts of all wholly-owned
subsidiaries after elimination of intercompany accounts and
transactions.
In September, 2007, the Company agreed to be acquired by
EchoStar Communications Corporation (EchoStar) for
approximately $380,000. EchoStar, through a wholly-owned
subsidiary, was already an investor in the Company.
Certain reclassifications have been made to the 2005
consolidated financial statements to conform to 2006
presentation.
|
|
(d)
|
Unaudited
Interim Financial Information
|
The accompanying unaudited consolidated financial statements as
of September 30, 2007, and for the nine months ended
September 30, 2007 and 2006 have been prepared in
accordance with accounting principles generally accepted in the
United States (U.S.) and Article 10 of
Regulation S-X
for interim financial information. The unaudited consolidated
financial statements as of September 30, 2007 and for the
nine-month periods ended September 30, 2007 and 2006 have
been prepared on the same basis as the consolidated financial
statements as of December 31, 2006 and 2005 and for each of
the years then ended and the period from inception
(June 14, 2004) to December 31, 2004 included
therein, and in the opinion of management, reflect all
adjustments, consisting only of normal and recurring accruals,
considered necessary to present fairly the Companys
consolidated financial position as of September 30, 2007
and the consolidated results of its operations and its cash
flows for the nine month periods ended September 30, 2007
and 2006. However, they do not include all of the information
and footnotes required by accounting principles generally
accepted in the U.S. (U.S. GAAP) for complete
financial statements. The consolidated results of operations for
the nine months ended September 30, 2007 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2007 or for any other period.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the
F-47
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
reporting period. Management periodically evaluates such
estimates and assumptions for continued reasonableness.
Appropriate adjustments, if any, to the estimates used are made
prospectively based upon such periodic evaluation. Actual
results could differ from those estimates.
|
|
(b)
|
Fair
Value of Financial Instruments
|
For certain financial instruments, including cash and cash
equivalents, prepaid expenses and other current assets, accounts
receivable, and accounts payable, recorded amount approximates
fair value due to their relatively short maturity period.
|
|
(c)
|
Cash
Equivalents and Short-Term Investments
|
The Company classifies all highly liquid investments purchased
with an original or remaining maturity of three months or less
at the date of purchase to be cash equivalents and those
investments with an original or remaining maturity of greater
than three months to be short-term investments. Both are stated
at cost, which approximates fair value. Cash equivalents and
short-term investments are maintained with several high credit
quality financial institutions. The Companys investments
consist primarily of cash, money market investments, and
certificates of deposits amounting to $73 and $3,805 at
December 31, 2006 and 2005, respectively. Although the
Company deposits its cash with multiple financial institutions,
its deposits exceed insured amounts.
|
|
(d)
|
Concentration
of Credit Risk
|
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of trade
accounts receivable. The Companys trade receivables result
from sales of its products to large, well-established wholesale
and retail distributors, primarily located in the U.S. and
the European Union. Management reviews the creditworthiness of
its customers in the ordinary course of business, and further
reviews the need for allowances for potential credit losses. At
December 31, 2006 and 2005 there were no such allowances.
As of December 31, 2006, three customers individually
accounted for 43%, 28% and 13% of total accounts receivable and
16%, 31% and 24% of total revenue. As of December 31, 2005,
two customers individually accounted for 57% and 22% of total
accounts receivable and 58% and 35% of total revenue.
As of December 31, 2006 and 2005, $400 and $
were classified as restricted on the accompanying consolidated
balance sheets, and consist of a certificate of deposit held by
a financial institution for the benefit of the landlord of the
Companys corporate headquarters.
Inventories, which consist primarily of finished goods held for
sale, are stated at the lower of cost (determined on a
weighted-average basis) or market. Products are built by
contract manufacturers to Company specifications. The Company
depends on a few manufacturers for its finished good products.
The Company periodically reviews its inventories and reduces the
carrying value for slow-moving or obsolete items to the
estimated market value, if lower, based upon assumptions about
future demand and market conditions.
|
|
(g)
|
Property
and Equipment
|
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is
computed using the straight-line method based on the estimated
useful lives of three to five years for the respective assets.
Leasehold improvements are amortized on a straight-line basis
over the shorter
F-48
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
of the lease term or estimated useful life of the assets.
Depreciation and amortization expense of property and equipment
for the years ended December 31, 2006 and 2005 was $294 and
$54, respectively, and $1 for the period from inception
(June 14, 2004) to December 31, 2004, is included
as a component of operating expenses, dependent upon the
department to which the asset is allocated, in the accompanying
consolidated statements of operations.
Intangible assets with finite lives, which consist of patents
and other intellectual property assets, are stated at cost less
accumulated amortization. Amortization is computed using the
straight-line method based on the estimated useful lives of the
assets of three to ten years, respectively. Amortization expense
for intangible assets with finite lives for the years ended
December 31, 2006 and 2005 was $72 and $16, respectively,
and $7 for the period from inception (June 14,
2004) to December 31, 2004, and is included as a
component of costs of goods sold in the accompanying
consolidated statements of operations. Amortization expense is
expected to be $293 for 2007, $289 for 2008, 2009 and 2010, and
$1,658 thereafter.
|
|
(i)
|
Foreign
Currency Translation
|
The functional currencies of the Companys
non-U.S. subsidiaries
are their respective local currencies. Asset and liability
balances denominated in
non-U.S. dollar
currencies are translated into U.S. dollars using
period-end exchange rates, while revenues and expenses based
upon the exchange rate at the time of the transaction, if known,
or at the average rate for the period. Differences are recorded
as a component of accumulated 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
income and expense. Net transaction gains (losses) during 2006,
2005 and for the period of inception (June 14,
2004) through December 31, 2004 were not significant.
|
|
(j)
|
Impairment
of Long-Lived Assets
|
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, long-lived
assets, such as property and equipment and intangible assets
with finite lives, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. There were no
indicators of impairment for any period presented.
Income taxes are accounted for using the asset and liability
method as prescribed by SFAS No. 109,
Accounting
For Income Taxes
. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income (loss) in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period of enactment. The Company is subject to foreign
income taxes on its foreign operations.
F-49
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
|
|
(l)
|
Stock-Based
Compensation and Equity Instruments Issued to Nonemployees for
Services
|
Effective January 1, 2006, the Company adopted
SFAS No. 123(R),
Share-Based Payment
which
requires that all stock-based compensation be recognized as an
expense in the financial statements and that such cost be
measured at the fair value of the award. This statement was
adopted using the Prospective method of application, which
requires the Company to recognize compensation cost on a
prospective basis. Therefore, prior years financial
statements have not been restated.
Under this method, the Company has recorded stock-based
compensation expense only for awards granted or modified after
January 1, 2006, based on estimated grant date fair value
using the Black-Scholes, single option award approach, which
requires the Company to estimate the fair-value of its common
stock, expected term, expected volatility, risk-free interest
rate, and dividend yield. For expected term, the Company has
estimated the life over which each award will remain outstanding
based on expected behavior of the optionees. Because there is no
open market for the Companys stock, expected volatility is
based upon the historical volatility of several other companies
in the Companys peer group. This peer group was the same
as was used in determining the Companys common stock
valuation. Risk-free interest rate is based on an average
interest rate based on U.S. Treasury instruments whose term
is consistent with the expected term of the Companys
awards. Estimated forfeitures represent the Companys
historical forfeiture rate. As the Company has not declared
dividends for any period presented, and does not anticipate
doing so in the future, dividend yield is zero.
These variables are highly subjective, determined on a periodic
basis and can vary over time, thus changes in these assumptions
can materially affect the fair value estimate. The Company will
continue to evaluate the assumptions used to derive estimated
fair value as new events or changes in circumstances occur.
Compensation cost is recognized in the results of operations
over the period during which an employee provides the requisite
service in exchange for the award, and is adjusted for expected
forfeitures.
Prior to January 1, 2006, the Company accounted for
stock-based employee compensation using the intrinsic value
method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
, Financial
Accounting Standards Boards (FASB) Interpretation
(FIN) No. 44,
Accounting for Certain
Transactions Involving Stock Compensation an
Interpretation of APB Opinion No. 25
, and Emerging
Issues Task Force (EITF) Issue
No. 00-23,
Issues Related to the Accounting for Stock Compensation
.
Under APB Opinion No. 25, compensation expense is based on
the difference, if any, between the fair value of the
Companys common stock and the exercise price of the option
on the measurement date, which is typically the date of grant
and would be recognized on a straight-line basis.
The Company accounted for equity instruments granted to
non-employees under EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
. The options are recorded at fair value
using the Black-Scholes model and are measured and recognized in
accordance with EITF No.
96-18
and
FIN No. 28.
Refer to Note 10 for additional discussion regarding
details of the Companys stock-based compensation plans,
adoption of SFAS 123(R) and recognized compensation expense.
|
|
(m)
|
Shares
Subject to Repurchase
|
The Company has granted to founders shares of restricted stock
that are subject to repurchase at the original exercise price
until they vest. The Companys stock option plan also
allows certain employees to exercise options prior to vesting.
Upon the exercise of an option prior to vesting, the Company has
a right to repurchase the shares purchased upon exercise of the
option at the original exercise price; provided, however, that
its right to repurchase theses shares will lapse in accordance
with the vesting schedule included in the
F-50
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
optionees option agreement. In accordance with
EITF 00-23,
Issues Related to Accounting for Stock Compensation under APB
25
and FIN 44, the consideration received for
restricted stock and for the exercise of an option is considered
to be a deposit of the exercise price, and the related dollar
amount is recorded as a liability. This liability is then
reclassified into equity on a ratable basis as the award vests.
As of December 31, 2006 and 2005, respectively, 2,457,057
and 4,030,402 shares were issued but subject to repurchase.
These shares are presented as outstanding on the accompanying
consolidated statements of stockholders equity and
consolidated balance sheets. See Note 2(n) for discussion of
treatment of these shares in Loss per Share.
Basic loss per share is computed using the weighted average
number of shares outstanding during each period, including
restricted shares outstanding during the period, less the
weighted average number of shares of common stock that are
subject to repurchase. Diluted loss per share is computed by
including the dilutive effect of common stock that would be
issued assuming conversion or exercise of outstanding
convertible notes, convertible preferred stock, stock options,
warrants, stock based compensation awards and other dilutive
securities. For the years ended December 31, 2006, 2005,
and the period from inception (June 14, 2004) to
December 31, 2004, and the nine-month periods ended
September 30, 2007 and 2006, there is no difference between
the Companys basic and diluted net loss per share
attributable to holders of common stock because losses were
incurred in each of the periods presented. The following table
presents the calculation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(June 14,
|
|
|
|
Nine-Month Period Ended
|
|
|
Year Ended
|
|
|
2004 to
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(31,098
|
)
|
|
$
|
(15,049
|
)
|
|
$
|
(20,932
|
)
|
|
$
|
(3,612
|
)
|
|
$
|
(1,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
10,026,145
|
|
|
|
8,841,052
|
|
|
|
8,954,320
|
|
|
|
7,991,763
|
|
|
|
7,788,163
|
|
Less: Weighted average number of shares subject to repurchase
|
|
|
(1,927,198
|
)
|
|
|
(3,306,008
|
)
|
|
|
(3,100,850
|
)
|
|
|
(4,540,744
|
)
|
|
|
(6,425,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing basic and
diluted net loss per share
|
|
|
8,098,947
|
|
|
|
5,535,044
|
|
|
|
5,853,470
|
|
|
|
3,451,019
|
|
|
|
1,362,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(3.84
|
)
|
|
$
|
(2.72
|
)
|
|
$
|
(3.58
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
Potential shares of common stock, which have been excluded from
the determination of net loss per share for the years ended
December 31, 2006 and 2005, the period from inception
(June 14, 2004) to December 31, 2004 and the
unaudited nine month periods ended September 30, 2006 and
2007, respectively, since their effect was anti-dilutive,
consisted of potential shares issuable upon the exercise of
outstanding options, shares of restricted common stock subject
to repurchase and shares of common stock issuable upon the
conversion of outstanding Series B and Series A
Convertible Preferred Stock and are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(June 14,
|
|
|
|
Nine Month Period Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable under stock options
|
|
|
2,897,198
|
|
|
|
2,291,814
|
|
|
|
2,733,157
|
|
|
|
1,650,626
|
|
|
|
1,165,126
|
|
Shares exercised but unvested and subject to repurchase
|
|
|
1,022,896
|
|
|
|
679,412
|
|
|
|
1,207,057
|
|
|
|
905,402
|
|
|
|
398,263
|
|
Shares of restricted stock subject to repurchase
|
|
|
|
|
|
|
1,718,750
|
|
|
|
1,250,000
|
|
|
|
3,125,000
|
|
|
|
5,000,000
|
|
Shares issuable upon conversion of preferred stock
|
|
|
15,454,353
|
|
|
|
15,454,353
|
|
|
|
15,454,353
|
|
|
|
7,759,082
|
|
|
|
7,759,082
|
|
Shares issuable upon conversion of convertible debt
|
|
|
825,083
|
|
|
|
|
|
|
|
|
|
|
|
2,681,325
|
|
|
|
|
|
Shares issuable upon exercise of warrants
|
|
|
251,846
|
|
|
|
227,093
|
|
|
|
227,093
|
|
|
|
187,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
|
20,451,375
|
|
|
|
20,371,422
|
|
|
|
20,871,660
|
|
|
|
16,309,128
|
|
|
|
14,322,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(o)
|
Software
Development Costs
|
The Company accounts for internally generated software
development costs in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed
. Capitalization of software
development costs begins upon the establishment of technological
feasibility of the product, which the Company defines as the
development of a working model which generally occurs upon the
completion of beta testing of the software. The establishment of
technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by
management with respect to certain external factors, including,
but not limited to, anticipated future gross product revenue,
estimated economic life, and changes in technology. To date,
internal software development costs that were eligible for
capitalization have been insignificant, and the Company has
charged all software development costs to research and
development expenses as incurred.
Revenue is derived from sales of its products to wholesale and
retail distributors. The Company recognizes revenues in
accordance with SOP
97-2,
Software Revenue Recognition
, as amended. Revenue is
recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and
collection is probable. If any of these criteria are not met,
revenue recognition is deferred until such time as all of the
criteria are met.
The Company establishes allowances for expected product returns
in accordance with SFAS No. 48,
Revenue Recognition
When Right of Return Exists
. These allowances are recorded
as a direct reduction of revenues and accounts receivable.
In accordance with
EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products)
, certain
payments to retailers and distributors such as market
development
F-52
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
funds and co-operative advertising are shown as a reduction of
revenue rather than as sales and marketing expense. The Company
also records rebates offered to consumers as a reduction to
revenue. The classification of these items was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
September 30
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
(unaudited)
|
|
|
Year Ending December 31
|
|
|
(June 14, 2004) to
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
December 31, 2004
|
|
|
Reductions to revenue
|
|
|
782
|
|
|
|
1,153
|
|
|
|
1,539
|
|
|
|
572
|
|
|
|
|
|
Sales and marketing expense
|
|
|
1,480
|
|
|
|
176
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,262
|
|
|
|
1,329
|
|
|
|
2,139
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company offers a basic limited parts and labor warranty on
its hardware products. The basic warranty period for hardware
products is typically one year from the date of purchase by the
end-user. The Company currently estimates warranty costs at the
time the related revenue is recognized based on historical
warranty cost. As of December 31, 2006 and 2005, the
Company had reserves totaling $68 and $ ,
respectively.
Cost of sales consists primarily of the cost of finished goods
as charged by the Companys outsourced manufacturer. Cost
of sales also includes fees paid to the Companys
third-party customer support providers and amortization of
intangible assets.
|
|
(s)
|
Shipping
and Handling Costs
|
Shipping and handling costs for 2006, 2005 and the period from
inception (June 14, 2004) through December 31,
2004 totaling $256, $69 and $ , respectively, are
classified as a component of sales and marketing expense in the
accompanying consolidated statements of operations.
Comprehensive loss, as defined by SFAS No. 130,
Reporting Comprehensive Income
, includes all non-owner
changes to shareholders equity. For the years ended
December 31, 2006 and 2005 comprehensive loss differed from
reported net loss by the cumulative translation adjustment.
There was no such difference for the period from inception
(June 14, 2004) through December 31, 2004.
The Company expenses the cost of advertising as incurred.
Advertising expense costs for 2006, 2005 and the period from
inception (June 14, 2004) through December 31,
2004 totaling $12,556, $3,529 and $33, respectively, are
included as a component of sales and marketing expense in the
accompanying consolidated statements of operations.
From time to time, the Company may be involved in claims or
lawsuits that arise in the ordinary course of business. We
reserve for legal contingencies when a liability for those
contingencies has become probable and the cost is reasonably
estimable, in accordance with SFAS No. 5,
Accounting for Contingencies
. Any significant litigation
or significant change in estimates on outstanding litigation
could cause an increase in the provision for related costs,
which, in turn, could materially affect financial results. Any
provision made for
F-53
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
these legal contingencies are expensed to general and
administrative or research and development, dependent upon the
nature of the case, in the accompanying consolidated statements
of operations. Although the outcome of these claims or lawsuits
cannot be ascertained, on the basis of present information and
advice from counsel, it is managements opinion that the
ultimate outcome will not have a material adverse effect on the
Company.
|
|
(w)
|
Recent
Accounting Pronouncements
|
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities-Including and amendment of FASB Statement
No. 115.
SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value. This statement provides entities the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This
statement is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007.
Management is currently evaluating the impact of adopting this
statement.
In November 2006 the FASB ratified the EITF consensus reached in
EITF Issue
No. 06-6,
Debtors Accounting for a Modification (or Exchange) of
Convertible Debt Instruments
, which provides guidance for
debtors accounting for a modification or exchange of
convertible debt instruments. The guidance is effective for
modifications or exchanges of debt occurring in interim or
annual reporting periods beginning after November, 2006, thus
for the periods presented there is no impact.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which defines fair value,
provides a framework for measuring fair value, and expands the
disclosures required for fair value measurements.
SFAS No. 157 applies to other accounting
pronouncements that require fair value measurements; it does not
require any new fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007 (certain provisions related to nonfinancial assets and
liabilities have been deferred to fiscal years beginning after
November 15, 2008). Although the Company will continue to
evaluate the application of SFAS No. 157, management
does not currently believe adoption will have a material impact
on the Companys results of operations or financial
position.
In June 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
. FIN
No. 48 clarifies the accounting for uncertainty in income
taxes by creating a framework for how companies should
recognize, measure, present, and disclose in their financial
statements uncertain tax positions that they have taken or
expect to take in a tax return. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006 and is
required to be adopted by the Company beginning in fiscal 2007.
Management has adopted the standard and it currently will not
have a material impact on the Companys results of
operations or financial position.
|
|
(3)
|
Balance
Sheets Components
|
The following tables provide details of selected balance sheet
items as of December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw material
|
|
$
|
577
|
|
|
$
|
401
|
|
Finished goods
|
|
|
5,080
|
|
|
|
1,480
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,657
|
|
|
$
|
1,881
|
|
|
|
|
|
|
|
|
|
|
F-54
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
742
|
|
|
$
|
178
|
|
Software
|
|
|
517
|
|
|
|
15
|
|
Furniture and fixtures
|
|
|
476
|
|
|
|
34
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
|
|
Other equipment
|
|
|
189
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,934
|
|
|
|
252
|
|
Less: accumulated depreciation
|
|
|
(349
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,585
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
$
|
2,888
|
|
|
$
|
75
|
|
Capitalized patent costs
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,913
|
|
|
|
100
|
|
Less: accumulated amortization
|
|
|
(95
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,818
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
Inventories as of September 30, 2007 consist of $1,593
(unaudited) of raw material and $4,853 (unaudited) of finished
goods.
In November 2006, the Company acquired ownership rights of
technology in exchange for $1,500 in cash and
175,000 shares of the Companys common stock, with a
value of $1,313.
In June 2005, the Company signed a Senior Loan and Security
Agreement (the Line) in an aggregate principal amount of $4,000
secured by all tangible and intangible assets of the Company.
The Line bore interest at 10.25% annually with monthly
installment repayments due starting February 1, 2006 and
final payment was due December 1, 2008. The Company drew
the full amount of the Line, all of which was outstanding as of
December 31, 2005, which is included as a component of
current liabilities. On February 28, 2006, the Company paid
the balance drawn on the Line, in full, and terminated the
governing agreement.
The Line also included a provision giving the lender a right to
purchase shares of the Companys equity securities up to an
aggregate amount of $500 upon completion of the Companys
next round of financing. As discussed in Note 9, the
Company completed its Series B round of financing, in which
the lender participated.
Additionally, the agreement required the Company to issue the
lender a warrant to purchase 187,693 shares of
Series A Preferred Stock. The warrants were bifurcated from
the debt and valued using the Black-Scholes pricing model. The
value was determined based on a risk-free interest rate of 4%,
contractual life of seven years; expected volatility of 70% and
no expected dividends. The resulting value of approximately $194
was recorded as a discount on the Line, and for the year ended
December 31, 2006 and 2005 approximately $4 and $31 of the
discount was accreted into interest expense. Upon the payoff of
the Line, the remaining discount of $161 was recorded to
interest expense in 2006.
|
|
(5)
|
Convertible
Notes Payable
|
On November 18, 2005, the Company entered into a Note and
Warrant Purchase Agreement, pursuant to which the Company issued
Convertible Notes (the Notes) payable to a lender in
the aggregate principal amount of $4,000. A Director of the
Company is a General Partner of the lender. The Notes bore
interest at
F-55
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
6% with a stated maturity of one year, and also required the
Company to issue the lender a warrant to purchase shares of the
Companys preferred stock with a value equal to 6% of the
principal balance of the Notes. The Notes were automatically
convertible into equity securities issued in the Companys
next financing, defined as the sale by the Company of its equity
securities for gross proceeds of not less than $10,000
(including the $4,000 aggregate principal and interest
outstanding under the Notes). If said financing were not to
occur by November 18, 2006, then, at the option of the
lender, the notes were convertible into Series A Preferred
Stock at $1.49 per share subject to anti-dilution adjustments.
The Company determined that an initial conversion feature
existed at the commitment date under the guidance of
EITF 00-27,
Application of Issues
No. 98-5
to Certain Convertible Instruments
which should be recorded
based on the best conversion option available to the lender if
the only circumstances to change were the passage of time. Due
to the initial conversion price ($1.49) being less than the fair
value of the Series A Preferred Stock (the stock into which
the note would convert) at the commitment date, the Company
recorded a beneficial conversion feature. The value of the
feature was determined to be in excess of the carrying value of
the debt and, as such, a debt discount equal to the carrying
value of the $4,000 principal was recorded, which reduced the
carrying value of the debt to zero, with a corresponding
increase to additional paid-in capital. This discount was
accreted into interest expense in the accompanying consolidated
statements of operations over the life of the Notes, and for the
years ended December 31, 2006 and 2005, totaled $250 and
$471, respectively.
As discussed in Note 9, the Company completed its
Series B financing round, during which the Company raised
in excess of the $10,000 trigger in the Notes agreement
discussed above. Under the terms of the Notes agreement, this
financing automatically adjusted the conversion price to the
$6.06 per share price raised in the Series B financing. In
accordance with the provisions of
EITF 00-27,
the Company recalculated the beneficial conversion feature as a
result of the change in conversion price, and determined that
the new value of the beneficial conversion feature was
de minimus. Accordingly, the remaining un-accreted portion
of the debt discount was reversed by reducing additional paid-in
capital and increasing the debt balance to the original $4,000.
This debt balance and accrued interest thereon were converted
into 666,727 shares of Series B Preferred Stock. There
was no impact on the consolidated statement of operations as a
result of the conversion.
Additionally, upon conversion, the Company issued 39,400
warrants to acquire Series B Preferred Stock to the lender,
valued using the Black-Scholes pricing model. The value was
determined based on a risk-free interest rate of 4%, contractual
life of five years, expected volatility of 75%, and no expected
dividend yield. The resulting value of approximately $153 was
recorded as a separate component of shareholders equity.
In September 2007, the Company entered into a Revolving Credit
Agreement pursuant to which the Company issued Convertible Notes
(the Notes) payable to a lender in the aggregate
principal amount of $5,000. A Director of the Company is a
General Partner of the lender. The Notes bore interest at 9%
with a stated maturity of June 2008. The Notes were
automatically convertible into equity securities issued in the
Companys next financing, defined as the sale by the
Company of its equity securities for gross proceeds of not less
than $15,000 (including the $5,000 aggregate principal and
interest outstanding under the Notes). If said financing were
not to occur by June 7, 2008, then, at the option of the
lender, the notes were convertible into Series B Preferred
Stock at $6.06 per share subject to anti-dilution adjustments.
Due to the initial conversion price ($6.06) being less than the
fair value of the Series B Preferred Stock (the stock into
which the note would convert) at the commitment date, the
Company recorded a beneficial conversion feature. The value of
the feature was determined to be in excess of the carrying value
of the debt and, as such, a debt discount equal to the carrying
value of the $5,000 principal was recorded, which reduced the
carrying value of the debt to zero, with a corresponding
increase to additional paid-in capital. This discount is being
accreted into interest expense in the accompanying consolidated
statements of operations over the life of the Notes, and for the
nine month period ended September 30, 2007, totaled $367
(unaudited). The aggregate principal and
F-56
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
interest outstanding under the Notes was repaid by EchoStar
Communications Corporation in connection with its acquisition of
Sling Media, Inc. as discussed in Note 13.
|
|
(6)
|
Capital
Lease Obligations
|
The Company has non-cancelable capital lease agreements in place
for furniture and fixtures, software, and various computer and
office equipment. As of December 31, 2006, and 2005
balances of $1,129 and $ were capitalized as
components of property, plant and equipment, respectively, in
the accompanying consolidated balance sheet. Related accumulated
depreciation of $86 and $ , respectively was also
recorded in the accompanying consolidated balance sheet. Short-
and long-term obligations are shown as components of notes
payable and long-term liabilities, respectively, in the
accompanying consolidated balance sheet. The Company recognized
$86, $ and $ of depreciation expense
related to assets held under capital leases for the years ended
December 31, 2006, 2005 and the period from inception
(June 14, 2004) through December 31, 2004,
respectively, as a component of operating expenses depending on
which department to which the asset was assigned, in the
accompanying consolidated statements of operation.
Future minimum lease payments under these capital lease
obligations for the nine months ended September 30, 2007
and year ended December 31, 2006, respectively are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year Ended
|
|
|
|
2007
|
|
|
December 31,
|
|
|
|
(unaudited)
|
|
|
2006
|
|
|
2007
|
|
$
|
258
|
|
|
$
|
378
|
|
2008
|
|
|
1,402
|
|
|
|
342
|
|
2009
|
|
|
1,350
|
|
|
|
217
|
|
2010
|
|
|
510
|
|
|
|
112
|
|
2011
|
|
|
109
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
3,629
|
|
|
|
1,158
|
|
Less: amount representing interest
|
|
|
(260
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
3,369
|
|
|
|
971
|
|
Less: current portion
|
|
|
(1,053
|
)
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
$
|
2,316
|
|
|
$
|
674
|
|
|
|
|
|
|
|
|
|
|
During the unaudited nine-month period in 2007, the Company
issued warrants to purchase 24,753 shares of Series B
Preferred stock with a determined value of $186 in conjunction
with the formation of a capital lease agreement. The value was
determined based on a risk-free interest rate of 4%, contractual
life of five years; expected volatility of 75% and no expected
dividends. The value of the warrants was recorded to the
accompanying consolidated balance sheets as a discount to the
short and long term portions of capital lease obligations, and
the discount accreted to interest expense over the life of the
lease agreement, which is four years. Interest expense related
to this transaction for the nine-month period ended
September 30, 2007 was $29.
F-57
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
|
|
(7)
|
Future
Commitments and Obligations
|
The Company rents facilities under non-cancelable operating
lease agreements. As of December 31, 2006, future minimum
payments under these leases are as follows:
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2007
|
|
$
|
827
|
|
2008
|
|
|
822
|
|
2009
|
|
|
817
|
|
2010
|
|
|
734
|
|
2011 and Thereafter
|
|
|
821
|
|
The terms of certain of the lease agreements provide for rental
payments on a graduated basis, and accordingly the Company
recognizes related rent expense on the straight-line basis over
the term of the lease.
Rent expense for the years ended December 31, 2006, 2005
and the period from inception (June 14, 2004) through
December 31, 2004 was $443, $129 and $28, respectively.
In August, 2006, the Company entered into an operating lease
agreement for its new corporate headquarters. Rather than
terminate the lease agreement for its previous headquarters, the
Company entered into a sub-lease agreement with a third party.
The terms of the sub-lease are such that the Company expects to
recoup all rent and rent-related expenses through the end of the
lease period in May 2008. Sublease income is expected to total
$166 and $69 in 2007 and 2008, respectively. Rental payments for
both the old and new facility are included in the commitments
table above.
In September, 2006, the Company entered into an operating lease
agreement for its new India operations facilities. Rather than
terminate the lease agreement for its previous location, the
Company entered into a
sub-lease
agreement with a third party. The terms of the sub-lease are
such that the Company expects to recoup all rent and
rent-related expenses through the end of the lease period in
January 2009. Sublease income is expected to total $349 in 2007,
$202 in 2008, and $12 in 2009, respectively. Rental payments for
both the old and new facility are included in the commitments
table above.
The Company purchases materials from many domestic and foreign
suppliers. The Company has no long-term purchase commitments or
arrangements with any of its suppliers, and believes it is not
dependent on any one supplier.
The Company undertakes indemnification obligations in its
ordinary course of business. For instance, the Company has
undertaken to indemnify its underwriters and certain investors
in connection with the issuance and sale of its securities. The
Company has also undertaken to indemnify certain customers and
business partners for, among other things, the licensing of its
technology, the sale of its products, and the provision of
engineering and consulting services. Pursuant to these
agreements, the Company may indemnify the other party for
certain losses suffered or incurred by the indemnified party in
connection with various types of claims, which may include,
without limitation, intellectual property infringement,
advertising and consumer disclosure laws, certain tax
liabilities, negligence and intentional acts in the performance
of services and violations of laws. The term of these
indemnification obligations is generally perpetual. The
Companys obligation to provide indemnification generally
would arise in the event that a third party filed a claim
against one of the parties that was covered by the
Companys indemnification obligation. As an example, if a
third party sued a customer for intellectual property
infringement arising from the use of the Companys product
and the Company agreed to indemnify that customer against such
claims, its obligation would be triggered.
The Company is unable to estimate with any reasonable accuracy
the liability that may be incurred pursuant to its
indemnification obligations. A few of the variables affecting
any such assessment include but are not limited to: the nature
of the claim asserted; the relative merits of the claim; the
financial ability of the party
F-58
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
suing the indemnified party to engage in protracted litigation;
the number of parties seeking indemnification; the nature and
amount of damages claimed by the party suing the indemnified
party; and the willingness of such party to engage in settlement
negotiations. Due to the nature of the Companys potential
indemnity liability, its indemnification obligations could range
from immaterial to having a material adverse impact on its
financial position and its ability to continue operation in the
ordinary course of business
The components of net loss before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period From
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
(June 14,
|
|
|
|
|
|
|
|
|
|
2004)
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
United States
|
|
$
|
(21,028
|
)
|
|
$
|
(3,649
|
)
|
|
$
|
(1,121
|
)
|
Foreign
|
|
|
170
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss before income taxes
|
|
$
|
(20,858
|
)
|
|
$
|
(3,587
|
)
|
|
$
|
(1,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
(June 14,
|
|
|
|
|
|
|
|
|
|
2004)
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
14
|
|
|
|
3
|
|
|
|
|
|
Foreign
|
|
|
60
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
74
|
|
|
|
25
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
74
|
|
|
$
|
25
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the federal statutory income tax rate to
the Companys effective income tax rate is as follows.
F-59
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
(June 14, 2004)
|
|
|
|
December 31,
|
|
|
Through
|
|
|
|
2006
|
|
|
|
|
|
2005
|
|
|
December 31, 2004
|
|
|
Loss before income taxes
|
|
$
|
(20,858
|
)
|
|
|
|
|
|
$
|
(3,587
|
)
|
|
|
|
|
|
$
|
(1,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. statutory rate
|
|
|
(7,092
|
)
|
|
|
34.0
|
%
|
|
|
(1,220
|
)
|
|
|
34.0
|
%
|
|
|
(381
|
)
|
|
|
34.0
|
%
|
State taxes
|
|
|
(1,604
|
)
|
|
|
7.7
|
|
|
|
2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Foreign rate differential
|
|
|
(10
|
)
|
|
|
0.1
|
|
|
|
1
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
Permanent items
|
|
|
(1,812
|
)
|
|
|
8.7
|
|
|
|
47
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
23
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
10,569
|
|
|
|
(50.8
|
)
|
|
|
1,195
|
|
|
|
(33.3
|
)
|
|
|
381
|
|
|
|
(34.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74
|
|
|
|
(0.4
|
)%
|
|
$
|
25
|
|
|
|
(0.7
|
)%
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
434
|
|
|
$
|
6
|
|
Accruals and reserves
|
|
|
446
|
|
|
|
294
|
|
State taxes
|
|
|
0
|
|
|
|
1
|
|
Net operating losses
|
|
|
11,388
|
|
|
|
1,234
|
|
Credits
|
|
|
481
|
|
|
|
247
|
|
Stock compensation
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
12,886
|
|
|
$
|
1,782
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(556
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(556
|
)
|
|
$
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,330
|
|
|
|
1,761
|
|
Valuation allowance
|
|
|
(12,330
|
)
|
|
|
(1,761
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets/liabilities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the deferred tax assets were fully
offset by a valuation allowance. The total valuation allowance
for the year ended December 31, 2006 was $12,330.
SFAS No. 109
Accounting for Income Taxes
provides for the recognition of deferred tax assets if
realization of such assets is more likely than not to occur.
Based upon the weight of available evidence, which includes its
historical operating performance, reported cumulative net losses
since inception and difficulty in accurately forecasting its
results, the Company provided a full valuation allowance against
its net deferred tax assets. The Company reassesses the need for
its valuation allowance on a quarterly basis.
As of December 31, 2006 and 2005, the Company has net
operating loss carryforwards for federal and state income tax
purposes of approximately $29,051 and $24,027 and $3,084 and
$3,123, respectively. The federal
F-60
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
net operating loss carryforwards expire, if not utilized,
beginning in the year 2024. The California net operating loss
carryforwards expire, if not utilized, beginning in the year
2014.
As of December 31, 2006 and 2005, unused research and
development tax credits of approximately $322 and $159 and $141
and $106 are available to reduce future federal and California
income taxes, respectively. The federal credit carryforward
expires, if not utilized, beginning in the year, 2024. The
California credit will carry forward indefinitely.
Utilization of the net operating loss carryforwards and credits
may be subject to substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue
Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating
losses and credits before utilization.
|
|
(a)
|
Convertible
Preferred Stock
|
Convertible Preferred Stock as of December 31, 2006 and
2005 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Net Proceeds
|
|
|
|
Shares
|
|
|
Issued and
|
|
|
Liquidation
|
|
|
After
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Preference
|
|
|
Issuance Costs
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
8,400,000
|
|
|
|
7,759,082
|
|
|
$
|
11,575
|
|
|
$
|
11,497
|
|
Series B
|
|
|
7,930,000
|
|
|
|
7,695,271
|
|
|
|
46,633
|
|
|
|
42,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,330,000
|
|
|
|
15,454,353
|
|
|
$
|
58,208
|
|
|
$
|
54,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
8,400,000
|
|
|
|
7,759,082
|
|
|
$
|
11,575
|
|
|
$
|
11,497
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,400,000
|
|
|
|
7,759,082
|
|
|
$
|
11,575
|
|
|
$
|
11,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 23, January 31 and February 13, 2006, the
Company sold 7,695,271 shares of Series B Preferred
Stock for proceeds of approximately $46,528 net of $107 in
issuance costs. Shares issued include conversion of debt and
accrued interest related to notes payable to 666,727 shares
of Series B Preferred Stock. See Note 5 for further
discussion. Proceeds from the issuance were used to fund ongoing
operations and research and development efforts.
As of December 31, 2006 and 2005 there were 227,293 and
187,693 warrants outstanding for the right to purchase Preferred
Series stock, respectively. At September 30, 2007 and 2006
there were 251,846 and 227,293 warrants outstanding for the
right to purchase Preferred Series stock, respectively.
The holders of convertible preferred stock have various rights
and preferences as follows:
Voting
Each share of both Series A Preferred Stock and
Series B Preferred Stock has voting rights equal to an
equivalent number of shares of common stock into which it is
convertible.
Dividends
Holders of both Series A Preferred Stock and Series B
Preferred Stock are entitled to receive noncumulative dividends
out of any assets legally available, prior and in preference to
any declaration or payment of any
F-61
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
dividend on the Common Stock of the Company. For holders of
Series A Preferred Stock the per annum dividend rate is
$0.1193 per share and for holders of Series B Preferred
Stock the per annum dividend rate is $0.4848 per share, when and
if declared by the board of directors (the Board). No dividends
on convertible preferred stock or common stock were declared by
the Board for any period presented.
Liquidation
Upon any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, owners of Series B
Preferred Stock will be entitled to receive, prior and in
preference to owners of Series A Preferred Stock and Common
Stock, an amount per share equal to the sum of the original
issue price of $6.06 for the Series B Preferred Stock (as
adjusted for any stock dividends, splits, combinations,
recapitalizations, and the like) plus any declared and unpaid
dividends. If upon occurrence of any such event, the assets and
funds of the Company legally available for distribution are
insufficient to permit payment of the aforesaid preferential
amounts, then the assets and funds of the Company legally
available for distribution shall be distributed ratably among
the owners of Series B Preferred Stock in accordance with the
preferences noted above.
On completion of the distribution to owners of Series B
Preferred Stock, the owners of Series A Preferred Stock
will be entitled to receive, prior to and in preference to the
owners of Common Stock, an amount per share equal to the sum of
the original issue price of $1.4918 for the Series A
Preferred Stock (as adjusted for any stock dividends, splits,
combinations, recapitalizations, and the like) plus any declared
and unpaid dividends. If upon occurrence of any such event, and
on completion of the distribution to owners of Series B
Preferred Stock, the remaining assets and funds of the Company
legally available for distribution are insufficient to permit
payment of the preferential amounts to owners of Series A
Preferred Stock, then the assets and funds of the Company
legally available for distribution shall be distributed ratably
among the owners of Series A Preferred Stock in accordance with
the preferences noted above.
After fulfillment of the aforesaid preferences, any remaining
assets of the Company legally available for distribution shall
be distributed ratably to the holders of Common Stock.
The following shall be deemed to be a liquidation, dissolution
or winding up of the Company:
(A) The closing of the sale, transfer, exclusive license or
other disposition of all or substantially all of the
Companys assets,
(B) the consummation of a merger or consolidation of the
Company with or into another entity (except a merger or
consolidation in which the holders of capital stock of the
Company, immediately prior to such merger or consolidation,
continue to hold at least 50% of the voting power of the capital
stock of the Company or the surviving or acquiring entity),
(C) the closing of the transfer (whether by merger,
consolidation or otherwise), in one transaction or a series of
related transactions, to a person or group of affiliated persons
(other than an underwriter of the Companys securities), of
the Companys securities if, after such closing, such
person or group of affiliated persons would hold 50% or more of
the outstanding voting stock of the Company (or surviving or
acquiring entity), or
(D) a liquidation, dissolution or winding up of the Company.
Conversion
Each share of both Series B Preferred Stock and
Series A Preferred Stock is convertible at the option of
the holder, according to a conversion ratio calculated by
dividing the applicable original issue price by the applicable
conversion price. Each share of Preferred Stock automatically
converts into the number of shares of Common Stock in to which
such shares are convertible at the then effective conversion
ratio upon: (1) the closing of a public offering of Common
stock in which the aggregate public offering price equals or
exceeds
F-62
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
$18.18 per share (as adjusted for any stock dividends, splits,
combinations, recapitalizations, and the like) and $30,000 in
the aggregate, or (2) the written consent or agreement of
the holders of a majority of the then outstanding Preferred
stock provided, however, that the conversion of the shares of
Series B Preferred Stock requires the written consent of
the holders of a majority of the then outstanding shares of
Series B Preferred Stock. The per share effective purchase
price of the Series A Preferred Stock is $1.49 and the
Series B Preferred Stock is $6.06. The per share conversion
prices of the Series A Preferred Stock is $1.49 and the
Series B Preferred Stock is $6.06.
The Companys Articles of Incorporation authorize the
Company to issue 30,670,000 shares of Common Stock at a par
value of $0.0001. The Company issued 7,500,000 shares of
its Common stock to the founders and employees under its stock
purchase agreement, some of which are subject to certain
repurchase provisions. As of December 31, 2006 and 2005,
1,210,286 and 3,083,973 shares, respectively, are subject
to repurchase. For the majority of such shares of Common Stock
subject to such repurchase rights, the right of repurchase
lapses with respect to the first 25% of the shares subject to
repurchase when the stockholder completes 12 months of
continuous service after the vesting commencement date. The
right of repurchase after the first 12 months lapses at a
rate of 1/48 per month as the stockholder completes each month
of continuous service.
As discussed in footnote 2(m), the Companys stock option
plan allows certain employees to exercise options prior to their
having vested. Upon the exercise of an option prior to its
vesting, the Company has a right to repurchase the shares at the
options original exercise price. For shares that have been
exercised prior to vesting, the Company has recorded a liability
for an amount equal to the consideration received. As of
December 31, 2006 and 2005, 1,207,062 and
878,267 shares were exercised but not yet vested, and the
related liability was $576 and $111, respectively, which is
reflected in the accompanying consolidated balance sheets.
In November, 2006 the Company issued 175,000 shares of
Common Stock valued at $7.50 per share as part of an agreement
to purchase technology.
|
|
(10)
|
Stock
Options and Stock-Based Compensation
|
In September 2004, the Company adopted the 2004 Stock Option
Plan (the Plan), which authorizes
2,490,000 shares of common stock for the granting of stock
options. The Plan was amended by the board in October 2004 to
authorize an additional 727,500 shares, and in January and
August 2006 to authorize an additional 799,580 and
1,500,000 shares respectively, bringing the total number of
authorized shares to 5,517,080 (2005 and 2004: 3,217,500). The
Plan provides for the granting of stock options to employees,
consultants, and directors of the Company. Options granted under
the Plan may be either incentive stock options or non-statutory
stock options. Incentive stock options (ISO) may be granted only
to Company employees (including officers and directors who are
also employees). Non-statutory stock options (NSO) may be
granted to Company employees, consultants and directors.
Options under the Plan may be granted for periods up to
10 years and at prices no less than 85% of the estimated
fair value of the shares on the date of grant as determined by
the board of directors, provided; however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and
85% of estimated fair value of the shares on the date of grant,
respectively; and (ii) the exercise price of an ISO and NSO
granted to a 10% stockholder shall not be less than 110% of the
estimated fair value of the shares on the date of grant. Options
generally become exercisable in monthly equal increments over a
four-year vesting period subject to a first year vesting of 25%
upon the first year vesting anniversary and expire at the end of
10 years from the date of grant or sooner if the
optionees service is terminated by the Company.
F-63
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
Effective January 1, 2006 the Company adopted
SFAS No. 123(R),
Share-Based Payment
requiring
that all stock-based compensation be recognized as an expense in
the financial statements and that such cost be measured at the
fair value of the award. This statement was adopted using the
Prospective method of application, which requires the Company to
recognize compensation cost on a prospective basis. Therefore,
prior years financial statements have not been restated.
Total non-cash, stock based compensation expense net of related
tax effect was $4,096 (unaudited), $271 (unaudited) and $1,014
for the nine months ended September 30, 2007 and 2006 and
year ended December 31, 2006, respectively, and is
reflected in the accompanying consolidated statement of
operations in the same expense categories as the base
compensation for key employees as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
Research and development
|
|
$
|
965
|
|
|
$
|
71
|
|
|
$
|
197
|
|
Sales and marketing
|
|
|
2,126
|
|
|
|
123
|
|
|
|
482
|
|
General and administrative
|
|
|
1,005
|
|
|
|
77
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense
|
|
$
|
4,096
|
|
|
$
|
271
|
|
|
$
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 and 2006 and December 31,
2006 the Company had $17,361 (unaudited), $4,288 (unaudited) and
$16,757, respectively, of unrecognized compensation expense
related to unvested options, based upon an assumed average
future forfeiture rate of 12% per year, which will be recognized
over a weighted-average period of approximately 4 years.
No compensation cost was recognized in the accompanying
consolidated financial statements of operations prior to 2006 on
stock options granted to employees, since all options granted
under the Companys stock option plan had an exercise price
equal to the market value of the underlying common stock on the
date of grant.
The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model using
the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2006
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
Fair value of common stock
|
|
$10.25 - $11.00
|
|
$0.35 - 7.50
|
|
$0.35 - 9.84
|
Risk free interest rate
|
|
4.37%
|
|
4.71%
|
|
4.71%
|
Expected term (in years)
|
|
7 yrs
|
|
7 yrs
|
|
7 yrs
|
Dividend yield
|
|
|
|
|
|
|
Volatility
|
|
70%
|
|
70%
|
|
70%
|
Weighted average grant date fair value
|
|
9.79
|
|
$4.85
|
|
7.36
|
F-64
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
A summary of stock option activity for the years ended
December 31, 2006 2005 and 2004 under the Plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
Options
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
Price
|
|
|
Balance as of company inception
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Shares reserved
|
|
|
3,217,500
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,563,389
|
)
|
|
|
1,563,389
|
|
|
|
0.07
|
|
Exercised
|
|
|
|
|
|
|
(398,263
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
1,654,111
|
|
|
|
1,165,126
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,428,000
|
)
|
|
|
1,428,000
|
|
|
|
0.15
|
|
Exercised
|
|
|
|
|
|
|
(850,000
|
)
|
|
|
0.13
|
|
Forfeited
|
|
|
92,500
|
|
|
|
(92,500
|
)
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
318,611
|
|
|
|
1,650,626
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
2,299,580
|
|
|
|
|
|
|
|
1.52
|
|
Granted
|
|
|
(2,428,562
|
)
|
|
|
2,428,562
|
|
|
|
0.66
|
|
Exercised
|
|
|
|
|
|
|
(979,918
|
)
|
|
|
0.55
|
|
Repurchased
|
|
|
20,017
|
|
|
|
(20,017
|
)
|
|
|
0.15
|
|
Forfeited
|
|
|
346,096
|
|
|
|
(346,096
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
555,742
|
|
|
|
2,733,157
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(542,500
|
)
|
|
|
542,500
|
|
|
|
1.50
|
|
Exercised
|
|
|
|
|
|
|
(129,803
|
)
|
|
|
0.96
|
|
Forfeited
|
|
|
248,656
|
|
|
|
(248,656
|
)
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 (unaudited)
|
|
|
261,898
|
|
|
|
2,897,198
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised during the nine-month period ended
September 30, 2007 and 2006 and the year ended
December 31, 2006 had an aggregate intrinsic value of
$1,371 (unaudited), $923 (unaudited) and $8,351, respectively.
During the nine-month period ended September 30, 2007 and
2006 and the year ended December 31, 2006, shares with an
aggregate fair value of $292 (unaudited), $262 (unaudited) and
$362, respectively vested. Payments under share-based
liabilities were not material during the year or for either of
the nine-month periods.
As of December 31, 2006 there were 418,638 shares
vested and outstanding with a weighted average exercise price of
$0.16, a weighted-average remaining contractual life of
8.16 years, and aggregate intrinsic value of $4,052. As of
September 30, 2007, there were 1,006,557 (unaudited) shares
vested and outstanding with a weighted average exercise price of
$0.25 (unaudited), a weighted average remaining contractual life
of 7.64 (unaudited) and aggregate intrinsic value of $11,341
(unaudited). Aggregate intrinsic value of options outstanding
and options exercisable was $25,715 and $15,134, respectively,
as of December 31, 2006. Aggregate intrinsic value of
options outstanding and options exercisable was $33,030
(unaudited) and $24,201 (unaudited), respectively, as of
September 30, 2007.
F-65
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
The Plan provides the right to early exercise options granted
which may not have vested, however this feature excludes non-US
employees. The Plan also provides that the Company can
repurchase those unvested options that were not exercised as of
an employees termination date at the original exercise
price. The table below reflects those options that are
exercisable as of December 31, 2006 taking these factors
into account, and also reflects those shares not exercisable and
unvested. As of September 30, 2007, exercisable shares
totaled 2,150,774 (unaudited), less shares exercisable, but
unvested of 1,144,217 (unaudited), and vested shares were
1,006,557 (unaudited). The Company expects an additional
1,438,000 (unaudited) shares to vest during the twelve month
period ending December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Options
|
|
|
|
|
|
Contractual
|
|
|
Exercisable
|
|
Exercise Price
|
|
Shares
|
|
Life (Years)
|
|
|
Shares
|
|
|
$0.02
|
|
147,750
|
|
|
7.67
|
|
|
|
17,484
|
|
0.08
|
|
202,188
|
|
|
7.75
|
|
|
|
17,851
|
|
0.15
|
|
808,688
|
|
|
8.19
|
|
|
|
358,774
|
|
0.35
|
|
38,000
|
|
|
9.03
|
|
|
|
7,728
|
|
0.43
|
|
393,000
|
|
|
9.31
|
|
|
|
315,832
|
|
0.73
|
|
422,031
|
|
|
9.67
|
|
|
|
383,031
|
|
0.76
|
|
721,500
|
|
|
9.89
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,733,157
|
|
|
|
|
|
|
1,625,700
|
|
|
|
Less shares exercisable but unvested
|
|
|
|
|
|
|
(1,207,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares vested
|
|
|
|
|
|
|
418,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
|
Employee
Benefit Plans
|
The Company sponsors a 401(k) Employee Savings Plan (the
401(k) Plan) for eligible employees. Employees may make
voluntary contributions to the 401(k) Plan, however the Company
does not match contributions of the employees, nor are there any
discretionary contributions on behalf of the Company to the plan.
In August 2007 the Company entered into a Supply, Development,
and Licensing Agreement with an independent third party,
pursuant to which the Company agreed to develop and provide
certain products to the third party. In connection with the
agreement, the Company received a $4,000 (unaudited) deposit
from the third party which is classified as long term deferred
revenue at September 30, 2007. The revenue has been
deferred due to certain acceptance provisions having not yet
been met. Due to the uncertainty of the timing of this
acceptance, the Company has classified the deferred revenue as
long-term. The revenue is expected to be recognized over the
remaining term of the arrangement subsequent to acceptance.
Pursuant to the Supply, Development, and Licensing Agreement,
the Company issued warrants to the third party to purchase
75,000 shares of common stock. The warrants vest upon the
earlier of the delivery of a specified number of products, a
liquidation event as defined by the Companys Certificate
of Incorporation, or the consummation by the Company to sell its
common stock or other securities under the Securities Act of
1933, or the termination date of August 2017. As such, the
warrants were exercised pursuant to the terms of the Warrant
Agreement in connection with its acquisition of Sling Media,
Inc. by EchoStar Communications
F-66
SLING
MEDIA, INC.
Notes to Consolidated Financial Statements
(Continued)
Corporation as noted below. The value of the warrants was
determined to be $797 based on a risk-free interest rate of 4%,
contractual life of ten years; expected volatility of 75% and no
expected dividends. These warrants will be accounted for using
the guidance in
EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products)
. This
guidance will require the value to be recorded once the warrants
are probable of vesting. This value will then be netted against
the proceeds from the arrangement and recognized as a revenue
reduction over the life of the arrangement. As the acquisition
of the Company was not consummated until October 15, 2007,
the warrants were not probable of vesting as of
September 30, 2007.
On October 15, 2007, EchoStar Communications Corporation
acquired Sling Media, Inc. for $380,000 in cash and stock
options.
F-67