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| SATS > SEC Filings for SATS > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Changes in DISH Network subscriber growth could have a material adverse affect
on our digital set-top box sales. In particular, weaknesses in the economy and
other factors adversely affecting DISH Network, such as the decision by AT&T to
terminate its distribution agreement with DISH Network effective January 31,
2009, may have an adverse impact on us. According to DISH Network's Form 10-K
for the year ended December 31, 2008, its relationship with AT&T accounted for
approximately 17% of DISH Network's gross subscriber additions. If DISH
Network's gross subscriber additions are adversely affected by the loss of its
distribution relationship with AT&T, we may experience a decline in our sales of
digital set-top boxes to DISH Network. Furthermore, DISH Network has in recent
quarters experienced declining and negative subscriber growth. To the extent
that this trend continues or intensifies as a result of deteriorating economic
conditions in the United States or otherwise, sales of our digital set-top boxes
to DISH Network may decline. Because DISH Network's current digital set-top box
inventory is at higher-than-historical levels, we may see fewer orders for
digital set-top boxes from DISH Network in the near term.
The impact to us of declining DISH Network subscriber growth may be offset over
the near term by an increase in sales to DISH Network resulting from the upgrade
of DISH Network subscribers to advanced products such as high definition ("HD")
receivers, digital video recorders ("DVRs") and HD DVRs, as well as by the
upgrade of DISH Network digital set-top boxes to new technologies such as MPEG-4
digital compression technology or Slingbox placeshifting technology. However,
there can be no assurance that any of these factors will mitigate declining
subscriber growth at DISH Network. In addition, although we expect DISH Network
to continue to purchase products and services from us, there can be no assurance
that DISH Network will continue to purchase products and services from us in the
future.
We may experience significant pressure on margins we earn on the sale of digital
set-top boxes and other equipment, including on sales to DISH Network. This
pressure may be due to current economic conditions, advancements in the
technology and functionality of digital set-top boxes and other equipment. The
margins we earn on sales are determined largely through periodic negotiations
that could result in pricing reflecting, among other things, the digital set-top
boxes and other equipment that best meet our customers' current sales and
marketing priorities, the product and service alternatives available from other
equipment suppliers, and our ability to respond to customer requirements and to
differentiate ourselves from other equipment suppliers on bases other than
pricing.
Our future success may also depend on the extent to which prospective customers
that have been competitors of DISH Network are willing to purchase products and
services from us. Many of these customers may continue to view us as a
competitor as a result of common ownership and related management with DISH
Network. If we do not develop relationships with new customers, we may not be
able to expand our customer base and our ability to increase or even maintain
our revenue will be impacted.
Additional Challenges for our "Digital Set-Top Box" Business. We believe that
our best opportunities for developing potential new customers for our "Digital
Set-Top Box" business over the near term lie in international markets, and we
therefore expect our performance in international markets to be a significant
factor in determining whether we will be able to generate revenue and income
growth in future periods. However, there can be no assurance that we will be
able to sustain or grow our international business. In particular, we have
noticed an increase in new market entrants, primarily located in Asia, that
offer low cost set-top boxes, including set-top boxes that are modeled after our
products or products of our principal competitors. The entry of these new
competitors may result in pricing pressure in international markets that we hope
to enter. If market prices in international markets are substantially reduced by
such new entrants, it may be difficult for us to make profitable sales in
international markets.
Furthermore, if we do not continue to distinguish our products, particularly our
retail products, through distinctive, technologically advanced features and
design, as well as continue to build and strengthen our brand recognition, our
business could be harmed as we may not be able to effectively compete on price
alone in both domestic and international markets against new low cost market
entrants that are principally located in Asia. If we do not otherwise compete
effectively, demand for our products could decline, our gross margins could
decrease, we could lose market share, our revenues and earnings may decline and
our growth prospects would be diminished.
The current economic downturn and tightened credit markets may cause certain
suppliers that we rely on to cease operations which, in turn, may cause us to
suffer disruptions to our supply chain or incur higher production costs.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Our ability to sustain or increase profitability will also depend in large part
on our ability to control or reduce our costs of producing digital set-top
boxes. The market for our digital set-top boxes, like other electronic products,
has been characterized by regular reductions in selling prices and production
costs. Therefore, we will likely be required to reduce production costs in order
to maintain the margins we earn on digital set-top boxes and the profitability
of our "Digital Set-Top Box" business.
"Satellite Services" Business
Our satellite services segment consists principally of transponder leasing
provided primarily to DISH Network, and secondarily to government entities,
internet service providers, broadcast news organizations and private enterprise
customers. We began operating the "Satellite Services" business following the
completion of the Spin-off using our owned and leased in-orbit satellites,
multiple digital broadcast centers and other transmission assets. We are also
pursuing expanding our business offerings by providing value added services such
as telemetry, tracking and control services to third parties. 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. However, there can be no assurance that we will
be able to effectively compete against our competitors due to their significant
resources and operating history.
Dependence on DISH Network. We currently depend on DISH Network for a
substantial portion of the revenue for our "Satellite Services" business.
Therefore, our results of operations are and will for the foreseeable future be
closely linked to the performance of DISH Network's satellite pay-TV business.
While we expect to continue to provide satellite services to DISH Network for
the foreseeable future, its satellite capacity requirements may change for a
variety of reasons, including the launch of additional satellites. Any
termination or reduction in the services we provide to DISH Network would
increase excess capacity on our satellites and require that we aggressively
pursue alternative sources of revenue for this business.
In addition, because the number of potential new customers for our "Satellite
Services" business is small and may be limited by our relationship with DISH
Network, our current customer concentration is likely to continue for the
foreseeable future. Our future success may also depend on the extent to which
prospective customers that have been competitors of DISH Network are willing to
purchase services from us. Many of these customers may continue to view us as a
competitor given the common ownership and management team we continue to share
with DISH Network.
Additional Challenges for our "Satellite Services" Business. Our ability to
expand revenues in the "Satellite Services" business will likely require that we
displace incumbent suppliers that generally have well established business
models and often benefit from long term contracts with customers. As a result,
in order to grow our "Satellite Services" business we may need to develop or
otherwise acquire access to new satellite-delivered services so that we may
offer customers differentiated services. However, there can be no assurance that
we would be able to develop successful alternative services or the sales and
marketing expertise necessary to sell these services profitably.
Adverse Economic Conditions
Our ability to grow or maintain our business may be adversely affected by
weakening global and domestic economic conditions, including wavering consumer
confidence and constraints on discretionary purchasing, unemployment, tight
credit markets, declines in global and domestic stock markets, falling home
prices and other factors that may adversely affect the markets in which we
operate. Our ability to increase our income or to generate additional revenues
will depend in part on our ability to organically grow our business, identify
and successfully exploit opportunities to acquire other businesses or
technologies, and enter into strategic partnerships. These activities may
require significant additional capital that may not be available on terms that
would be attractive to us or at all. In particular, current dislocations in the
credit markets, which have significantly impacted the availability and cost of
financing, specifically in the leveraged finance markets, may significantly
constrain our ability to obtain financing to support our growth initiatives.
These developments in the credit markets may increase our cost of financing and
impair our liquidity position. In addition, these developments may cause us to
defer or abandon business strategies and transactions that we would otherwise
pursue if financing were available on acceptable terms.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Furthermore, unfavorable events in the economy, including a continuation or
further deterioration in the credit and equity markets could cause consumer
demand for pay-TV services and consequently sales of our digital set-top boxes
to DISH Network, Bell TV and other international customers to decline materially
because consumers may delay purchasing decisions or reduce or reallocate their
discretionary spending.
Impairments and Investment Losses
Following periodic assessments of the carrying value of our tangible and
intangible assets, we recorded impairments of our AMC-14, AMC-15, AMC-16 and
CMBStar satellites, certain FCC licenses, the fair value of goodwill carried in
our "Digital Set-Top Box" business and certain marketable investment securities.
Satellites
AMC-15 and AMC-16 Impairments. In connection with the Spin-off, we assumed
satellite lease agreements for AMC-15 and AMC-16, two in-orbit satellites with
substantial unused satellite capacity. These assets are part of our "Satellite
Services" business. Notwithstanding that as indicated in our 2007 Form 10-K,
these satellites had substantial unused capacity, our initial business plan
contemplated that we would generate cash inflows sufficient to support their
carrying values. However, due to fewer opportunities for profitable alternative
uses of the satellite capacity and lower demand for satellite services due to
the weakening economy, we determined that an impairment triggering event had
occurred. Our 2007 Form 10-K indicated that, because of the substantial unused
capacity, a significant risk existed that we could record impairment charges of
up to $250 million. Based on the results of our impairment analysis, we recorded
impairment charges of aggregating $218 million with respect to these satellites,
although we continue to explore opportunities to generate revenues from these
assets.
CMBStar Impairment. In connection with the Spin-off, DISH Network contributed to
us a satellite under construction, CMBStar. In April 2008, we notified the State
Administration of Radio, Film and Television of China that we were suspending
construction of the CMBStar satellite pending, among other things, further
analysis relating to efforts to meet the satellite performance criteria and/or
confirmation that alternative performance criteria would be acceptable. We had
disclosed in our Quarterly Report for the three months ended March 31, 2008,
that the suspension of construction of the CMBStar satellite could result in an
impairment charge. During the second and third quarters of 2008, we continued to
explore remedies and alternative uses for this satellite. During the fourth
quarter of 2008, there were significant adverse change in the business climate
and we were unable to secure a commercial agreement for an alternative use. As a
result, we performed an impairment analysis in accordance with SFAS 144 and
determined that the undiscounted cash flows would not recover the carrying
amount of this satellite. We had previously disclosed that the suspension of
construction of the CMBStar satellite could result in an impairment charge of up
to $100 million. Based on the results of our impairment analysis, we recorded an
impairment charge of $85 million with respect to CMBStar. We will continue to
explore alternative uses for this satellite, including potentially reconfiguring
the satellite and shifting its proposed orbital location in a manner that would
be more cost effective than designing and constructing a new satellite.
Digital Set Top Business Goodwill Impairment. The estimated fair value of our
reporting units were based on discounted cash flow models derived from internal
forecasts. Goodwill carried in our "Digital Set-Top Box" business, primarily
related to our 2007 acquisition of Sling Media. Assessment of goodwill requires
that we consider, among other factors, the fair value of our net assets as
compared to our current equity market capitalization. In the fourth quarter, our
stock price was negatively impacted by, among other things, the deteriorating
macroeconomic environment and market liquidity and our common stock has traded
at a discount to our book value, which is an indication of a possible goodwill
impairment. As a result of our impairment analysis, we recorded a goodwill
impairment charge of $247 million. As we indicated in our 2007 Form 10-K, our
financial results would suffer significantly if we are unable to develop new
markets for our set-top boxes. Notwithstanding the goodwill impairment, we are
continuing to capitalize on the Sling's "placeshifting" technology that allows
consumers to watch and control their Pay TV content via a broadband internet
connection, and we intend to integrate this technology into our next generation
of digital set-top boxes.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Losses on Investments
We disclosed in our 2007 Form 10-K, that we have a number of strategic
investments some of which involve a high degree of risk and could expose us to
significant financial losses. During 2008, equity and debt markets experienced
significant declines in value and the market value of our strategic investments
declined as well. During 2008, we recorded $352 million of unrealized losses on
investments accounted for at fair value. Of this amount, $170 million was
recorded during the fourth quarter 2008.
We also recorded $90 million of net unrealized and realized losses on
investments primarily related to other-than-temporary impairments of marketable
investments securities. Of this amount, $46 million was recorded during the
fourth quarter 2008.
Other Risks
Our profitability is also affected by costs associated with our efforts to
expand our sales, marketing, product development and general and administrative
capabilities in all of our businesses, as well as other expenses that we incur
as a separate publicly-traded company. These costs are 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 digital
set-top boxes to comply with local laws or local specifications and to ship our
digital set-top boxes to our international customers.
Basis of Presentation
Within this report, we have included both "combined" financial statements prior
to the Spin-off and "consolidated" financial statements following the Spin-off,
as discussed below. Throughout the remainder of this report, we refer to both as
"consolidated."
After Spin-off - Principles of Consolidation. The financial statements in this
Annual Report on Form 10-K for the periods presented after the Spin-off are
presented on a consolidated basis and represent the "Digital Set-Top Box"
business, satellites, digital broadcast operations assets, certain real estate
and other net assets contributed to us as part of the Spin-off. We consolidate
all majority owned subsidiaries 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 investee.
Prior to Spin-off - Principles of Combination. The financial statements in this
Annual Report on Form 10-K for the periods presented prior to the Spin-off are
presented on a combined basis and principally represent the "Digital Set-Top
Box" business and certain other net assets. The assets and liabilities presented
have been reflected on a historical basis, as prior to the Spin-off such assets
and liabilities were 100% owned by DISH Network. Our historical financial
statements do not include the satellites, digital broadcast operations assets,
certain real estate and other assets and related liabilities that were
contributed to us by DISH Network in the Spin-off. Also, the financial
statements for the periods presented prior to the Spin-off do not include all of
the actual expenses that would have been incurred had EchoStar been a
stand-alone entity during the periods presented and do not reflect EchoStar's
combined results of operations, financial position and cash flows had we been a
stand-alone company during the periods presented. All significant intercompany
transactions and accounts have been eliminated.
Our historical statements of operations include expense allocations for certain
corporate functions historically provided to us by DISH Network, 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 DISH Network were allocated to us based on the relative percentages, as
compared to DISH Network's 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 entered into with DISH Network prior to the
Spin-off, DISH Network has continued to provide us with certain of these
services at prices agreed upon by DISH Network and us for a period of two years
from the date of the Spin-off at cost plus an additional amount that is equal to
a fixed percentage of DISH Network's cost, which is believed to be fair value
pricing.
Acquisition of Sling Media, Inc. Our financial statements reflect the financial
position, results of operations and cash flows of Sling Media, Inc. ("Sling
Media") from the acquisition date of October 19, 2007.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Explanation of Key Metrics and Other Items.
Equipment sales - DISH Network. "Equipment sales - DISH Network" primarily
includes sales of digital set-top boxes and related components to DISH Network,
including Slingboxes and related hardware products.
Equipment sales - other. "Equipment sales - other" primarily includes sales of
digital set-top boxes and related components to Bell TV and other international
customers, including sales of Slingboxes and related hardware products.
Satellite services, digital broadcast operations and other services - DISH
Network. "Satellite services, digital broadcast operations and other services -
DISH Network" primarily includes revenue associated with satellite and
transponder leasing, satellite uplinking/downlinking, signal processing,
conditional access management, telemetry, tracking and control, professional
services, facilities rental revenue and other services provided to DISH Network.
Satellite and other services - other. "Satellite and other services - other"
primarily includes revenue associated with satellite and transponder leasing,
satellite uplinking/downlinking and other services provided to customers other
than DISH Network.
Cost of sales - equipment. "Cost of sales - equipment" principally includes
costs associated with digital set-top boxes and related components sold to DISH
Network, Bell TV and other international customers, including costs associated
with Slingboxes and related hardware products.
Satellite services, digital broadcast operations and other cost of sales.
"Satellite services, digital broadcast operations and other cost of sales"
principally includes costs associated with satellite and transponder leasing,
satellite uplinking/downlinking, signal processing, conditional access
management, telemetry, tracking and control, professional services and
facilities rental revenue.
Research and development expenses. "Research and development expenses" consist
primarily of costs associated with the design and development of our digital
set-top boxes, Slingboxes and related components, including among other things,
salaries and consulting fees.
Selling, general and administrative expenses. "Selling, general and
administrative expenses" consists primarily of selling and marketing costs and
employee-related costs associated with administrative services (i.e.,
information systems, human resources and other services), including non-cash,
stock-based compensation expense. It also includes professional fees (i.e.,
. . .
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