Prospectus Filed Pursuant to Rule 424
Filed pursuant to Rule 424(b)(3)
Registration No. 333-179121
PROSPECTUS
HUGHES SATELLITE SYSTEMS CORPORATION
Offer to Exchange up to $1,100,000,000 aggregate principal amount of new
6½% Senior Secured Notes due 2019 and
up to $900,000,000 aggregate principal amount of new 7
5
/
8
% Senior Notes due 2021,
which have been registered under the Securities Act of 1933,
for any and all of its outstanding 6½% Senior Secured Notes due 2019 and 7
5
/
8
% Senior Notes
due 2021, respectively
Subject to the Terms and Conditions described in this Prospectus
The Exchange Offer will expire at 5:00 p.m., New York City time, on February 27, 2012,
unless extended
We are offering to exchange, upon the terms and subject to the conditions set forth in this prospectus and the accompanying letter of transmittal, our new 6½% Senior Secured Notes due 2019 for all of our outstanding 6½% Senior Secured Notes due 2019 and our new 7 5 / 8 % Senior Notes due 2021 for all of our outstanding 7 5 / 8 % Senior Notes due 2021. We refer to our outstanding 6½% Senior Secured Notes due 2019 as the “Old Secured Notes,” our outstanding 7 5 / 8 % Senior Notes due 2021 as the “Old Unsecured Notes” (together with the Old Secured Notes, the “Old Notes”), the new 6½% Senior Secured Notes due 2019 issued in this offer as the “Secured Notes” and the new 7 5 / 8 % Senior Notes due 2021 issued in this offer as the “Unsecured Notes” (together with the Secured Notes, the “Notes”). The Secured Notes and the Unsecured Notes are substantially identical to the Old Secured Notes and the Old Unsecured Notes, respectively, that we issued on June 1, 2011, except for certain transfer restrictions and registration rights provisions relating to the Old Notes. The CUSIP numbers for the Old Secured Notes are 268520 AA1 and U2792Q AA5. The CUSIP numbers for the Old Unsecured Notes are 268520 AC7 and U2792Q AB3.
MATERIAL TERMS OF THE EXCHANGE OFFER
· You will receive an equal principal amount of Secured Notes for all Old Secured Notes that you validly tender and do not validly withdraw, and an equal principal amount of Unsecured Notes for all Old Unsecured Notes that you validly tender and do not validly withdraw.
· The exchange should not be a taxable exchange for United States federal income tax purposes.
· There has been no public market for the Old Notes and we cannot assure you that any public market for the Notes will develop. We do not intend to list the Notes on any securities exchange or to arrange for them to be quoted on any automated quotation system.
· The terms of the Secured Notes and the Unsecured Notes are substantially identical to the Old Secured Notes and the Old Unsecured Notes, respectively, except for transfer restrictions and registration rights relating to the Old Notes.
· If you fail to tender your Old Notes for the Notes, you will continue to hold unregistered securities and it may be difficult for you to transfer them.
Investing in the Notes involves risks. Consider carefully the “Risk Factors” beginning on page 20 of this prospectus.
We are not making this exchange offer in any state where it is not permitted.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is January 27, 2012.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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F-31 |
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F-67 |
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F-119 |
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus is an offer to exchange only the Notes offered by this prospectus and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of its date.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 throughout this prospectus, including the documents incorporated herein by reference. Whenever you read a statement that is not simply a statement of historical fact (such as when we describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or “anticipate” will occur, and other similar statements), you must remember that our expectations may not be achieved, even though we believe they are reasonable. We do not guarantee that any future transactions or events described in this prospectus will happen as described or that they will happen at all. You should read this prospectus in its entirety and with the understanding that actual future results may be materially different from what we expect. Whether actual events or results will conform to our expectations and predictions is subject to a number of risks and uncertainties. The risks and uncertainties include, but are not limited to, the following:
General Risks Affecting Our Business
· One of our principal operating subsidiaries, EchoStar Satellite Services L.L.C. (“ESS”), currently derives a substantial portion of its revenue from its two primary customers, DISH Network Corporation (“DISH Network”) and Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”). The loss of, or a significant reduction in orders from or a decrease in selling price of transponder leasing and/or providing digital broadcast operations to DISH Network or Dish Mexico would also significantly reduce our revenue and adversely impact our results of operations derived from ESS.
· Economic weakness, including high unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.
· If we are unable to properly respond to technological changes, our business could be significantly harmed.
· The failure to adequately anticipate the need for transponder capacity or the inability to obtain transponder capacity could harm our results of operations.
· We currently have unused satellite capacity, and our results of operations may be materially adversely affected if we are not able to lease more of this capacity to third parties.
· Certain of our sales to DISH Network could be terminated or substantially curtailed on short notice, which would have a detrimental effect on us.
· We currently face competition from established competitors in the satellite service business and may face competition from others in the future.
· The enterprise network communications industry is highly competitive. We may be unsuccessful in competing effectively against other terrestrial and satellite-based network providers in our enterprise groups.
· The consumer network communications market is highly competitive. We may be unsuccessful in competing effectively against DSL and cable service providers and other satellite broadband providers in the consumer market. Following the commencement of service on ViaSat-1 by WildBlue and prior to the commencement of service on Jupiter 1, we will be at a competitive disadvantage to WildBlue.
· If we are unable to develop, introduce and market new products, applications and services on a cost-effective and timely basis, or if we are unable to sell our new products and services to existing and new customers, our business could be adversely affected.
· Any failure or inadequacy of our information technology infrastructure or those of our third-party service providers could harm our business.
· We are dependent upon third-party providers for components, manufacturing outsourcing, installation, and customer support service, and our results of operations may be materially adversely affected if any of these third-party providers fail to appropriately deliver the contracted goods or services.
· 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.
· If our products contain defects, we could be subject to significant costs to correct such defects and our product and network service contracts could be delayed or cancelled, which could adversely affect our revenues.
· We may be unable to raise additional capital in the future to, among other things, continue investing in our business, construct and launch new satellites and pursue acquisitions and other strategic transactions.
· We may experience significant financial losses on our existing investments.
· Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others. The loss of or infringement of our intellectual property rights could have a significant adverse impact on our business.
· From time to time, we are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property.
· We are a wholly owned subsidiary of EchoStar Corporation (“EchoStar”) and do not operate as an independent company.
· EchoStar has not been an independent company for a significant amount of time and it may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company.
· We rely on key personnel and the loss of their services may negatively affect our businesses.
· Although we expect that the Acquisition (as defined below) will benefit us, those expected benefits may not occur because of the complexity of integration and other challenges.
· We may pursue acquisitions and other strategic transactions to complement or expand our business, which may not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.
· The pro forma financial information is presented for illustrative purposes only and may not be an indication of our financial condition or results of operations in the future.
Risks Related to Our Satellites
· Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.
· Our satellites have minimum design lives ranging from 12 to 15 years, but could fail or suffer reduced capacity before then.
· We generally do not have commercial insurance coverage on the satellites we use and could face significant impairment charges if one of our uninsured satellites fails.
· Our satellites under construction are subject to risks related to construction and launch that could limit our ability to utilize these satellites.
Risks Related to the Regulation of Our Business
· Our business is subject to risks of adverse government regulation.
· Our use of satellites is dependent on satellite coordination agreements, which may be difficult to obtain.
· Our business depends on Federal Communications Commission (“FCC”) licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted.
· We may face difficulties in accurately assessing and collecting contributions towards the Universal Service Fund.
· Our foreign operations expose us to regulatory risks and restrictions not present in our domestic operations.
· We may not be aware of certain foreign government laws or regulations or changes to them which could have a significant adverse impact on our business.
· Our international sales and operations require access to international markets and are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.
Risks Relating to Our Relationship with DISH Network
· We have potential conflicts of interest with DISH Network due to our common ownership and management.
· We may not be able to resolve any potential conflicts of interest with DISH Network and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.
Risks Related to the Notes and the Exchange Offer
· We have substantial debt outstanding and may incur additional debt.
· We may be required to raise and refinance indebtedness during unfavorable market conditions.
· We depend upon our subsidiaries’ earnings to make payments on our indebtedness.
· The guarantees of the Notes by our subsidiaries may be subject to challenge.
· Certain subsidiaries are not included as guarantor subsidiaries.
· The covenants in the indentures will not necessarily restrict our ability to take actions that may impair our ability to repay the Notes.
· We may be unable to repay or repurchase the Notes upon a change of control.
· There may be no public market for the Notes.
Additional Risks Related to the Secured Notes
· The Collateral (as defined below) securing the Secured Notes is subject to priority liens held by holders of indebtedness secured by priority liens and holders of other indebtedness secured by permitted prior liens. If there is a default, such collateral may not be sufficient to repay both the holders of such priority liens and the holders of the Secured Notes.
· State law may limit the ability of the Collateral Agent and the noteholders to foreclose on the real property and improvements included in the Collateral.
· We may not be able to grant you a collateral interest in our leased satellites.
· The value of the Collateral securing the Secured Notes may not be sufficient to satisfy our obligations under the Secured Notes or to secure post-petition interest under U.S. federal bankruptcy law.
· The ability of the Trustee to foreclose on certain of the collateral securing the Secured Notes may be limited by U.S. law.
· The pledge of the capital stock, other securities and similar items of our subsidiaries that secure the Secured Notes will automatically be released from the lien on them and no longer constitute Collateral for so long as the pledge of such capital stock or such other securities would require the filing of separate financial statements with the SEC for that subsidiary.
· Foreclosing on any of the Collateral located outside the United States may be difficult due to the laws of certain jurisdictions.
· The Collateral securing the Secured Notes may be diluted under certain circumstances.
· The rights of holders of the Secured Notes to the Collateral securing the Secured Notes may be materially limited by any intercreditor agreement to the extent we have incurred or will incur any priority lien debt.
· There are circumstances other than repayment or discharge of the Secured Notes under which the Collateral securing the Secured Notes will be released automatically, without your consent or the consent of the Collateral Agent.
· The rights of holders of the Secured Notes in the Collateral may be adversely affected by the failure to perfect security interests in the Collateral and other issues generally associated with the realization of security interests in the Collateral.
· The Collateral is subject to casualty risks.
· Any future note guarantees or additional liens on the Collateral provided after the Secured Notes are issued could also be avoided by a trustee in bankruptcy.
· U.S. federal bankruptcy laws may significantly impair noteholders’ ability to realize value from the Collateral.
Additional Risks Related to the Unsecured Notes
· The Unsecured Notes are unsecured, and the Unsecured Notes will be effectively subordinated to any existing and future secured debt.
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.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements. All forward-looking statements contained in
this prospectus only speak as of the date of this document. We assume no responsibility for updating forward-looking information contained herein.
Should one or more of the risks or uncertainties described in this prospectus take place, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
You should read carefully the section of this prospectus under the heading “Risk Factors” beginning on page 20.
In this prospectus, the words “Company,” “we,” “our” and “us” refer to Hughes Satellite Systems Corporation, formerly known as EH Holding Corporation (“HSS”) and its subsidiaries, unless otherwise stated or the context otherwise requires. “ESS” refers to EchoStar Satellite Services L.L.C., our wholly owned subsidiary, and its subsidiaries. “Hughes Communications” refers to Hughes Communications, Inc. and its subsidiaries. “EchoStar” refers to EchoStar Corporation, our ultimate parent company, and its subsidiaries, including us. The “Acquisition” refers to the completed merger of a wholly owned subsidiary of HSS with and into Hughes Communications, Inc. on June 8, 2011, following which Hughes Communications, Inc. became a direct wholly owned subsidiary of HSS. The use of the phrase “the Acquisition and related financing transactions” refers to the Acquisition, the other transactions contemplated by the merger agreement governing the Acquisition (referred to as the “Merger Agreement”), and the issuance of the Old Notes. Historical financial information of HSS presented in this prospectus includes both “combined” historical financial statements and “consolidated” historical financial statements, both of which we refer to as “consolidated” for purposes of this prospectus. This summary highlights selected information contained in greater detail elsewhere in this prospectus herein. This summary may not contain all of the information that you should consider before investing in the Notes. You should carefully read the entire prospectus, including the sections under the headings “Risk Factors” and “Disclosure Regarding Forward-Looking Statements.”
Background
Effective January 1, 2008, EchoStar Corporation became the holding company of certain businesses, infrastructure and other assets that had been part of DISH Network, including certain satellites, uplink and satellite transmission assets and other assets and related liabilities, as a result of the completion of the related distribution (the “Spin-off”) by DISH Network. Following the Spin-off, EchoStar has been able to pursue strategic satellite transactions, focus on the commercialization of previously under-utilized satellite capacity, expand the sales of set top boxes and pursue international opportunities.
Since the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies, and neither entity has any ownership interest in the other. However, a substantial majority of the voting power of the shares of EchoStar and DISH Network is owned beneficially by Charles W. Ergen, our and EchoStar’s Chairman, or by certain trusts established by Mr. Ergen for the benefit of his family. EchoStar and DISH Network share significant intercompany agreements such as receiver, broadcast and satellite capacity contracts.
On June 8, 2011, EchoStar completed its previously announced acquisition of Hughes Communications, pursuant to which a wholly owned subsidiary of EchoStar Corporation merged with and into Hughes Communications, Inc., with Hughes Communications, Inc. becoming an indirect wholly owned subsidiary of EchoStar Corporation and a direct wholly owned subsidiary of HSS. The cash portion of the Acquisition, related costs and repayment of certain indebtedness of Hughes Communications, Inc., including of its wholly owned subsidiary Hughes Network Systems, LLC (“HNS”), was financed with a combination of the net proceeds from the offering of the Old Notes and existing cash balances and marketable securities at EchoStar Corporation and Hughes Communications.
Hughes Satellite Systems Corporation (Issuer of the Notes)
HSS is a holding company wholly owned by EchoStar Corporation that was formed in March 2011 as EH Holding Corporation to facilitate the Acquisition and related financing transactions. EH Holding Corporation was renamed Hughes Satellite Systems Corporation in October 2011. The principal operating subsidiaries of HSS include ESS and Hughes Communications. HSS is a leading provider of diverse satellite services, including broadcast satellites services (“BSS”), fixed satellite services (“FSS”), consumer satellite broadband services and enterprise satellite broadband services.
We rank among the leading fixed global satellite service providers in terms of revenues and satellite fleet size. We are the largest provider of satellite Internet broadband in North America to the consumer market in terms of the number of subscribers and a global leader in providing satellite network services and systems to the enterprise market. We have a satellite fleet of 11 owned and leased satellites that have Ka-band and Ku-band transponder
capacity, enabling us to be a leader in the consumer and enterprise markets. We serve broadband consumers, small and medium sized businesses, large enterprises, governments, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers around the world.
For the nine months ended September 30, 2011, our revenues, net loss and EBITDA were $576 million, $8 million and $203 million, respectively. As of September 30, 2011, we had contracted revenue backlog attributable to satellites currently in orbit of approximately $905 million and contracted backlog attributable to satellites under construction, including QuetzSat-1, of $1.305 billion, and we had a total non-consumer revenue backlog (excluding backlog of satellites under construction) of $818 million, each providing significant visibility into future revenue, EBITDA and cash flow.
Our Satellite Fleet
We have a satellite fleet of 11 owned and leased satellites that have Ka-band and Ku-band transponder capacity and that represent approximately $741 billion in net book value as of September 30, 2011. We cover the North American market with our owned satellite fleet and North American and international markets with our significant leased Ku-band capacity. Our satellite fleet has substantial average life remaining, which will increase materially following the anticipated launches of EchoStar XVI and Jupiter 1. The table below does not include any of our individual satellite transponder leases.
|
Satellites (1) |
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Launch Date |
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Degree Orbital
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Initial Useful
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Owned: |
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EchoStar III (2) |
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October 1997 |
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61.5 |
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12 |
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EchoStar VI |
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July 2000 |
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77 |
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12 |
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EchoStar VIII |
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August 2002 |
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77 |
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12 |
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EchoStar IX |
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August 2003 |
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121 |
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12 |
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EchoStar XII |
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July 2003 |
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61.5 |
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10 |
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SPACEWAY 3 |
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August 2007 |
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94.95 |
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15 |
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Leased from DISH Network: |
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EchoStar I |
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December 1995 |
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77 |
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12 |
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Leased from Other Third Parties: |
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AMC-15 (3) |
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December 2004 |
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105 |
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10 |
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AMC-16 (3) |
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January 2005 |
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85 |
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10 |
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Nimiq 5 (3) |
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September 2009 |
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72.7 |
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15 |
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QuetzSat-1 (3) |
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September 2011 |
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67.1 |
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10 |
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Under Construction: |
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EchoStar XVI (owned) |
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Expected in 2012 |
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61.5 |
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15 |
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Jupiter 1 (owned) |
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Expected in 2012 |
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107 |
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15 |
|
(1) EchoStar IV, which was launched in May 1998 and operated at the 77 degree west longitude orbital location, is fully depreciated and was retired from service in the third quarter of 2011.
(2) Fully depreciated.
(3) These satellites are accounted for as capital leases.
EchoStar Corporate Structure
The diagram below depicts, in simplified form, the corporate structure of EchoStar.
Neither EchoStar Corporation nor any of its subsidiaries (other than HSS and its domestic subsidiaries that are Restricted Subsidiaries) will have any obligations or liability with respect to the Notes at any time.
EchoStar Satellite Services
ESS, a principal subsidiary of ours, uses its 10 owned and leased in-orbit satellites and related FCC licenses to provide service capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, U.S. government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers. ESS also continues to pursue expanding its business offerings by providing value added services such as telemetry, tracking and control services to third parties.
ESS’ transponder capacity is currently used by its customers for a variety of applications:
· Direct To Home (“DTH”) Services. ESS provides satellite transponder capacity to satellite TV providers, broadcasters and programmers that use its satellites to deliver programming. ESS’ satellites are also used for the transmission of live sporting events, Internet, disaster recovery, and satellite news gathering services.
· Government Services. ESS provides satellite services and technical services to U.S. government service providers and directly to some state agencies. ESS believes its commercial satellites may be used for government services such as homeland security, emergency response, continuing education, distance learning, and training.
· Network Services. ESS provides satellite transponder capacity and provides terrestrial network services to corporations. These networks are dedicated private networks that allow delivery of video and data services for corporate communications. ESS’ satellites can be used for point-to-point or point-to-multi-point communications.
ESS’ primary customer is DISH Network, the nation’s third largest pay-TV provider, with more than 13.9 million customers across the United States as of September 30, 2011. DISH Network provides significant coverage throughout the United States, including local channel coverage in standard definition to markets covering 100% of U.S. TV households and local HD channel coverage to markets representing approximately 94% of U.S. TV households as of December 31, 2010. In 2010, DISH Network represented approximately 80% of ESS revenue.
Hughes Communications
Hughes Communications, our other principal subsidiary, is a leading provider of broadband satellite network services and systems to the enterprise market and is the largest satellite Internet broadband access provider to North American consumers in terms of the number of subscribers. In addition, Hughes Communications provides managed services to large enterprises that combine the use of satellite and terrestrial alternatives, thus offering solutions that are tailored and cost effective for specific customers. Hughes Communications also provides networking systems solutions to customers for mobile satellite and wireless backhaul systems.
Since Hughes Communications’ deployment of the first very small aperture terminal (“VSAT”) network in 1983, the company has been a leader in commercial digital satellite communications and has achieved extensive depth and experience in the development, manufacturing and operation of satellite-based data, voice and video networks.
Hughes Communications has three main businesses: (i) North American broadband; (ii) international broadband; and (iii) telecom systems.
North American Broadband. Hughes Communications delivers broadband Internet service to more than approximately 626,000 consumers as of September 30, 2011 and provides satellite, wire line and wireless communication network products and services to enterprises in North America. To support the growth of its North American enterprise and consumer business, Hughes Communications launched its SPACEWAY™ 3 satellite (“SPACEWAY 3”) in August 2007. SPACEWAY 3 was designed and developed as the next generation Ka-band broadband satellite system with a unique architecture for broadband data communications. Because SPACEWAY 3 supports higher data rates and offers direct user-to-user network connectivity, Hughes Communications is able to offer its North American enterprise and consumer customers faster communication rates, reduce its operating costs substantially through the reduction of third-party transponder capacity expenses as the company utilizes the additional capacity of SPACEWAY 3, and as a result, significantly improve its margins. In addition, in June 2009, Hughes Communications entered into an agreement with Space Systems/Loral, Inc. for the design and manufacture of a next-generation, high throughput geostationary satellite (“Jupiter 1”). Jupiter 1 will employ a multi-spot beam, bent pipe Ka-band architecture and is expected to provide additional capacity of approximately 100 gigabits per second for satellite broadband Internet service to the consumer market in North America. Hughes Communications anticipates launching Jupiter 1 in the second quarter of 2012.
International Broadband. Hughes Communications provides satellite communication networks and services to customers worldwide. The international broadband business suite of products and services are particularly well-suited to many international markets because of the geographic dispersion of customers as well as the lack of local infrastructure. Hughes Communications also provides hardware and shared-hub services, modeled in part on its North American enterprise business. Shared-hub services are available both via Hughes Communications’ own hubs covering Europe, Brazil, Northern Africa, India and the Middle East and through third-party and joint venture operations. Hughes Communications leases transponder capacity on satellites from multiple providers for its enterprise customers. International customers span a wide variety of industries and include state-owned operators as well as private businesses.
Telecom Systems. The telecom systems business consists of the Mobile Satellite Systems group and the Terrestrial Microwave group. This ancillary business line gives Hughes Communications the opportunity to exploit its extensive technological capabilities by developing and supplying turnkey technologies in the L and S band. This business has the technology, engineering talent and manufacturing and customer support capability to offer design and equipment of mobile satellite systems and terrestrial microwave networking equipment for point-to-multipoint and cellular backhaul solutions. The telecom systems business customers include leading mobile satellite operators, telecom and cellular mobile operators and aeronautical and maritime customers (including airlines, workboats and offshore oil rigs).
Our Competitive Strengths
Leading satellite services provider with key assets. We have significant assets with orbital slots in key locations serving leading global markets, and a long history and expertise in providing satellite services to consumers and enterprises.
Leading satellite Internet access provider to underserved rural consumer markets in North America. We are one of the few satellite broadband service providers to address underserved markets that are less likely to receive terrestrial broadband service. We believe there is significant growth opportunity in these markets.
Strong and predictable cash flow driven by long-term contracts with high renewal rates. Both ESS and Hughes Communications have been able to generate strong and predictable cash flow due to a significant contracted revenue backlog from long-term customer contracts, high customer retention, pre-contracted service on expansion satellites, the relatively fixed-cost nature of the business and disciplined expense management. Enterprise customers include blue chip companies and leaders in the retail, energy, financial, hospitality and services industries, with a high historical rate of renewals.
New satellite launches expected to provide significant additional capacity. During 2008, we entered into a ten-year satellite service agreement with SES Latin America S.A. (“SES”) to lease all of the capacity on the QuetzSat-1 satellite, which was launched on September 29, 2011. In addition, we have two satellites under construction that are expected to be launched in the near term. Jupiter 1, our next-generation high-throughput satellite, is expected to launch in the second quarter of 2012. Jupiter 1 is expected to provide approximately 100 gigabits per second of data capacity for between 1.5 and 2.0 million additional broadband Internet subscribers. EchoStar XVI is expected to launch in the second half of 2012. DISH Network has agreed to lease all of the capacity on this satellite from us for a portion of its useful life.
Global operations providing revenue diversification and economies of scale . We benefit from a geographically diverse revenue stream that consists of a mix of services and hardware revenues. In 2010, on a pro forma basis after giving effect to the Acquisition, HSS derived approximately 80.6% of global revenues from providing services and 19.4% from hardware revenues and enterprise equipment leases.
Our Strategies
Leverage our available satellite capacity . We benefit from available satellite capacity. We believe market opportunities exist to lease our capacity to a broader customer base, including providers of pay-TV service, satellite-delivered broadband, corporate communications and government services. We plan to use this capacity to seek cross selling opportunities, including bundling wholesale broadband services from Hughes Communications together with video DTH services under a single package.
Capitalize on demand for broadband services . We intend to capitalize on the increasing demand for satellite-delivered broadband services and enterprise solutions by utilizing our industry expertise, technology leadership and high level of reliable and quality service to continue subscriber growth both among consumers and enterprise customers.
Develop improved technologies . We believe HSS will be one of the prime beneficiaries of the combined engineering power of EchoStar and Hughes Communications. This will allow us to continue to develop and deploy cutting edge technology and maintain a leading technological position in our industry.
Exploit international opportunities . We believe that international DTH satellite and broadband services are particularly well-suited for countries without extensive telecommunications and cable infrastructure, and we intend to continue to seek new investments and customer relationships with international DTH satellite and broadband service providers. Our available satellite capacity provides us, in certain cases, with the ability to initiate new services quickly, which gives us a competitive advantage.
Pursue strategic partnerships, joint ventures and acquisitions . We intend to selectively pursue partnerships, joint ventures and strategic acquisition opportunities, both domestically and internationally, that we believe may allow us to increase our existing market share, expand into new markets, broaden our portfolio of products and intellectual property, and strengthen our relationships with our customers.
HSS Corporate Structure
The diagram below depicts, in simplified form, our corporate and financing structure.
(1) HSS is 100% owned by EchoStar Corporation. Neither EchoStar Corporation nor any of its subsidiaries (including those forming part of EchoStar’s digital set-top box business, but excluding those identified above) are guarantors; nor do any of their assets or share interests form any part of the collateral securing the Old Secured Notes and the Secured Notes.
(2) Each of EchoStar Satellite Services L.L.C. and Hughes Communications, Inc. has subsidiaries that are guarantors and subsidiaries that are non-guarantors.
(3) Our non-guarantor subsidiaries, which are primarily comprised of our foreign subsidiaries, accounted for approximately $164 million, or 12.6%, of our revenues for the year ended December 31, 2010 on a pro forma basis after giving effect to the Acquisition and related financing transactions, and approximately $126 million, or 3.0% of our consolidated total assets, and approximately $67 million, or 2.2% of our liabilities, in each case as of September 30, 2011.
Our principal executive offices are located at 100 Inverness Terrace East, Englewood, Colorado 80112, and our telephone number is (303) 706-4000.
The Exchange Offer
The exchange offer relates to the exchange of up to $1,100,000,000 aggregate principal amount of outstanding 6½% Senior Secured Notes due 2019 and up to $900,000,000 aggregate principal amount of outstanding 7 5 / 8 % Senior Notes due 2021, for an equal aggregate principal amount of the Secured Notes and the Unsecured Notes, respectively. The form and terms of the Secured Notes and the Unsecured Notes are identical in all material respects to the form and terms of the corresponding outstanding Old Secured Notes and Old Unsecured Notes, respectively, except that the Notes will be registered under the Securities Act, and therefore they will not bear legends restricting their transfer.
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The Exchange Offer |
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We are offering to exchange $1,000 principal amount of our Secured Notes that we have registered under the Securities Act for each $1,000 principal amount of outstanding Old Secured Notes, and $1,000 principal amount of our Unsecured Notes that we have registered under the Securities Act for each $1,000 principal amount of outstanding Old Unsecured Notes. Old Notes tendered in the exchange offer must be in minimum denominations of $2,000 principal amount and any integral multiples of $1,000 in excess thereof. In order for us to exchange your Old Notes, you must validly tender them to us and we must accept them. We will exchange all outstanding Old Notes that are validly tendered and not validly withdrawn. |
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Resale of the Notes |
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Based on interpretations by the staff of the SEC set forth in no-action letters issued to other parties, we believe that you may offer for resale, resell and otherwise transfer your Notes without compliance with the registration and prospectus delivery provisions of the Securities Act if you are not our affiliate and you acquire the Notes issued in the exchange offer in the ordinary course.
You must also represent to us that you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in the distribution of the Notes we issue to you in the exchange offer.
Each broker-dealer that receives Notes in the exchange offer for its own account in exchange for Old Notes that it acquired as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the Notes issued in the exchange offer. You may not participate in the exchange offer if you are a broker-dealer who purchased such outstanding Old Notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act. |
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Expiration date |
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The exchange offer will expire at 5:00 p.m., New York City time, on February 27, 2012, unless we decide to extend the expiration date. We may extend the expiration date for any reason. If we fail to consummate the exchange offer, you will have certain rights against us under the registration rights agreement we entered into as part of the offering of the Old Notes. |
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Special procedures for beneficial owners |
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If you are the beneficial owner of Old Notes and you registered your Old Notes in the name of a broker or other institution, and you wish to participate in the exchange, you should promptly contact the person in whose name you registered your Old Notes and instruct that person to tender the Old Notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding Old Notes, either make appropriate |
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arrangements to register ownership of the outstanding Old Notes in your name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. |
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Guaranteed delivery procedures |
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If you wish to tender your Old Notes and time will not permit your required documents to reach the exchange agent by the expiration date, or you cannot complete the procedure for book-entry transfer on time or you cannot deliver your certificates for registered Old Notes on time, you may tender your Old Notes pursuant to the procedures described in this prospectus under the heading “The Exchange Offer—How to use the guaranteed delivery procedures if you will not have enough time to send all documents to us.” |
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Withdrawal rights |
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You may withdraw the tender of your Old Notes at any time prior to the expiration date. |
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Material United States federal income tax consequences |
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An exchange of Old Notes for Notes should not be subject to United States federal income tax. See “Material United States Federal Income Tax Considerations.” |
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Use of proceeds |
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We will not receive any proceeds from the issuance of Notes pursuant to the exchange offer. Old Notes that are validly tendered and exchanged will be retired and canceled. We will pay all expenses incident to the exchange offer. |
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Exchange Agent |
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You can reach the Exchange Agent, Wells Fargo Bank, National Association at MAC - N9303-121, Corporate Trust Operations, P.O. Box 1517, Minneapolis, Minnesota 55480-1517. For more information with respect to the exchange offer, you may call the Exchange Agent at (800) 344-5128; the fax number for the Exchange Agent is (612) 667-6282. |
The Notes
The exchange offer applies to $1,100,000,000 aggregate principal amount of 6½% Senior Secured Notes due 2019 and $900,000,000 aggregate principal amount of 7 5 / 8 % Senior Notes due 2021. The form and terms of the Secured Notes and the Unsecured Notes are identical in all material respects to the form and terms of the corresponding outstanding Old Secured Notes and Old Unsecured Notes, respectively, except that the Notes will be registered under the Securities Act, and therefore they will not bear legends restricting their transfer. The Notes will be entitled to the benefits of the respective indentures governing the Notes. See “Description of the Secured Notes” and “Description of the Unsecured Notes.” As used in this summary of the Notes, “subsidiaries” refers to our direct and indirect subsidiaries.
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Issuer |
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Hughes Satellite Systems Corporation. |
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Notes Offered |
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$1,100,000,000 aggregate principal amount of 6½% Senior Secured Notes due 2019; and $900,000,000 aggregate principal amount of 7 5 / 8 % Senior Notes due 2021. |
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Maturity |
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Secured Notes: June 15, 2019 Unsecured Notes: June 15, 2021 |
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Interest Payment Dates |
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June 15 and December 15 of each year, starting on June 15, 2012 |
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Security |
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The Secured Notes will be secured by first-priority Liens on substantially all existing and future tangible and intangible assets of HSS and the guarantors subject to certain excluded assets and permitted liens (the “Collateral”). Certain other pari passu lien obligations incurred after issuance may share in the Collateral equally and ratably with the Secured Notes and the guarantees thereof.
For more information, see “Description of the Secured Notes — Security.” |
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Ranking |
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The Notes and the guarantees thereof are HSS’s senior indebtedness, and rank pari passu in right of payment with all of its existing and future senior debt.
Indebtedness under the Secured Notes and all related guarantees are secured by the Collateral (as defined herein) and will rank effectively senior to any of HSS’s future senior unsecured debt to the extent of the Collateral securing the Secured Notes.
The Secured Notes will rank effectively junior to HSS’s obligations that are secured by assets that do not constitute Collateral. As of September 30, 2011, the Old Secured Notes ranked effectively junior to $393 million of debt secured by assets not constituting Collateral or assets that secure such other debt on a higher priority basis.
Indebtedness under the Unsecured Notes will be unsecured senior obligations of the issuer and will rank effectively junior to HSS’s existing and future senior secured indebtedness to the extent of the collateral securing such indebtedness. As of |
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September 30, 2011, the Old Unsecured Notes ranked effectively junior to $1.5 billion of debt of which $1.1 billion was attributed to the Old Secured Notes. |
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Guarantees |
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The Notes will be fully and unconditionally guaranteed, on a joint and several basis, by each of HSS’s domestic subsidiaries, including Hughes Communications and its domestic subsidiaries, other than immaterial subsidiaries, that are Restricted Subsidiaries (as defined herein), and by any other parties that become guarantors of the Notes after the issue date.
Our non-guarantor subsidiaries accounted for approximately $164 million, or 12.6%, of our revenues for the year ended December 31, 2010 on a pro forma basis after giving effect to the Acquisition and related financing transactions, and approximately $126 million, or 3.0% of our consolidated total assets, and approximately $67 million, or 2.2% of our liabilities, in each case as of September 30, 2011.
Neither EchoStar Corporation nor any of its subsidiaries (other than HSS and its domestic subsidiaries that are Restricted Subsidiaries) will have any obligations or liability with respect to the Notes. |
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Optional Redemption |
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We may redeem the Secured Notes, in whole or in part, at any time at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued interest and unpaid interest, if any. In addition, we may redeem up to 10% of the outstanding Secured Notes per year at any time prior to June 15, 2015 at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. For more information, see “Description of the Secured Notes — Optional Redemption.”
We may redeem the Unsecured Notes, in whole or in part, at any time at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued interest and unpaid interest, if any. For more information, see “Description of the Unsecured Notes — Optional Redemption.” |
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Optional Redemption After Equity Offering |
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At any time (which may be more than once) before June 15, 2014, we may redeem up to 35% of the aggregate principal amount of Notes issued with the net proceeds that we raise in one or more equity offerings, as long as at least 65% of the aggregate principal amount of Notes issued remains outstanding afterwards. |
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Change of Control |
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If a Change of Control occurs, as that term is defined in “Description of the Secured Notes — Certain Definitions” and “Description of the Unsecured Notes — Certain Definitions,” holders of Notes will have the right, subject to certain conditions, to require us to repurchase their Notes at a purchase price equal to 101% of the aggregate principal amount of Notes repurchased plus accrued and unpaid |
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interest, if any, to the date of repurchase. See “Description of the Secured Notes — Change of Control Offer” and “Description of the Unsecured Notes — Change of Control Offer.” |
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Certain Covenants
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The indentures governing the Notes, among other things, limit our ability and the ability of our restricted subsidiaries to:
· pay dividends or distributions, repurchase equity, prepay subordinated debt or make certain investments;
· incur additional debt or issue certain disqualified stock and preferred stock;
· incur liens on assets;
· merge or consolidate with another company or sell all or substantially all assets;
· enter into transactions with affiliates; and
· allow to exist certain restrictions on the ability of the guarantors to pay dividends or make other payments to us.
These covenants are subject to important exceptions and qualifications as described under “Description of the Secured Notes — Certain Covenants” and “Description of the Unsecured Notes — Certain Covenants.” |
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Registration Rights |
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Pursuant to a registration rights agreement between us and the initial purchaser of the Old Notes, we agreed to use our reasonable best efforts to cause an exchange offer registration statement to be declared effective within 365 days after June 8, 2011. We intend the registration statement relating to this prospectus to satisfy these obligations. In certain circumstances, we will be required to file a shelf registration statement to cover resales of the Notes. If we do not comply with our obligations under the registration rights agreement, we will be required to pay additional interest on the Notes. See “Registration Rights.” |
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Risk Factors |
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Investing in the Notes involves substantial risks. You should carefully consider all the information contained in this prospectus prior to investing in the Notes. In particular, we urge you to carefully consider the information set forth in the section under the heading “Risk Factors” for a description of certain risks you should consider before investing in the Notes. |
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Indentures |
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The Secured Notes will be issued under an indenture, dated as of June 1, 2011, with Wells Fargo Bank, National Association, as trustee and collateral agent, as supplemented by a supplemental indenture, dated as of June 8, 2011. The rights of holders of the Secured Notes, including rights with |
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respect to default, waivers and amendments will be governed by the indenture, as supplemented.
The Unsecured Notes will be issued under an indenture, dated as of June 1, 2011, with Wells Fargo Bank, National Association, as trustee, as supplemented by a supplemental indenture, dated as of June 8, 2011. The rights of holders of the Unsecured Notes, including rights with respect to default, waivers and amendments will be governed by the indenture, as supplemented. |
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Governing Law |
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The indentures, as supplemented, are, and the Notes will be, governed by the laws of the State of New York. |
Unaudited Summary Pro Forma Condensed Combined Financial Data
The unaudited summary pro forma condensed combined statement of operations data have been prepared to give effect to the Acquisition and related financing transactions as if they had been completed on January 1, 2010.
The unaudited summary pro forma condensed combined financial data are for informational purposes, should not be considered indicative of actual results that would have been achieved had the Acquisition and related financing transactions been consummated on the date or for the periods indicated and do not purport to indicate combined statement of operations data or other financial data for any future period.
You should read the data below in conjunction with the information contained in “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Information,” the historical consolidated financial statements of HSS and related notes, and the historical consolidated financial statements of Hughes Communications and related notes appearing elsewhere in this prospectus.
HSS
Unaudited Pro Forma Condensed Combined Statements of Operations
(In thousands)
|
|
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For the |
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For the |
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Nine Months Ended |
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Year Ended |
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September 30, 2011 |
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December 31, 2010 |
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||
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Revenue: |
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|
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||
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Services and other revenue |
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$ |
715,713 |
|
$ |
839,421 |
|
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Services and other revenue — DISH Network |
|
160,457 |
|
208,364 |
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||
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Equipment revenue |
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164,795 |
|
252,003 |
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Equipment revenue — DISH Network |
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97 |
|
— |
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||
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Total revenue |
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1,041,062 |
|
1,299,788 |
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||
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|
|
|
|
|
|
||
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Costs and Expenses: (exclusive of depreciation shown separately below): |
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|
|
|
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Cost of sales - services and others |
|
369,243 |
|
457,583 |
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||
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Cost of sales — equipment |
|
148,137 |
|
218,410 |
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||
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Selling, general and administrative expenses |
|
191,744 |
|
219,883 |
|
||
|
Depreciation and amortization |
|
231,413 |
|
337,352 |
|
||
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Total costs and expenses |
|
940,537 |
|
1,233,228 |
|
||
|
|
|
|
|
|
|
||
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Operating income (loss) |
|
100,525 |
|
66,560 |
|
||
|
|
|
|
|
|
|
||
|
Other Income (Expense): |
|
|
|
|
|
||
|
Interest income |
|
2,489 |
|
2,069 |
|
||
|
Interest expense, net of amounts capitalized |
|
(117,154 |
) |
(163,175 |
) |
||
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Other, net |
|
9,455 |
|
1,663 |
|
||
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Total other income (expense) |
|
(105,210 |
) |
(159,443 |
) |
||
|
Income (loss) before income taxes |
|
(4,685 |
) |
(92,883 |
) |
||
|
Income tax (provision) benefit, net |
|
(1,618 |
) |
39,148 |
|
||
|
Net income (loss) |
|
(6,303 |
) |
(53,735 |
) |
||
|
Less: Net income (loss) attributable to noncontrolling interests |
|
103 |
|
193 |
|
||
|
Net income (loss) attributable to the HSS common shareholder |
|
$ |
(6,406 |
) |
$ |
(53,928 |
) |
Summary Historical Consolidated Financial Data
The following tables present the summary historical consolidated financial data of HSS and its subsidiaries at the dates and for the periods indicated. We derived the following summary historical consolidated financial data for the years ended December 31, 2010, 2009 and 2008 and as of December 31, 2010 and 2009 from the audited consolidated financial statements of HSS and its subsidiaries included elsewhere in this prospectus. We derived the following summary historical consolidated financial data for the nine months ended September 30, 2011 and 2010 and as of September 30, 2011 from the unaudited consolidated financial statements of HSS and its subsidiaries included elsewhere in this prospectus. The unaudited condensed consolidated financial statements of HSS were prepared on a basis consistent with its audited consolidated financial statements. In the opinion of HSS’ management, the unaudited condensed consolidated financial statements include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the results for those periods. Results for the nine months ended September 30, 2011 also include the operating results of Hughes Communications subsequent to June 8, 2011, the date of completion of the Acquisition, and are not necessarily indicative of the results that may be expected for the full year.
You should read this data in conjunction with, and it is qualified by reference to, the sections entitled “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
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For the Years
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For the Nine Months
|
|
|||||||||||
|
|
|
2010 |
|
2009 |
|
2008 |
|
2011 |
|
2010 |
|
|||||
|
|
|
(In thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Services and other revenue |
|
$ |
52,643 |
|
$ |
40,284 |
|
$ |
30,014 |
|
$ |
331,775 |
|
$ |
38,571 |
|
|
Services and other revenue — DISH Network |
|
208,364 |
|
131,111 |
|
149,513 |
|
160,457 |
|
157,114 |
|
|||||
|
Equipment revenue |
|
1,172 |
|
851 |
|
124 |
|
83,444 |
|
946 |
|
|||||
|
Equipment revenue — DISH Network |
|
— |
|
— |
|
— |
|
97 |
|
— |
|
|||||
|
Total revenue |
|
262,179 |
|
172,246 |
|
179,651 |
|
575,773 |
|
196,631 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Costs and Expenses: (exclusive of depreciation shown below) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cost of sales — services and other |
|
64,593 |
|
35,025 |
|
37,271 |
|
185,277 |
|
48,193 |
|
|||||
|
Cost of sales — equipment |
|
876 |
|
10 |
|
11 |
|
68,541 |
|
700 |
|
|||||
|
Selling, general and administrative expenses |
|
12,072 |
|
9,512 |
|
6,868 |
|
93,029 |
|
9,133 |
|
|||||
|
Depreciation and amortization |
|
95,069 |
|
107,471 |
|
141,701 |
|
163,976 |
|
71,799 |
|
|||||
|
Impairments of long-lived assets |
|
— |
|
— |
|
234,959 |
|
— |
|
— |
|
|||||
|
Total costs and expenses |
|
172,610 |
|
152,018 |
|
420,810 |
|
510,823 |
|
129,825 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating income (loss) |
|
89,569 |
|
20,228 |
|
(241,159 |
) |
64,950 |
|
66,806 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest income |
|
26 |
|
23 |
|
53 |
|
1,823 |
|
5 |
|
|||||
|
Interest expense, net of amounts capitalized |
|
(23,640 |
) |
(23,567 |
) |
(30,836 |
) |
(50,904 |
) |
(19,527 |
) |
|||||
|
Acquisition costs |
|
— |
|
— |
|
— |
|
(35,230 |
) |
— |
|
|||||
|
Other, net |
|
1,289 |
|
92 |
|
3 |
|
9,703 |
|
1,082 |
|
|||||
|
Total other income (expense) |
|
(22,325 |
) |
(23,452 |
) |
(30,780 |
) |
(74,608 |
) |
(18,440 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) before income taxes |
|
67,244 |
|
(3,224 |
) |
(271,939 |
) |
(9,658 |
) |
48,366 |
|
|||||
|
Income tax (provision) benefit, net |
|
(24,812 |
) |
396 |
|
98,126 |
|
1,697 |
|
(17,846 |
) |
|||||
|
Net income (loss) |
|
42,432 |
|
(2,828 |
) |
(173,813 |
) |
(7,961 |
) |
30,520 |
|
|||||
|
Less: Net income (loss) attributable to noncontrolling interests |
|
— |
|
— |
|
— |
|
357 |
|
— |
|
|||||
|
Net income (loss) attributable to the HSS common shareholder |
|
$ |
42,432 |
|
$ |
(2,828 |
) |
$ |
(173,813 |
) |
$ |
(8,318 |
) |
$ |
30,520 |
|
|
|
|
As of |
|
|||||||
|
|
|
December 31, |
|
September 30, |
|
|||||
|
|
|
2010 |
|
2009 |
|
2011 |
|
|||
|
|
|
(In thousands) |
|
|||||||
|
|
|
|
|
|
|
(unaudited) |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents |
|
$ |
106 |
|
$ |
— |
|
$ |
194,212 |
|
|
Total assets |
|
$ |
996,676 |
|
$ |
942,729 |
|
$ |
4,173,407 |
|
|
Total debt |
|
$ |
411,763 |
|
$ |
443,893 |
|
$ |
2,396,312 |
|
|
Total shareholder’s equity |
|
$ |
480,633 |
|
$ |
437,580 |
|
$ |
1,084,437 |
|
|
|
|
For the Years
|
|
For the Nine Months
|
|
|||||||||||
|
|
|
2010 |
|
2009 |
|
2008 |
|
2011 |
|
2010 |
|
|||||
|
|
|
(In thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|||||||
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
EBITDA(1) |
|
$ |
185,927 |
|
$ |
127,791 |
|
$ |
(99,455 |
) |
$ |
203,042 |
|
$ |
139,687 |
|
|
Net cash flows from: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating activities |
|
$ |
167,527 |
|
$ |
78,185 |
|
$ |
80,673 |
|
$ |
192,696 |
|
$ |
114,690 |
|
|
Investing activities |
|
$ |
(120,191 |
) |
$ |
(138,196 |
) |
$ |
(28,031 |
) |
$ |
(2,067,020 |
) |
$ |
(97,710 |
) |
|
Financing activities |
|
$ |
(47,230 |
) |
$ |
60,011 |
|
$ |
(52,642 |
) |
$ |
2,067,675 |
|
$ |
(16,855 |
) |
|
(1) |
EBITDA is defined as net income (loss) attributable to the HSS common shareholder plus net interest expense, taxes and depreciation and amortization. EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United States (“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 the multi-channel video programming distribution industry. Conceptually, EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures because EBITDA is independent of the actual leverage and capital expenditures employed by the business. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. |
|
|
|
|
|
The following table reconciles EBITDA to net income (loss) attributable to the HSS common shareholder: |
|
|
|
For the Years |
|
For the Nine Months |
|
|||||||||||
|
|
|
Ended December 31, |
|
Ended September 30, |
|
|||||||||||
|
|
|
2010 |
|
2009 |
|
2008 |
|
2011 |
|
2010 |
|
|||||
|
|
|
(In thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
EBITDA |
|
$ |
185,927 |
|
$ |
127,791 |
|
$ |
(99,455 |
) |
$ |
203,042 |
|
$ |
139,687 |
|
|
Interest income (expense), net |
|
(23,614 |
) |
(23,544 |
) |
(30,783 |
) |
(49,081 |
) |
(19,522 |
) |
|||||
|
Income tax (provision) benefit, net |
|
(24,812 |
) |
396 |
|
98,126 |
|
1,697 |
|
(17,846 |
) |
|||||
|
Depreciation and amortization |
|
(95,069 |
) |
(107,471 |
) |
(141,701 |
) |
(163,976 |
) |
(71,799 |
) |
|||||
|
Net income (loss) attributable to the HSS common shareholder |
|
$ |
42,432 |
|
$ |
(2,828 |
) |
$ |
(173,813 |
) |
$ |
(8,318 |
) |
$ |
30,520 |
|
Investing in the Notes involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before deciding whether to invest in the Notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently believe to be immaterial, may also become important factors that affect us.
If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, the value of the Notes could decline and you may lose some or all of your investment.
General Risks Affecting Our Business
One of our principal operating subsidiaries, ESS, currently derives a substantial portion of its revenue from its two primary customers, DISH Network and Dish Mexico. The loss of, or a significant reduction in orders from or a decrease in selling price of transponder leasing and/or providing digital broadcast operations to DISH Network or Dish Mexico would also significantly reduce our revenue and adversely impact our results of operations derived from ESS.
Revenues generated by ESS from DISH Network accounted for 79.5%, 76.1% and 83.2% of our total revenue for the years ended December 31, 2010, 2009 and 2008, respectively, and 27.9% of our total revenue for the nine months ended September 30, 2011. Furthermore, Dish Mexico accounted for 3.2%, 4.8% and 0.1% of our total revenue for the years ended December 31, 2010, 2009 and 2008, respectively, and 1.1% of our total revenue for the nine months ended September 30, 2011. Any reduction in sales to DISH Network or Dish Mexico or in the prices they pay for the services they purchase from us could have a significant negative impact on our business. In addition, because a substantial portion of ESS’ revenue is derived from DISH Network and Dish Mexico, ESS’ success also depends to a significant degree on the continued success of DISH Network and Dish Mexico in attracting new subscribers.
There are a relatively small number of potential new customers for ESS’ satellite services, and we expect this customer concentration to continue for the foreseeable future. Therefore, our operating results from ESS will likely continue to depend on sales to a relatively small number of customers, as well as the continued success of these customers. In addition, we may from time to time enter into customer agreements providing for exclusivity periods during which we may sell a specified product only to that customer. If we do not develop relationships with new customers, we may not be able to expand our customer base or maintain or increase our revenue.
Historically, many of ESS’ potential customers have perceived it as a competitor due to our affiliation with DISH Network. There can be no assurance that we will be successful in entering into any commercial relationships with potential customers who are competitors of DISH Network (particularly if we continue to be perceived as affiliated with DISH Network as a result of common ownership and shared management services).
Economic weakness, including high unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.
Our business depends on the economic health and willingness of our customers and potential customers to make and adhere to capital and financial commitments to purchase our products and services. The U.S. and world economy experienced significant slowdown and other weaknesses in the past few years, and the economic environment may continue to be unfavorable in the future. In addition, the telecommunications industry has been facing significant challenges resulting from excess capacity, new technologies and intense price competition. If the U.S. and world economic conditions continue to be volatile or deteriorate further or if the telecommunications industry experiences future weaknesses, we could experience reduced demand for, and pricing pressure on, our products and services, which could lead to a reduction in our revenues and adversely affect our business, financial condition and results of operations. In addition, a substantial portion of ESS’ revenue comes from providers of pay-TV services that in turn derive a substantial majority of their revenue from residential customers whose spending is affected by economic uncertainty Our ability to grow or maintain our business may be adversely affected by sustained economic weakness, including the effect of wavering consumer confidence, high unemployment and other
factors that may adversely affect providers of pay-TV services and the telecommunications industry. In particular, the weak economic conditions may result in the following:
· Decreased Demand and Increased Pricing Pressure . Subscribers to pay-TV services may delay purchasing decisions or reduce or reallocate their discretionary spending, which may in turn decrease demand for programming packages from pay-TV providers. Increased pricing pressures may also result in reduced margins for pay-TV providers, which are the primary customers of ESS.
· Excess Satellite Capacity . There is an increased risk of excess satellite capacity resulting from possible decreased demand for pay-TV services and other services utilizing satellite transmission.
· Increased Impairment Charges . Sustained economic weakness could result in substantial future impairment charges relating to, among other things, satellites, FCC authorizations, goodwill and intangibles, and our debt and equity investments.
If we are unable to properly respond to technological changes, our business could be significantly harmed.
Our business and the market in which we operate are characterized by rapid technological changes, evolving industry standards and frequent product and service enhancements. If we are unable to properly respond to technological developments, our existing products and services may become obsolete and demand for our products and services may decline. We and our suppliers may not be able to keep pace with technological developments. If we fail to timely obtain such technologies from our suppliers or introduce products and services with superior technologies, if the new technologies developed by us or our partners fail to achieve sustained acceptance in the marketplace or become obsolete, or if our competitors obtain or develop proprietary technologies that are perceived by the market as being superior to ours, we could suffer a material adverse effect on our future competitive position that could in turn decrease our revenues and earnings. Furthermore, after we have incurred substantial research and development costs, one or more of the technologies under our development, or under development by one or more of our strategic partners, could become obsolete prior to its introduction. Even if we keep up with technological innovation, we may not meet market demands.
Our response to technological developments depends, to a significant degree, on the work of technically skilled employees. Competition for the services of such employees is intense. Although we strive to attract and retain these employees, we may not succeed in this respect. Moreover, issues arising from the integration of EchoStar and Hughes Communications, including, among others, differences in corporate culture, may affect our ability to retain technically skilled employees. If we are unable to attract and retain technically skilled employees, we may not be able to respond to changes in technologies and, as a result, our competitive position could be materially and adversely affected.
The failure to adequately anticipate the need for transponder capacity or the inability to obtain transponder capacity could harm our results of operations.
Our Hughes segment has made substantial contractual commitments for transponder capacity based on its existing customer contracts and backlog, as well as anticipated future business, to the extent its existing broadband customers are not expected to utilize our SPACEWAY 3 satellite. If future demand does not meet our expectations, we will be committed to maintaining excess transponder capacity for which we will have no or insufficient revenues to cover our costs, which would have a negative impact on our margins and results of operations. Our transponder leases are generally for two to five years, and different leases cover satellites with coverage of different geographical areas or support different applications and features, so we may not be able to quickly or easily adjust our capacity to changes in demand. If we only purchase transponder capacity based on existing contracts and bookings, capacity for certain types of coverage in the future that cannot be readily served by SPACEWAY 3 may be unavailable to us, and we may not be able to satisfy certain needs of our customers, which could result in a loss of possible new business and could negatively impact the margins earned for those services. At present, until the launch and operation of additional satellites, there is limited availability of capacity on the Ku-band frequencies in North America. In addition, the FSS industry has seen consolidation in the past decade, and today, the three main FSS providers in North America and a number of smaller regional providers own and operate the current satellites that are available for our capacity needs. The failure of any of these FSS providers to replace existing satellite assets at the end of their useful lives or a downturn in their industry as a whole could reduce or interrupt the Ku-band capacity available
to us. If we are not able to renew our capacity leases at economically viable rates, or if capacity is not available due to any problems of the FSS providers, our business and results of operations could be adversely affected, to the extent SPACEWAY 3 and Jupiter 1 are unable to satisfy the associated demand.
We currently have unused satellite capacity, and our results of operations may be materially adversely affected if we are not able to lease more of this capacity to third parties.
While we are currently evaluating various opportunities to make profitable use of our satellite capacity (including, but not limited to, supplying satellite capacity for new international ventures), we do not have firm plans to utilize all of our satellite capacity. In addition, especially in light of the potential continued lack of demand for satellite services as a result of sustained economic weakness, there can be no assurance that we can successfully develop the business opportunities we currently plan to pursue with this capacity. If we are unable to lease our excess satellite capacity to third parties, our margins would be negatively impacted and we may be required to record impairments related to our satellites.
Certain of our sales to DISH Network could be terminated or substantially curtailed on short notice, which would have a detrimental effect on us.
DISH Network has only certain obligations to continue to purchase certain of ESS’ services. Therefore, our relationship with DISH Network could be terminated or substantially curtailed with little or no advance notice. Any material reduction in our sales to DISH Network would have a significant adverse effect on our business, results of operations and financial position. Furthermore, because there are a relatively small number of potential customers for our products and services and because we have had limited success to date in attracting such potential customers, if we lose DISH Network as a customer, it will be difficult for us to replace, in whole or in part, ESS’ historical revenues from DISH Network.
We currently face competition from established competitors in the satellite service business and may face competition from others in the future.
We compete against larger, well-established satellite service companies, such as Intelsat, SES and Telesat. Because the satellite services industry is relatively mature, our growth strategy depends largely on our ability to displace current incumbent providers, which often have the benefit of long-term contracts with customers. These long-term contracts and other factors result in relatively high costs for customers to change service providers, making it more difficult for us to displace customers from their current relationships with our competitors. In addition, the supply of satellite capacity has increased in recent years, which makes it more difficult for us to sell our services in certain markets and to price our capacity at acceptable levels. Competition may cause downward pressure on prices and further reduce the utilization of our fleet capacity, both of which could have an adverse effect on our financial performance. Our satellite services business also competes with fiber optic cable and other terrestrial delivery systems, which may have a cost advantage, particularly in point-to-point applications where such delivery systems have been installed.
The enterprise network communications industry is highly competitive. We may be unsuccessful in competing effectively against other terrestrial and satellite-based network providers in our enterprise groups.
We operate in a highly competitive enterprise network communications industry in the sale and lease of our products and services. This industry is characterized by competitive pressures to provide enhanced functionality for the same or lower price with each new generation of technology. As the prices of our products decrease, we will need to sell more products and/or reduce the per-unit costs to improve or maintain our results of operations. We face competition from providers of terrestrial-based networks, such as Digital Subscriber Line (“DSL”), cable modem service, Multiprotocol Label Switching and Internet protocol-based virtual private networks, which may have advantages over satellite networks for certain customer applications. Terrestrial-based networks are offered by telecommunications carriers and other large companies, many of which have substantially greater financial resources and greater name recognition than us.
The costs of a satellite network may exceed those of a terrestrial-based network, especially in areas that have experienced significant DSL and cable Internet build-out. It may become more difficult for us to compete with terrestrial providers as the number of these areas increases and the cost of their network and hardware services
declines. We also compete for enterprise clients with other satellite network providers, satellite providers that are targeting small and medium businesses and smaller independent systems integrators on procurement projects.
The consumer network communications market is highly competitive. We may be unsuccessful in competing effectively against DSL and cable service providers and other satellite broadband providers in the consumer market. Following the commencement of service on ViaSat-1 by WildBlue and prior to the commencement of service on Jupiter 1, we will be at a competitive disadvantage to WildBlue.
We face competition in our consumer group primarily from DSL and cable Internet service providers. Also, other satellite and wireless broadband companies have launched or are planning the launch of consumer satellite Internet access services in competition with ours in North America. Some of these competitors offer consumer services and hardware at lower prices than ours. In addition, terrestrial alternatives do not require our external dish which may limit customer acceptance of our products.
Our primary competitor for consumer satellite Internet access services is WildBlue Communications, Inc. (“WildBlue”), which is owned by ViaSat, Inc. (“ViaSat”). Following the commencement of service on ViaSat-1 by WildBlue and prior to the commencement of service on Jupiter 1, WildBlue may be in a better position economically to offer faster connection speeds than us, and there can therefore be no assurance that our product offerings will remain competitive with those of WildBlue. As discussed above, there can be no assurance that the expected launch of Jupiter 1 in the second quarter of 2012 will not be delayed or will not fail. See “Risks Related to Our Satellites—Our satellites under construction are subject to risks related to construction and launch that could limit our ability to utilize these satellites.”
If we are unable to develop, introduce and market new products, applications and services on a cost-effective and timely basis, or if we are unable to sell our new products and services to existing and new customers, our business could be adversely affected.
The network communications market is characterized by rapid technological changes, frequent new product introductions and evolving industry standards. If we fail to develop new technology or keep pace with significant industry technological changes, our existing products and technology could be rendered obsolete. Even if we keep up with technological innovation, it may not meet the demands of the network communications market. For example, our large enterprise customers may only choose to renew services with us at substantially lower prices or for a decreased level of service. Many of our large enterprise customers have existing networks available to them and may opt to find alternatives to our VSAT services or may renew with us solely as a backup network. If we are unable to respond to technological advances on a cost-effective and timely basis, or if our products or applications are not accepted by the market, then our business, financial condition and results of operations would be adversely affected.
Any failure or inadequacy of our information technology infrastructure or those of our third-party service providers could harm our business.
The capacity, reliability and security of our information technology hardware and software infrastructure are important to the operation of our current business, which would suffer in the event of system failures. Likewise, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives. Our networks and those of our third-party service providers and our customers may be vulnerable to unauthorized access, computer viruses and other security problems. Persons who circumvent security measures could wrongfully obtain or use information on the network or cause interruptions, delays or malfunctions in our operations, any of which could have a material adverse effect on our business, financial condition and results of operations. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although we have implemented and intend to continue to implement industry-standard security measures, these measures may prove to be inadequate and result in system failures and delays that could lower network operations center availability and have a material adverse effect on our business, financial condition and results of operations. In addition, our inability to expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new offerings, product or service interruptions, and the diversion of development resources.
We are dependent upon third-party providers for components, manufacturing outsourcing, installation, and customer support service, and our results of operations may be materially adversely affected if any of these third-party providers fail to appropriately deliver the contracted goods or services.
We are dependent upon third-party services and products provided to us, including the following:
· Components. A limited number of suppliers manufacture some of the key components required to build our products. These key components may not be continually available and we may not be able to forecast our component requirements sufficiently in advance, which may have a detrimental effect on supply. If we are required to change suppliers for any reason, we would experience a delay in manufacturing our products if another supplier is not able to meet our requirements on a timely basis. In addition, if we are unable to obtain the necessary volumes of components on favorable terms or prices on a timely basis, we may be unable to produce our products at competitive prices and we may be unable to satisfy demand from our customers.
· Commodity Price Risk. Many of our products contain components whose base raw materials have undergone dramatic cost fluctuations in the last 24 months. Fluctuations in pricing of raw materials have the ability to affect our product costs. Although we have been successful in offsetting or mitigating our exposure to these fluctuations, such changes could have an adverse impact on our product costs.
· Manufacturing outsourcing. While we develop and manufacture prototypes for our products, we use contract manufacturers to produce a significant portion of our hardware. If these contract manufacturers fail to provide products that meet our specifications in a timely manner, then our customer relationships may be harmed.
· Installation and customer support service. Each of our North American and international operations utilizes a network of third-party installers to deploy our hardware. In addition, a portion of our customer support and management is provided by offshore call centers. Since we provide customized services for our customers that are essential to their operations, a decline in levels of service or attention to the needs of our customers could adversely affect our reputation, renewal rates and ability to win new business.
Our dependence on outside contractors could result in delays related to the design, manufacture and launch of our new satellites, which could in turn adversely affect our operating results.
There are a limited number of manufacturers that are able to design and build satellites according to the technical specifications and standards of quality we require, including Astrium Satellites, Boeing Satellite Systems, Lockheed Martin, Space Systems/Loral and Thales Alenia Space. There are also a limited number of launch service providers able to launch such satellites, including International Launch Services, Arianespace, United Launch Alliance, Space Exploration Technologies Corp. and Sea Launch Company. The loss of any of our manufacturers or launch service providers could increase the cost and result in the delay of the design, construction or launch of our satellites. Even if alternate suppliers for such services are available, we may have difficulty identifying them in a timely manner or we may incur significant additional expense in changing suppliers, and this could result in difficulties or delays in the design, construction or launch of our satellites. Any delays in the design, construction or launch of our satellites could have a material adverse effect on our business, financial condition and results of operations.
If our products contain defects, we could be subject to significant costs to correct such defects and our product and network service contracts could be delayed or cancelled, which could adversely affect our revenues.
The products and the networks we deploy are highly complex, and some may contain defects when first introduced or when new versions or enhancements are released, despite extensive testing and our quality control procedures. In addition, many of our products and network services are designed to interface with our customers’ existing networks, each of which has different specifications and utilizes multiple protocol standards. Our products and services must interoperate with the other products and services within our customers’ networks, as well as with future products and services that might be added to these networks, to meet our customers’ requirements. The occurrence of any defects, errors or failures in our products or network services could result in: (i) additional costs to correct such defects; (ii) cancellation of orders; (iii) a reduction in revenue backlog; (iv) product returns or recalls;
(v) diversion of our resources; and (vi) the issuance of credits to customers and other losses to us, our customers or end users. Any of these occurrences could also result in the loss of or delay in market acceptance of our products and services and loss of sales, which would harm our reputation and our business and adversely affect our revenues and profitability.
We may be unable to raise additional capital in the future to, among other things, continue investing in our business, construct and launch new satellites, and pursue acquisitions and other strategic transactions.
Weakness in the financial markets could make it difficult for us to access capital markets at acceptable terms or at all. Instability in the equity markets could make it difficult for us to raise equity financing without incurring substantial dilution to our existing shareholders. In addition, sustained economic weakness may limit our ability to generate sufficient internal cash to fund investments, capital expenditures, acquisitions and other strategic transactions. We cannot predict with any certainty whether or not we will be impacted by sustained economic weakness. As a result, these conditions make it difficult for us to accurately forecast and plan future business activities because we may not have access to funding sources necessary for us to pursue organic and strategic business development opportunities.
We may experience significant financial losses on our existing investments.
We have entered into certain strategic transactions and investments in North America, Asia and elsewhere. These investments involve a high degree of risk and could diminish our ability to invest capital in our business. The overall sustained economic uncertainty, as well as financial, operational and other difficulties encountered by certain companies in which we have invested, increases the risk that the actual amounts realized in the future on our debt and equity investments will differ significantly from the fair values currently assigned to them. These investments could also expose us to significant financial losses and may restrict our ability to make other investments or limit alternative uses of our capital resources. In particular, the laws, regulations and practices of certain countries may make it harder for our international investments to be successful. If our investments suffer losses, our financial condition could be materially adversely affected. In addition, the companies in which we invest or with whom we partner may not be able to compete effectively or there may be insufficient demand for the services and products offered by these companies.
Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others. The loss of or infringement of our intellectual property rights could have a significant adverse impact on our business.
We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our vendors and other parties, to use our technologies, conduct our operations and sell our products and services. Legal challenges to our intellectual property rights and claims by third parties of intellectual property infringement could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question or from the continuation of our businesses as currently conducted, which could require us to change our business practices or limit our ability to compete effectively or could otherwise have an adverse effect on our results of operations. Even if we believe any such challenges or claims are without merit, they can be time-consuming and costly to defend and may divert management’s attention and resources away from our business. Moreover, due to the rapid pace of technological change, we rely in part on technologies developed or licensed by third parties, and if we are unable to obtain or continue to obtain licenses or other required intellectual property rights from these third parties on reasonable terms, our business, financial position and results of operations could be adversely affected. In addition, technology licensed from third parties may have undetected errors that impair the functionality or prevent the successful integration of our products or services. As a result of any such changes or loss, we may need to incur additional development costs to ensure continued performance of our products or suffer delays until replacement technology, if available, can be obtained and integrated.
From time to time, we are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property.
From time to time, we are subject to various legal proceedings and claims, which arise in the ordinary course of business. Many entities, including some of our competitors, have or may in the future obtain patents and other
intellectual property rights that cover or affect products or services related to those that we offer. In general, if a court determines that one or more of our products or services infringes valid intellectual property rights held by others, we may be required to cease developing or marketing those products or services, to obtain licenses from the holders of the intellectual property at a material cost, or to redesign those products or services in such a way as to avoid infringement. If those intellectual property rights are held by a competitor, we may be unable to license the necessary intellectual property rights at any price, which could adversely affect our competitive position.
We are a wholly owned subsidiary of EchoStar Corporation and do not operate as an independent company.
We rely on EchoStar Corporation for a substantial portion of our administrative and management functions and services including human resources-related functions, accounting, tax administration, legal, external reporting, treasury administration, internal audit and insurance functions, information technology and telecommunications services and other support services. While HSS has access to certain of Hughes Communications’ infrastructure, we do not have in place the systems and resources to perform all these functions or services. Instead, we generally receive these services pursuant to an arrangement between us and EchoStar. As discussed in more detail below, EchoStar in turn receives certain of these services from DISH Network pursuant to a management services agreement and a professional services agreement entered into between them. We anticipate continuing to rely upon DISH Network to provide many of these services. If our intercompany arrangement with EchoStar were to terminate, or if EchoStar no longer receives certain services from DISH Network, we would need to obtain agreements with third-party service providers or obtain additional internal resources, neither of which may be available on acceptable terms or at all.
EchoStar has not been an independent company for a significant amount of time and it 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, EchoStar’s business (including ESS) was operated by DISH Network as part of its broader corporate organization, rather than as an independent company. DISH Network’s senior management oversaw the strategic direction of our businesses and DISH Network performed various corporate functions for us, including, but not limited to:
· human resources related functions;
· accounting;
· tax administration;
· legal and external reporting;
· treasury administration, investor relations, internal audit and insurance functions; and
· information technology and telecommunications services.
DISH Network and its affiliates are currently obligated to provide certain of these functions to EchoStar pursuant to the management services agreement and the professional services agreement between EchoStar and DISH Network. If DISH Network does not continue to perform effectively the services that are called for under the management services agreement and the professional services agreement, we may not be able to operate our business effectively. In addition if, once the management services agreement and the professional services agreement terminate, we do not have in place our own systems and business functions, we do not have agreements with other providers of these services or we are not able to make these changes cost-effectively, we may not be able to operate our business effectively and our profitability may decline.
We rely on key personnel and the loss of their services may negatively affect our businesses.
We believe that our future success will depend to a significant extent upon the performance of Mr. Charles W. Ergen, our and EchoStar’s Chairman, and certain other key executives. Certain of these key executives will also continue to devote significant time to their employment at DISH Network. The loss of Mr. Ergen or of certain other key executives or the ability of these certain other key executives to devote sufficient time and effort to our business
could have a material adverse effect on our business, financial condition and results of operations. Although all of EchoStar’s executives have certain agreements limiting their ability to work for or consult with competitors if they leave EchoStar, EchoStar does not have employment agreements with any of them.
Although we expect that the Acquisition will benefit us, those expected benefits may not occur because of the complexity of integration and other challenges.
We acquired Hughes Communications on June 8, 2011. Achieving the expected benefits of the Acquisition will depend in part on our ability to integrate Hughes Communications’ operations, technology and personnel in a timely and efficient manner. We have incurred substantial direct transaction costs associated with the Acquisition, and will incur additional costs associated with consolidation and integration of operations. The integration of Hughes Communications is complex, time-consuming, and expensive, and may disrupt our business or result in the loss of our or Hughes Communications’ customers or key employees or the diversion of our management’s attention. In addition, the integration process may strain our financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from our principal core business objectives. Moreover, we cannot assure you that the integration will be completed as quickly as we expect or that the Acquisition will achieve its expected benefits.
If the total costs of the Acquisition exceed estimates or if the expected benefits of the Acquisition do not exceed the total costs of the Acquisition, our business, financial condition and results of operations could be materially adversely affected.
We may pursue acquisitions and other strategic transactions to complement or expand our business, which may not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.
Our future success may depend on the existence of, and our ability to capitalize on, opportunities to buy other businesses or technologies or partner with other companies that could complement, enhance or expand our current business or products or that may otherwise offer us growth opportunities. We may pursue acquisitions, joint ventures or other business combination activities to complement or expand our business. In addition, we have entered, and may continue to enter, into strategic transactions and investments in North America, Asia and elsewhere. Any such acquisitions, transactions or investments that we are able to identify and complete, which may become substantial over time, involve a high degree of risk, including, but not limited to, the following:
· the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or joint venture;
· possible adverse effects on our operating results during the integration process; and
· exposure to significant financial losses if the transactions and/or the underlying ventures are not successful and/or we are unable to achieve the intended objectives of the transaction.
New acquisitions, joint ventures and other transactions may require the commitment of significant capital that may otherwise be directed to investments in our existing businesses. Commitment of this capital may cause us to defer or suspend any capital expenditures that we otherwise may have made.
We have made and will continue to make significant investments in research, development, and marketing for new products, services and related technologies, as well as entry into new business areas. Investments in new technologies and business areas are inherently speculative and commercial success thereof depends on numerous factors including innovativeness, quality of service and support, and effectiveness of sales and marketing. We may not achieve revenue or profitability from such investments for a number of years, if at all. Moreover, even if such products, services, technologies and business area become profitable, their operating margins may be minimal.
The pro forma financial information is presented for illustrative purposes only and may not be an indication of our financial condition or results of operations in the future.
The pro forma financial information contained in this prospectus is presented for illustrative purposes only and may not be an indication of our financial condition or results of operations in the future for several reasons. For
example, the pro forma financial information has been derived from the historical financial statements of HSS and Hughes Communications and certain adjustments and assumptions have been made regarding us after giving effect to the Acquisition and related financing transactions. These kinds of adjustments and assumptions are difficult to make with complete accuracy. Moreover, the pro forma financial information may not reflect all costs that are expected to be incurred by us in connection with the transaction. For example, the impact of any incremental costs incurred in integrating the two companies is not reflected in the pro forma financial information. As a result, our actual financial condition and results of operations following the transaction may not be consistent with, or evident from, this pro forma financial information.
In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the transaction. Any potential deterioration in our financial condition or results of operations may cause a significant decline in the value of your investment. See the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.”
Risks Related to Our Satellites
Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.
Satellites are subject to significant operational risks while in orbit. These risks include malfunctions, commonly referred to as anomalies, which have occurred in our satellites and the satellites of other operators as a result of various factors, such as satellite design and manufacturing defects, problems with the power systems or control systems of the satellites and general failures resulting from operating satellites in the harsh environment of space.
Although we work closely with the satellite manufacturers to determine and eliminate the cause of anomalies in new satellites and provide for redundancies of many critical components in the satellites, we may experience anomalies in the future, whether of the types described above or arising from the failure of other systems or components.
Any single anomaly or series of anomalies could materially and adversely affect our operations and revenues and our relationship with current customers, as well as our ability to attract new customers. 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 or satellite capacity.
Meteoroid events pose a potential threat to all in-orbit satellites. The probability that meteoroids will damage those satellites increases significantly when the Earth passes through the particulate stream left behind by comets. Occasionally, increased solar activity also poses a potential threat to all in-orbit satellites.
Some decommissioned spacecraft are in uncontrolled orbits, which pass through the geostationary belt at various points and present hazards to operational spacecraft, including our satellites. We may be required to perform maneuvers to avoid collisions and these maneuvers may prove unsuccessful or could reduce the useful life of the satellite through the expenditure of fuel to perform these maneuvers. The loss, damage or destruction of any of our satellites as a result of an electrostatic storm, collision with space debris, malfunction or other event could have a material adverse effect on our business, financial condition and results of operations.
Our satellites have minimum design lives ranging from 12 to 15 years, but could fail or suffer reduced capacity before then.
Generally, the minimum design life of each of our satellites ranges from 12 to 15 years. We can provide no assurance, however, as to the actual operational lives of our satellites, which may be shorter than their design lives. Our ability to earn revenue depends on the continued operation of our satellites, each of which has a limited useful life. A number of factors affect the useful lives of the satellites, including, among other things, the quality of their design and construction, the durability of their component parts, the ability to continue to maintain proper orbit and control over the satellite’s functions, the efficiency of the launch vehicle used, and the remaining on-board fuel following orbit insertion.
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. In addition, we cannot guarantee that another satellite will be available for use as a replacement for a failed or lost satellite, or that such relocation can be accomplished without a substantial utilization of fuel. Any such utilization of fuel would reduce the operational life of the replacement satellite.
We generally do not have commercial insurance coverage on the satellites we use and could face significant impairment charges if one of our uninsured satellites fails.
Historically, we have not carried launch or in-orbit insurance on the satellites we use. We currently do not carry in-orbit insurance on any of our satellites, other than on SPACEWAY 3, and often do not use commercial insurance to mitigate the potential financial impact of launch or in-orbit failures because we believe that the cost of insurance premiums is uneconomical relative to the risk of such failures. If one or more of our in-orbit uninsured satellites fail, we could be required to record significant impairment charges. However, pursuant to the terms of the indentures governing the Notes, we are required, subject to certain limitations on coverage, to obtain launch and in-orbit insurance for Jupiter 1 and EchoStar XVI.
Our satellites under construction are subject to risks related to construction and launch that could limit our ability to utilize these satellites.
Satellite construction and launch are subject to significant risks, including delays, launch failure and incorrect orbital placement. Certain launch vehicles that may be used by us have either unproven track records or have experienced launch failures in the past. The risks of launch delay and failure are usually greater when the launch vehicle does not have a track record of previous successful flights. Launch failures result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take more than three years, and to obtain other launch opportunities. Construction and launch delays could materially and adversely affect our ability to generate revenues. Because we generally do not carry launch insurance on our satellites, if a 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.
Risks Related to the Regulation of Our Business
Our business is subject to risks of adverse government regulation.
Our business is subject to varying degrees of regulation in the United States by the FCC and other entities, and in foreign countries by similar entities and internationally by the International Telecommunication Union (“ITU”). These regulations are subject to the political process and have changed from time to time. Moreover, a substantial number of foreign countries in which we have, or may in the future make, an investment, regulate, in varying degrees, the ownership of satellites and the distribution and ownership of programming services and foreign investment in telecommunications companies. Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing authorizations. 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 use of satellites is dependent on satellite coordination agreements, which may be difficult to obtain.
Because satellite transmissions and the use of frequencies often are dependent on coordination with other satellite systems operated by U.S. or foreign satellite operators, it can be difficult to determine the outcome of these coordination agreements with these other entities. The impact of a coordination agreement may result in the loss of rights to the use of certain frequencies or access to certain markets. The significance of such a loss would vary and it can therefore be difficult to determine which portion of our revenues will be impacted.
Furthermore the satellite coordination process is conducted under the guidance of the International Telecommunications Union, ITU, radio regulations and the national regulations of the satellites involved in the coordination process. These rules and regulations could be amended and could therefore materially adversely affect our business, financial condition and results of operations.
We cannot predict the outcomes of these coordination processes and proceedings, amendments to the rules and regulations under which they are conducted or their effect on our business.
Our business depends on FCC licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted.
If the FCC were to cancel, revoke, suspend, or fail to renew any of our licenses or authorizations, or fail to grant our applications for FCC licenses, it could have a material adverse effect on our business, financial condition and results of operations. Specifically, loss of a frequency authorization would reduce the amount of spectrum available to us, potentially reducing the amount of services we provide to our customers. The significance of such a loss of authorizations would vary based upon, among other things, the orbital location, the frequency band and the availability of replacement spectrum. In addition, Congress often considers legislation that could affect us and enacts legislation that does affect us, and FCC proceedings to implement the Communications Act of 1934, as amended (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 face difficulties in accurately assessing and collecting contributions towards the Universal Service Fund.
As a provider of telecommunications in the United States, we are presently required to contribute a percentage of our revenues from telecommunications services to the Universal Service Fund to support mechanisms that subsidize the provision of services to low-income consumers, high-cost areas, schools, libraries and rural health care providers. This percentage is set each calendar quarter by the FCC. Current FCC rules permit us to pass this Universal Service Fund contribution onto our customers.
Because our customer contracts often include both telecommunications services, which create such support obligations, and other goods and services, which do not, it can be difficult to determine which portion of our revenues forms the basis for this contribution and the amount that we can recover from our customers. If the FCC, which oversees the support mechanisms, or a court or other governmental entity were to determine that we computed our contribution obligation incorrectly or passed the wrong amount onto our customers, we could become subject to additional assessments, liabilities, or other financial penalties. In addition, the FCC is considering substantial changes to its Universal Service Fund contribution and distribution rules. These changes could impact our future contribution obligations and those of third parties that provide communication services to our business. Any such change to the Universal Service Fund contribution rules could adversely affect our costs of providing service to our customers. In addition, changes to the Universal Service Fund distribution rules could intensify the competition we face by offering subsidies to competing firms and/or technologies.
Our foreign operations expose us to regulatory risks and restrictions not present in our domestic operations.
Our operations outside the United States accounted for approximately 3.2%, 4.8% and 0.1% of our total revenues for the years ended December 31, 2010, 2009 and 2008, respectively, and 16.3% of our total revenues for the nine months ended September 30, 2011. We expect our foreign operations to continue to represent a significant portion of our business. We have operations in Brazil, Germany, India, Indonesia, Italy, Mexico, the Russian Federation, South Africa, the United Arab Emirates, the United Kingdom and China, among other nations. Over the last 20 years, Hughes Communications has sold products in over 100 countries. Our foreign operations involve varying degrees of risks and uncertainties inherent in doing business abroad. Such risks include:
· Complications in complying with restrictions on foreign ownership and investment and limitations on repatriation. We may not be permitted to own our operations in some countries and may have to enter into partnership or joint venture relationships. Many foreign legal regimes restrict our repatriation of earnings to the United States from our subsidiaries and joint venture entities. We may also be limited in our ability to distribute or access our assets by the governing documents pertaining to such entities. In such event, we will not have access to the cash flow and assets of our joint ventures.
· Difficulties in following a variety of foreign laws and regulations, such as those relating to data content retention, privacy and employee welfare. Our international operations are subject to the laws of many different jurisdictions that may differ significantly from United States law. For example, local political or intellectual property law may hold us responsible for the data that is transmitted over our network by our customers. Also, other nations have more stringent employee welfare laws that guarantee perquisites that we must offer. Compliance with these laws may lead to increased operations costs, loss of business opportunities or violations that result in fines or other penalties.
· Restrictions on space station landing rights/coordination. Satellite market access and landing rights are dependent on the national regulations established by foreign governments, including, but not limited to: (a) national coordination requirements and registration requirements for satellites; and (b) reporting requirements of national telecommunications regulators with respect to service provision and satellite performance.
· Financial and legal constraints and obligations. Operating pursuant to foreign licenses subjects us to certain financial constraints and obligations, including, but not limited to: (a) tax liabilities that may or may not be dependent on revenues; (b) the burden of creating and maintaining additional facilities and staffing in foreign jurisdictions; and (c) legal regulations requiring that we make available “free” satellite capacity for national social programing, which may impact our revenue.
· Significant competition in our international markets. Outside North America, we have traditionally competed for hardware and services sales primarily in Europe, Brazil and India and focused only on hardware revenues in other regions. In Europe, we face intense competition which is not expected to abate in the near future.
· Changes in exchange rates between foreign currencies and the United States dollar. We conduct our business and incur cost in the local currency of a number of the countries in which we operate. Accordingly, our results of operations are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our financial statements. These fluctuations in currency exchange rates have affected, and may in the future affect, revenue, profits and cash earned on international sales. In addition, we sell our products and services and acquire supplies and components from countries that historically have been, and may continue to be, susceptible to recessions or currency devaluation.
· Greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation or war. As we conduct operations throughout the world, we could be subject to regional or national economic downturns or instability, labor or political disturbances or conflicts of various sizes. Any of these disruptions could detrimentally affect our sales in the affected region or country or lead to damage to, or expropriation of, our property or danger to our personnel.
· Competition with large or state-owned enterprises and/or regulations that effectively limit our operations and favor local competitors. Many of the countries in which we conduct business have traditionally had state owned or state granted monopolies on telecommunications services that favor an incumbent service provider. We face competition from these favored and entrenched companies in countries that have not deregulated. The slower pace of deregulation in these countries, particularly in Asia and Latin America, has adversely affected the growth of our business in these regions.
· Customer credit risks. Customer credit risks are exacerbated in foreign operations because there is often little information available about the credit histories of customers in the foreign countries in which we operate.
We may not be aware of certain foreign government laws or regulations or changes to them which could have a significant adverse impact on our business.
Because regulatory schemes vary by country, we may be subject to laws or regulations in foreign countries of which we are not presently aware. If that were to be the case, we could be subject to sanctions by a foreign government that could materially and adversely affect our ability to operate in that country. There is no assurance that any current regulatory approvals held by us are, or will remain, sufficient in the view of foreign regulatory authorities, or that any additional necessary approvals will be granted on a timely basis or at all, in all jurisdictions in which we wish to operate new satellites, or that applicable restrictions in those jurisdictions will not be unduly
burdensome. The failure to obtain the authorizations necessary to operate satellites internationally could have a material adverse effect on our ability to generate revenue and our overall competitive position.
We, our customers and companies with whom we do business may be required to have authority from each country in which we or they provide services or provide our customers use of our satellites. Because laws and regulations in each country are different, we may not be aware if some of our customers and/or companies with which we do business do not hold the requisite licenses and approvals.
Our international sales and operations require access to international markets and are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with foreign national requirements for the registration of satellites and associated obligations. We may not be aware of the laws for new markets in which we intend to conduct business. Furthermore, for those countries in which we are presently conducting business, the requirements relating to satellite registration and satellite services could be changed. Non-compliance with these requirements may result in the loss of the authorizations and licenses to conduct business in these countries.
We must comply with all applicable export control laws and regulations of the United States and other countries. United States laws and regulations applicable to us include the Arms Export Control Act, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and the trade sanctions laws and regulations administered by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). The export of certain hardware, technical data and services relating to satellites is regulated by the United States Department of State’s Directorate of Defense Trade Controls under ITAR. Other items are controlled for export by the United States Department of Commerce’s Bureau of Industry and Security under EAR. We cannot provide services to certain countries subject to United States trade sanctions unless we first obtain the necessary authorizations from OFAC. Violations of these laws or regulations could result in significant sanctions including fines, more onerous compliance requirements, debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. A violation of ITAR or the other regulations enumerated above could materially adversely affect our business, financial condition and results of operations.
In addition, we are subject to the Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions that prohibit companies and their intermediaries from making improper payments to foreign officials and other individuals for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. However, we operate in many parts of the world that have experienced corruption to some degree. If we are found to be liable for violating these laws, we could suffer from civil and criminal penalties or other sanctions, which could have a material adverse impact on our business, financial condition, and results of operations.
Risks Relating to Our Relationship with DISH Network
We have potential conflicts of interest with DISH Network due to our common ownership and management.
Questions relating to conflicts of interest may arise between DISH Network and us in a number of areas relating to our past and ongoing relationships. Areas in which conflicts of interest between DISH Network and us could arise include, but are not limited to, the following:
· Cross officerships, directorships and stock ownership . We continue to have significant overlap in directors and executive officers with DISH Network, which may lead to conflicting interests. Certain of EchoStar’s executive officers and directors also serve as executive officers of DISH Network. DISH Network’s Corporate Controller provides us with services pursuant to a management services agreement between EchoStar and DISH Network and provides the same services to DISH Network. EchoStar’s Board of Directors includes persons who are members of the Board of Directors of DISH Network, including Charles W. Ergen, who serves as the Chairman of DISH Network, EchoStar and us. The executive officers and the members of EchoStar’s Board of Directors who overlap with DISH Network have fiduciary duties to DISH Network’s shareholders. Therefore, these individuals may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, there is potential for a conflict of interest when we or DISH Network look at acquisitions and other corporate opportunities that
may be suitable for both companies. In addition, many of EchoStar’s directors and officers own DISH Network stock and options to purchase DISH Network stock, certain of which they acquired or were granted prior to the spin-off, including Mr. Ergen, who beneficially owns approximately 53.2% of the total equity (assuming conversion of only the Class B Common Stock held by Mr. Ergen into Class A Common Stock) and controls approximately 90.4% of the voting power of DISH Network (assuming no conversion of the Class B Common Stock). Mr. Ergen’s beneficial ownership of DISH Network excludes 4,245,151 shares of DISH Network Class A Common Stock issuable upon conversion of shares of DISH Network Class B Common Stock currently held by certain trusts established by Mr. Ergen for the benefit of his family. These trusts beneficially own approximately 2.0% of the total equity securities of DISH Network (assuming conversion of only the Class B Common Stock held by such trusts into Class A Common Stock) and possess approximately 1.6% of the total voting power of DISH Network (assuming no conversion of the Class B Common Stock). Mr. Ergen beneficially owns approximately 50.4% of EchoStar’s total equity securities (assuming conversion of only the Class B Common Stock held by Mr. Ergen into Class A Common Stock) and possesses approximately 75.6% of EchoStar’s total voting power (assuming no conversion of the Class B Common Stock). Mr. Ergen’s beneficial ownership of EchoStar excludes 8,734,250 shares of EchoStar’s Class A Common Stock issuable upon conversion of shares of its Class B Common Stock currently held by certain trusts established by Mr. Ergen for the benefit of his family. These trusts beneficially own approximately 18.3% of EchoStar’s total equity securities (assuming conversion of only the Class B Common Stock held by such trusts into Class A Common Stock) and possess approximately 16.9% of EchoStar’s total voting power (assuming no conversion of the Class B Common Stock). These ownership interests could create actual, apparent or potential conflicts of interest when these individuals are faced with decisions that could have different implications for our company and DISH Network.
· Intercompany agreements related to the Spin-off . EchoStar entered into agreements with DISH Network pursuant to which DISH Network provides EchoStar certain management, administrative, accounting, tax, legal and other services, for which EchoStar pays DISH Network an amount equal to DISH Network’s cost plus a fixed margin. In addition, EchoStar entered into a number of intercompany agreements covering matters such as tax sharing and its responsibility for certain liabilities previously undertaken by DISH Network for certain of our businesses. The terms of certain of these agreements were established while EchoStar was a wholly owned subsidiary of DISH Network and were not the result of arm’s length negotiations. The allocation of assets, liabilities, rights, indemnifications and other obligations between DISH Network and EchoStar under the separation and ancillary agreements EchoStar entered into with DISH Network did not necessarily reflect what two unaffiliated parties might have agreed to. Had these agreements been negotiated with unaffiliated third parties, their terms may have been more favorable, or less favorable, to EchoStar. In addition, conflicts could arise in the interpretation or any extension or renegotiation of these existing agreements .
· Future intercompany transactions . In the future, DISH Network or its affiliates may enter into transactions with us or our subsidiaries or other affiliates. Although the terms of any such transactions will be established based upon negotiations between DISH Network and us and, when appropriate, subject to the approval of the committee of the non-interlocking directors or in certain instances non-interlocking management, there can be no assurance that the terms of any such transactions will be as favorable to us or our subsidiaries or affiliates as may otherwise be obtained in negotiations between unaffiliated third parties.
· Competition for business opportunities . DISH Network retains its interests in various companies that have subsidiaries or controlled affiliates that own or operate domestic or foreign services that may compete with services offered by our businesses. We may also compete with DISH Network when we participate in auctions for spectrum or orbital slots for our satellites.
We may not be able to resolve any potential conflicts of interest with DISH Network and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.
We do not have any agreements with DISH Network that restrict us from selling our services to competitors of DISH Network, nor do we have any agreement that prevents DISH Network from purchasing services from our competitors. We also do not have any agreements with DISH Network that would prevent us from competing with
each other. In addition, the corporate opportunity policy set forth in EchoStar’s articles of incorporation addresses potential conflicts of interest for officers and directors of DISH Network who are also officers or directors of EchoStar. This policy could restrict our ability to take advantage of certain corporate opportunities.
Risks Related to the Notes and the Exchange Offer
We have substantial debt outstanding and may incur additional debt.
As of September 30, 2011, our total debt, including the debt of our subsidiaries, was approximately $2.4 billion. Our debt levels could have significant consequences, including:
· making it more difficult to satisfy our obligations;
· having a dilutive effect on our outstanding equity capital or future earnings;
· increasing our vulnerability to general adverse economic conditions, including changes in interest rates;
· limiting our ability to obtain additional financing;
· requiring us to devote a substantial portion of our available cash and cash flow to make interest and principal payments on our debt, thereby reducing the amount of available cash for other purposes;
· limiting our financial and operating flexibility in responding to changing economic and competitive conditions; and
· placing us at a disadvantage compared to our competitors that have relatively less debt.
In addition, we may incur substantial additional debt in the future. The terms of the indentures governing the Notes permit us to incur substantial additional debt and will allow us to issue additional secured debt under certain circumstances which will also be guaranteed by the guarantors and will share in the Collateral that will secure the Secured Notes and the guarantees thereof, and, in some cases, such debt can be secured by a lien on the Collateral that is pari passu with the lien on certain Collateral securing the Secured Notes. The indentures will also allow our foreign subsidiaries to incur additional debt, which would be structurally senior to the Notes. In addition, the indentures will not prevent us from incurring other liabilities that do not constitute indebtedness. See “Description of the Secured Notes” and “Description of the Unsecured Notes.” This may have the effect of reducing the amount of proceeds paid to you. If new debt is added to our current debt levels, the risks we now face could intensify.
We may be required to raise and refinance indebtedness during unfavorable market conditions.
Our business plans may require that we raise additional debt to capitalize on our business opportunities. Recent developments in the financial markets have made it more difficult for issuers of high yield indebtedness such as us to access capital markets at reasonable rates. Currently, we have not been materially impacted by events in the current credit market. However, we cannot predict with any certainty whether or not we will be impacted in the future by the current conditions which may adversely affect our ability to secure additional financing to support our growth initiatives.
We depend upon our subsidiaries’ earnings to make payments on our indebtedness.
Since we conduct all of our operations through subsidiaries, our ability to service our debt obligations will depend upon the earnings of our subsidiaries and the payment of funds by our subsidiaries to us in the form of loans, dividends or other payments. We have few assets of significance other than the capital stock of our subsidiaries. Our subsidiaries are separate legal entities and are not obligated to make funds available to us, and creditors of our subsidiaries will have a superior claim to certain of our subsidiaries’ assets. In addition, our subsidiaries’ ability to make any payments to us will depend on their earnings, the terms of their indebtedness, business and tax considerations, and legal restrictions. We cannot assure you that our subsidiaries will be able to pay dividends or otherwise contribute or distribute funds to us in an amount sufficient to pay the principal of or interest on the indebtedness owed by us.
The guarantees of the Notes by our subsidiaries may be subject to challenge.
Our obligations under the Notes will be guaranteed jointly and severally by our principal domestic operating subsidiaries. It is possible that if the creditors of the subsidiary guarantors challenge the subsidiary guarantees as a fraudulent conveyance under relevant federal and state statutes, under certain circumstances (including a finding that a subsidiary guarantor was insolvent at the time its guarantee of the Notes was issued), a court could hold that the obligations of a subsidiary guarantor under a subsidiary guarantee may be voided or are subordinate to other obligations of a subsidiary guarantor. In addition, it is possible that the amount for which a subsidiary guarantor is liable under a subsidiary guarantee may be limited. The measure of insolvency for purposes of the foregoing may vary depending on the law of the jurisdiction that is being applied. Generally, however, a company would be considered insolvent if the sum of its debts is greater than all of its property at a fair valuation or if the present fair saleable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and mature. The indentures governing the Notes will provide that the obligations of the subsidiary guarantors under the subsidiary guarantees will be limited to amounts that will not result in the subsidiary guarantees being a fraudulent conveyance under applicable law. See “Description of the Secured Notes — Guarantees” and “Description of the Unsecured Notes — Guarantees.”
Certain subsidiaries are not included as guarantor subsidiaries.
The guarantors of the Notes include only certain of our direct and indirect subsidiaries. Because a portion of our operations is conducted by the non-guarantor subsidiaries, our cash flow and our ability to service debt, including our and the guarantor subsidiaries’ ability to pay the interest on and principal of the Notes when due, are dependent to some extent upon interest payments, cash dividends and distributions or other transfers from the non-guarantor subsidiaries. In addition, any payment of interest, dividends, distributions, loans or advances by the non-guarantor subsidiaries to us and to the guarantor subsidiaries, as applicable, could be subject to restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which those non-guarantor subsidiaries operate. Moreover, payments to us and the guarantor subsidiaries by the non-guarantor subsidiaries will be contingent upon non-guarantor subsidiaries’ earnings.
Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or the guarantees or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the non-guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors and holders of debt of that subsidiary.
The covenants in the indentures will not necessarily restrict our ability to take actions that may impair our ability to repay the Notes.
Although the indentures governing the Notes include covenants that will restrict us from taking certain actions, the terms of these covenants include important exceptions that you should review carefully before investing in the Notes. Notwithstanding the covenants in the indentures, we expect that we will continue to be able to incur substantial additional indebtedness and to make significant investments and other restricted payments without significant restrictions under the indentures, including actions which may adversely affect our ability to perform our obligations under the indentures. We are able to incur additional indebtedness based on a multiple of our Consolidated Cash Flow for the most recent four fiscal quarters, and we are able to make restricted payments (including investments) in an amount that is based in part upon our cumulative Consolidated Cash Flow since the issue date of the Notes. However, this may change in the future depending on, among other things, our expectations as to future cash needs as well as our operations, earnings and general financial condition, as well as other internal and external factors that we may deem relevant. See “Description of the Secured Notes — Certain Covenants” and “Description of the Unsecured Notes — Certain Covenants .”
We may be unable to repay or repurchase the Notes upon a change of control.
There is no sinking fund with respect to the Notes, and the entire outstanding principal amount of the Notes will become due and payable on its maturity date. If we experience a Change of Control Event, as defined in the indentures, you may require us to repurchase all or a portion of your Notes prior to maturity. See “Description of the Secured Notes — Change of Control Offer” and “Description of the Unsecured Notes — Change of Control Offer.” We may not have sufficient funds or be able to arrange for additional financing to repay the Notes at maturity or to repurchase Notes tendered to us following a change of control.
If we have insufficient funds to redeem all Notes that holders tender for purchase upon the occurrence of a change of control, and we are unable to raise additional capital, an event of default could occur under the indentures governing the Notes that have not been redeemed. An event of default could cause any other debt that we have to become automatically due, further exacerbating our financial condition and diminishing the value and liquidity of the Notes. We cannot assure you that additional capital would be available to us on acceptable terms, or at all.
There may be no public market for the Notes.
The Notes will be a new issue of securities with no established trading market. We cannot assure you that any market for the Notes will develop or, if it does develop, that it will be maintained. If a trading market is established, various factors could have a material adverse effect on the trading of the Notes, including fluctuations in the prevailing interest rates. We do not intend to apply for a listing of the Notes on any securities exchange.
Additional Risks Related to the Secured Notes
The Collateral securing the Secured Notes is subject to priority liens held by holders of indebtedness secured by priority liens and holders of other indebtedness secured by permitted prior liens. If there is a default, such collateral may not be sufficient to repay both the holders of such priority liens and the holders of the Secured Notes.
The indenture governing the Secured Notes permits us to issue and permits to exist additional indebtedness, including without limitation, indebtedness secured by Permitted Liens, that may be secured on a first-priority or equal and ratable basis by liens on the Collateral securing the Secured Notes. The holders of indebtedness secured by priority liens on the Collateral will be entitled to receive proceeds from any realization of their Collateral to repay their obligations in full before the holders of the Secured Notes will be entitled to any recovery from the Collateral. Thus, there can be no assurance that holders of the Secured Notes will realize any proceeds from the Collateral.
The Secured Notes will rank effectively junior to HSS’s obligations that are secured by assets that do not constitute Collateral. As of September 30, 2011, the Old Secured Notes ranked effectively junior to $393 million of debt secured by assets not constituting Collateral or assets that secure such other debt on a higher priority basis.
State law may limit the ability of the Collateral Agent and the noteholders to foreclose on the real property and improvements included in the Collateral.
The Secured Notes will be secured by, among other things, liens on owned and, to the extent applicable, certain leased or otherwise held real property and related improvements. State law may limit the ability of the Collateral Agent or the noteholders to foreclose on the improved real property Collateral located in those states. The perfection, enforceability and foreclosure of mortgage liens against real property interests that secure debt obligations such as the Secured Notes are generally governed by the laws of those states where the Collateral is located. In addition, these laws may impose procedural requirements for foreclosure different from and necessitating a longer time period for completion than the requirements for foreclosure of security interests in personal property. Debtors may have the right to reinstate defaulted debt (even if it is has been accelerated) before the foreclosure date by paying the past due amounts and a right of redemption after foreclosure. Governing laws may also impose security first and one form of action rules which can affect the ability to foreclose or the timing of foreclosure on real and personal property collateral regardless of the location of the Collateral and may limit the right to recover a deficiency following a foreclosure.
The Collateral Agent and the noteholders also may be limited in their ability to enforce a breach of the “no liens” covenant. Some decisions of state courts have placed limits on a lender’s ability to accelerate debt secured by real property upon breach of covenants prohibiting the creation of certain junior liens or leasehold estates, and the Collateral Agent and the noteholders may need to demonstrate that enforcement is reasonably necessary to protect against impairment of the lender’s security or to protect against an increased risk of default. Although the foregoing court decisions may have been preempted, at least in part, by certain federal laws, the scope of such preemption, if any, is uncertain. Accordingly, a court could prevent the Trustee and the holders of the Secured Notes from declaring a default and accelerating the notes by reason of a breach of this covenant, which could have a material adverse effect on the ability of such holders to enforce the covenant.
We may not be able to grant you a collateral interest in our leased satellites.
We currently lease 5 satellites and may in the future lease additional satellites. We have agreed to use our commercially reasonable efforts to have the owners of such current and future leased satellites agree to consent to our granting a security interest in our rights as lessee under such leases to the Collateral Agent for the benefit of the noteholders. We have agreed to use commercially reasonable efforts to obtain those consents prior to 180 days after June 8, 2011 (in the case of existing satellite leases) or prior to 180 days after entering into a new lease for a satellite. We cannot assure that the owners of such satellites will consent to our grant of a security interest in such leases to the Collateral Agent for the benefit of the noteholders. In the event they do not consent to our grant of such a security interest, the noteholders will not have a collateral interest in such leased satellite.
The value of the Collateral securing the Secured Notes may not be sufficient to satisfy our obligations under the Secured Notes or to secure post-petition interest under U.S. federal bankruptcy law.
The value of the Collateral is subject to fluctuations based on factors that include general economic conditions, the actual fair market value of the Collateral at such time, the timing and the manner of the sale and availability of buyers and similar factors. By its nature, some or all of the Collateral may be illiquid and may have no readily ascertainable market value. We cannot assure you that the Collateral will be saleable or, if saleable, that there will not be substantial delays in its liquidation. Further, to the extent that liens, rights and easements granted to third parties encumber assets located on property owned by us or the guarantors or constitute senior or pari passu or subordinate liens on the Collateral, those third parties have or may exercise rights and remedies with respect to the property subject to such encumbrances (including rights to require marshalling of assets) that could adversely affect the value of the Collateral located at a particular site and the ability of the Collateral Agent to realize or foreclose on the Collateral at that site. Further, the Collateral Agent’s rights to foreclose on certain Collateral consisting of equity interests in our first-tier foreign subsidiaries will be subject to local law, and the Collateral Agent may not be able to realize or foreclose on such Collateral due to foreign law restrictions.
As a result, liquidating the Collateral securing the Secured Notes may not produce proceeds in an amount sufficient to pay any amounts due on the Secured Notes. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding, the bankruptcy trustee, the debtor-in-possession or competing creditors could possibly assert that the fair market value of the Collateral with respect to the Secured Notes on the date of the bankruptcy filing was less than the then-current principal amount of the Secured Notes. If a bankruptcy court determines that the Secured Notes are under-collateralized, a claim in the bankruptcy proceeding with respect to a Secured Note would be bifurcated between a secured claim and unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the Collateral and may not receive other “adequate protection,” including any post-petition interest, under U.S. federal bankruptcy laws. See “—U.S. federal bankruptcy laws may significantly impair noteholders’ ability to realize value from the Collateral.”
In addition, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us or the guarantors, noteholders will be entitled to post-petition interest under the Bankruptcy Code only if the value of their security interest in the Collateral is greater than their pre-bankruptcy claim. Further, if any payments of post-petition interest were made at the time of such a finding of under-collateralization, such payments could be re-characterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the Secured Notes.
We therefore cannot assure you of the value of the Collateral or of the amount of gross proceeds that would be received upon a sale or liquidation of the Collateral.
The ability of the Trustee to foreclose on certain of the collateral securing the Secured Notes may be limited by U.S. law.
The ability to foreclose on, or to exercise certain rights or remedies with respect to, certain of the Collateral requires prior approval from the FCC to the extent it would result in an assignment or change of control of the FCC licenses of us or any subsidiary (whether as a matter of law or fact). Equity and voting rights in certain of the collateral, and control over such collateral, must remain with us even in the event of default until the FCC gives its consent to the exercise of security holder rights by a purchaser at a public or private sale of such Collateral or to the exercise of such rights by a receiver, trustee, conservator, or other agent duly appointed pursuant to applicable law. There is no assurance that any such required FCC approval can be obtained on a timely basis or at all. In addition, applicable foreign ownership restrictions could prevent non-United States citizens from foreclosing on certain of the collateral securing the Secured Notes.
The pledge of the capital stock, other securities and similar items of our subsidiaries that secure the Secured Notes will automatically be released from the lien on them and no longer constitute Collateral for so long as the pledge of such capital stock or such other securities would require the filing of separate financial statements with the SEC for that subsidiary.
The Secured Notes and the guarantees of the Secured Notes will be secured by a pledge of the stock of some of our subsidiaries. Under the SEC regulations currently in effect, if the par value, book value as carried by us or market value (whichever is greatest) of the capital stock, other securities or similar items of a subsidiary pledged as part of the Collateral is greater than or equal to 20% of the aggregate principal amount of the Secured Notes then outstanding, such a subsidiary would be required to provide separate financial statements to the SEC. The indenture and the collateral documents provide that any capital stock and other securities of any of our subsidiaries will be excluded from the Collateral for so long as the pledge of such capital stock or other securities to secure the Secured Notes would cause such subsidiary to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).
As a result, holders of the Secured Notes could lose a portion or all of their security interest in the capital stock or other securities of those subsidiaries during such period. It may be more difficult, costly and time-consuming for holders of the Secured Notes to foreclose on the assets of a subsidiary than to foreclose on its capital stock or other securities, so the proceeds realized upon any such foreclosure could be significantly less than those that would have been received upon any sale of the capital stock or other securities of such subsidiary. See “Description of the Secured Notes — Security.”
Foreclosing on any of the Collateral located outside the United States may be difficult due to the laws of certain jurisdictions.
Some of the Collateral securing the Secured Notes may be located outside of the United States. If we default under the indenture or if a guarantor defaults under its guarantee, the holders of a majority of the aggregate principal amount of the Old Secured Notes and the Secured Notes may direct the Trustee to instruct the Collateral Agent to bring a foreclosure action against the defaulting party. We cannot assure you that the Collateral or the guarantors will be located in a jurisdiction having effective or favorable foreclosure procedures and lien priorities. Any foreclosure proceedings could be subject to lengthy delays, resulting in increased custodial costs, deterioration in the condition of the Collateral and substantial reduction of the value of such Collateral. In addition, some jurisdictions may not provide a legal remedy for the enforcement of mortgages on the Collateral.
Such laws may vary significantly from jurisdiction to jurisdiction. Furthermore, all or some of those laws and procedures may be less favorable to mortgagees than those in other jurisdictions and may be less favorable than those applicable in the United States. The costs of enforcement in foreign jurisdictions can be high and can include fees based on the face amount of the mortgage(s) being enforced. Foreign court proceedings can also be slow and have unexpected procedural hurdles. Priorities accorded lien claims and mortgages can vary in foreign jurisdictions, and some jurisdictions prefer certain local claimants to foreign claimants. Consequently, there are no assurances that the Collateral Agent will be able to enforce any one or more of the mortgages covering any of the Collateral that is located outside the United States.
The Collateral securing the Secured Notes may be diluted under certain circumstances.
The indenture permits us to issue additional senior secured indebtedness, including other indebtedness that may be secured on a pari passu basis with the Secured Notes , subject to our compliance with the restrictive covenants in the indenture and the agreements governing our other indebtedness at the time we issue or incur such additional senior secured indebtedness. As a result, the Collateral securing the Secured Notes would be shared by any such other indebtedness, which would dilute the value of the Collateral compared to the aggregate principal amount of indebtedness issued or incurred such that there can be no assurance that the holders of the Secured Notes will realize any proceeds from the Collateral. As of September 30, 2011, the Old Unsecured Notes ranked effectively junior to $1.5 billion of debt of which $1.1 billion was the Old Secured Notes.
The rights of holders of the Secured Notes to the Collateral securing the Secured Notes may be materially limited by any intercreditor agreement to the extent we have incurred or will incur any priority lien debt.
The Collateral will be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by creditors that have the benefit of senior-priority liens on such Collateral from time to time, whether on or after the date the Secured Notes and guarantees thereof are issued. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the Collateral securing the Secured Notes as well as the ability of the Collateral Agent to realize or foreclose on such Collateral.
There are circumstances other than repayment or discharge of the Secured Notes under which the Collateral securing the Secured Notes will be released automatically, without your consent or the consent of the Collateral Agent.
Under various circumstances, Collateral securing the Secured Notes will be released automatically, including: (a) upon a sale, transfer or other disposal of such Collateral in a transaction not prohibited under the indenture; and (b) with respect to Collateral held by a guarantor, upon the release of the guarantor from its guarantee in accordance with the indenture.
The indenture also permits us to designate one or more of our Restricted Subsidiaries that is a guarantor of the Secured Notes as an Unrestricted Subsidiary. If we designate a subsidiary guarantor as an Unrestricted Subsidiary for purposes of the indenture, all of the liens on any Collateral owned by that subsidiary or any of its subsidiaries and any guarantees of the Secured Notes by that subsidiary or any of its subsidiaries will be released under the indenture if so permitted pursuant to the terms of the indenture.
The rights of holders of the Secured Notes in the Collateral may be adversely affected by the failure to perfect security interests in the Collateral and other issues generally associated with the realization of security interests in the Collateral.
Applicable law requires that a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The senior liens in all Collateral from time to time owned by us or the guarantors and/or the liens in all Collateral from time to time owned by us or the guarantors may not be perfected with respect to the Secured Notes and the guarantees thereof if the Collateral Agent has not taken the actions necessary to perfect any of those liens upon or prior to the issuance of the Secured Notes. The inability or failure of the Collateral Agent to take all actions necessary to create properly perfected security interests in the Collateral may result in the loss of the priority of the security interest for the benefit of the noteholders to which they would have been otherwise entitled.
In addition, applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. We and the guarantors will have limited obligations to perfect the security interest of the holders of the Secured Notes in specified Collateral. We cannot assure you that the Collateral Agent will monitor, or that we or the guarantors will inform the Collateral Agent of, the future acquisition of property and rights that constitute Collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired Collateral. The Collateral Agent for the Secured Notes has no obligation to monitor the acquisition of additional property or rights that constitute Collateral or the perfection of any security interest. Such failure may result in the loss of the security
interest in the Collateral or the priority of the security interest in favor of the Secured Notes and the guarantees thereof against third parties.
The security interest of the Collateral Agent will be subject to practical challenges generally associated with the realization of security interests in the Collateral. For example , the Collateral Agent may need to obtain the consent of a third party to obtain or enforce a security interest in an asset. We cannot assure you that the Collateral Agent will be able to obtain any such consent or that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. As a result, the Collateral Agent may not have the ability to foreclose upon those assets and the value of the Collateral may significantly decrease.
In addition, because a portion of the Collateral will consist of pledges of 65% of the capital stock of certain of our foreign subsidiaries, the validity of those pledges under local law, if applicable, and the ability of the holders of the Secured Notes to realize upon that Collateral under local law, to the extent applicable, may be limited by such local law, which limitations may or may not affect the liens securing the Secured Notes.
The Collateral is subject to casualty risks.
Certain losses, including losses resulting from terrorist acts, may be either uninsurable or not economically insurable, in whole or in part. As a result, we cannot assure you that the insurance proceeds, if any, will compensate us fully for our losses. If there is a total or partial loss of any of the Collateral securing the Secured Notes, we cannot assure you that any insurance proceeds received by us will be sufficient to satisfy all the secured obligations, including the Secured Notes. We currently do not carry in-orbit insurance on any of our satellites, other than for SPACEWAY 3, and, except for the planned launches of Jupiter 1 and EchoStar XVI, we often do not use commercial insurance to mitigate the potential financial impact of launch or in-orbit failures.
Any future note guarantees or additional liens on the Collateral provided after the Secured Notes are issued could also be avoided by a trustee in bankruptcy.
The indenture governing the Secured Notes provides that certain of our future subsidiaries will guarantee the Secured Notes and secure the guarantees thereof with liens on their assets. The indenture also requires us and the guarantors to grant liens on certain assets that are acquired after the Secured Notes are issued. Any future Secured Note guarantee or additional lien in favor of the Collateral Agent for the benefit of the holders of the Secured Notes might be avoidable by the grantor (as debtor-in-possession) or by its trustee in bankruptcy or other third parties if certain events or circumstances exist or occur. For instance , if the entity granting the future note guarantee or additional lien were insolvent at the time of the grant and if such grant were made within 90 days before that entity commenced a bankruptcy proceeding (or one year before commencement of a bankruptcy proceeding if the creditor that benefited from the note guarantee or lien is an “insider” under the Bankruptcy Code), and the granting of the future note guarantee or additional lien enabled the noteholders to receive more than they would if the grantor were liquidated under Chapter 7 of the Bankruptcy Code, then such note guarantee or lien could be avoided as a preferential transfer.
U.S. federal bankruptcy laws may significantly impair noteholders’ ability to realize value from the Collateral.
The right of the Collateral Agent to repossess and dispose of the Collateral securing the Secured Notes upon the occurrence of an event of default under the indenture governing the Secured Notes or any instrument governing future indebtedness is likely to be significantly impaired by U.S. federal bankruptcy law if bankruptcy proceedings were to be commenced by or against us or any guarantor prior to or possibly even after the Collateral Agent has repossessed and disposed of the Collateral. Under the Bankruptcy Code, a secured creditor is prohibited from repossessing its security from a debtor in a bankruptcy proceeding, or from disposing of security repossessed from such debtor, without the approval of the bankruptcy court. Moreover , the Bankruptcy Code permits the debtor to continue to retain and to use the Collateral, and the proceeds, products, rents or profits of the Collateral, even after the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the Collateral and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the Collateral as a result of the stay of repossession or disposition or any use of the Collateral by the debtor during the pendency of the bankruptcy proceeding. In view of the broad discretionary powers of a
bankruptcy court, we cannot predict (1) how long payments on the Secured Notes could be delayed following commencement of a bankruptcy proceeding, (2) whether or when the Collateral Agent would repossess or dispose of the Collateral or (3) whether or to what extent noteholders would be compensated for any delay in payment of loss of value of the Collateral through the requirements of “adequate protection.” Furthermore, in the event the bankruptcy court determines that the value of the Collateral is not sufficient to repay all amounts due on the Secured Notes, noteholders would have “undersecured claims.” U.S. federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorneys’ fees for ‘‘undersecured claims” during the debtor’s bankruptcy proceeding.
Additional Risks Relating to the Unsecured Notes
The Unsecured Notes are unsecured, and the Unsecured Notes will be effectively subordinated to any existing and future secured debt.
The Unsecured Notes are unsecured and will rank equal in right of payment with our existing and future unsecured and unsubordinated senior debt. The Unsecured Notes will be effectively subordinated to the Unsecured Notes and any future secured debt to the extent of the value of the assets that secure the indebtedness. In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the Unsecured Notes, payment on the Unsecured Notes could be less, ratably, than on any secured indebtedness. We may not have sufficient assets remaining after payment to our secured creditors to pay amounts due on any or all of the Unsecured Notes then outstanding.
The exchange offer is intended to satisfy our obligations under the registration rights agreement we entered into in connection with the issuance of the Old Notes. We will not receive any cash proceeds from the issuance of the Notes in the exchange offer. In consideration for issuing the Notes as contemplated in this prospectus, we will receive in exchange the Old Notes in like principal amount. We will cancel and retire the Old Notes surrendered in exchange for the Notes in the exchange offer. As a result, the issuance of the Notes will not result in any increase or decrease in our indebtedness.
The following table presents our cash position plus consolidated capitalization as of September 30, 2011. The table below should be read in conjunction with our consolidated financial statements and related notes thereto included in this prospectus.
|
|
|
As of |
|
|
|
|
|
September 30, 2011 |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
(unaudited) |
|
|
|
Cash, cash equivalents and marketable investment securities |
|
$ |
453,708 |
|
|
Debt: |
|
|
|
|
|
6 1 / 2 % Senior Secured Notes due 2019 |
|
1,100,000 |
|
|
|
7 5 / 8 % Senior Notes due 2021 |
|
900,000 |
|
|
|
Other (1) |
|
396,312 |
|
|
|
Total debt |
|
2,396,312 |
|
|
|
Total shareholder’s equity |
|
1,084,437 |
|
|
|
Total capitalization |
|
$ |
3,480,749 |
|
(1) Represents amounts relating to certain capital lease obligations, mortgages and other notes payable, including current portion, VSAT hardware financing, 8% note payable for EchoStar IX, and satellite vendor financing payable over 14 years from launch. See “Description of Certain Other Indebtedness.”
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present the selected historical consolidated financial data of HSS and its subsidiaries at the dates and for the periods indicated. We derived the following selected historical consolidated financial data for the years ended December 31, 2008, 2009 and 2010 and as of December 31, 2009 and 2010 from the audited consolidated financial statements of HSS and its subsidiaries included in this prospectus. We derived the following selected historical consolidated financial data for the nine months ended September 30, 2010 and 2011 and as of September 30, 2011 from the unaudited consolidated financial statements of HSS and its subsidiaries included elsewhere in this prospectus. The unaudited consolidated financial statements of HSS were prepared on a basis consistent with its audited consolidated financial statements. In the opinion of HSS’s management, the unaudited consolidated financial statements include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the results for those periods. Results for the nine months ended September 30, 2011 also include the operating results of Hughes Communications from June 8, 2011, the date of completion of the Acquisition, and are not necessarily indicative of the results that may be expected for the full year. No historical consolidated financial data of HSS and its subsidiaries are available as of any date or for any period prior to the Spin-off, which was effected as of January 1, 2008.
You should read this data in conjunction with, and it is qualified by reference to, the sections entitled “Summary—Summary Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
|
|
|
For the Years Ended
|
|
For the Nine Months Ended
|
|
|||||||||||
|
|
|
2010 |
|
2009 |
|
2008 |
|
2011 |
|
2010 |
|
|||||
|
|
|
(In thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Services and other revenue |
|
$ |
52,643 |
|
$ |
40,284 |
|
$ |
30,014 |
|
$ |
331,775 |
|
$ |
38,571 |
|
|
Services and other revenue — DISH Network |
|
208,364 |
|
131,111 |
|
149,513 |
|
160,457 |
|
157,114 |
|
|||||
|
Equipment revenue |
|
1,172 |
|
851 |
|
124 |
|
83,444 |
|
946 |
|
|||||
|
Equipment revenue — DISH Network |
|
— |
|
— |
|
— |
|
97 |
|
— |
|
|||||
|
Total revenue |
|
262,179 |
|
172,246 |
|
179,651 |
|
575,773 |
|
196,631 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Costs and Expenses: (exclusive of depreciation shown separately below) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cost of sales — services and other |
|
64,593 |
|
35,025 |
|
37,271 |
|
185,277 |
|
48,193 |
|
|||||
|
Cost of sales — equipment |
|
876 |
|
10 |
|
11 |
|
68,541 |
|
700 |
|
|||||
|
Selling, general and administrative expenses |
|
12,072 |
|
9,512 |
|
6,868 |
|
93,029 |
|
9,133 |
|
|||||
|
Depreciation and amortization |
|
95,069 |
|
107,471 |
|
141,701 |
|
163,976 |
|
71,799 |
|
|||||
|
Impairments of long-lived assets |
|
— |
|
— |
|
234,959 |
|
— |
|
— |
|
|||||
|
Total costs and expenses |
|
172,610 |
|
152,018 |
|
420,810 |
|
510,823 |
|
129,825 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating income (loss) |
|
89,569 |
|
20,228 |
|
(241,159 |
) |
64,950 |
|
66,806 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest income |
|
26 |
|
23 |
|
53 |
|
1,823 |
|
5 |
|
|||||
|
Interest expense, net of amounts capitalized |
|
(23,640 |
) |
(23,567 |
) |
(30,836 |
) |
(50,904 |
) |
(19,527 |
) |
|||||
|
Acquisition costs |
|
— |
|
— |
|
— |
|
(35,230 |
) |
— |
|
|||||
|
Other, net |
|
1,289 |
|
92 |
|
3 |
|
9,703 |
|
1,082 |
|
|||||
|
Total other income (expense) |
|
(22,325 |
) |
(23,452 |
) |
(30,780 |
) |
(74,608 |
) |
(18,440 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) before income taxes |
|
67,244 |
|
(3,224 |
) |
(271,939 |
) |
(9,658 |
) |
48,366 |
|
|||||
|
Income tax (provision) benefit, net |
|
(24,812 |
) |
396 |
|
98,126 |
|
1,697 |
|
(17,846 |
) |
|||||
|
Net income (loss) |
|
42,432 |
|
(2,828 |
) |
(173,813 |
) |
(7,961 |
) |
30,520 |
|
|||||
|
Less: Net income (loss) attributable to noncontrolling interests |
|
— |
|
— |
|
— |
|
357 |
|
— |
|
|||||
|
Net income (loss) attributable to the HSS common shareholder |
|
$ |
42,432 |
|
$ |
(2,828 |
) |
$ |
(173,813 |
) |
$ |
(8,318 |
) |
$ |
30,520 |
|
|
|
|
As of |
|
|||||||
|
|
|
December 31, |
|
September 30, |
|
|||||
|
Balance Sheet Data: |
|
2010 |
|
2009 |
|
2011 |
|
|||
|
|
|
(In thousands) |
|
|||||||
|
|
|
|
|
|
|
(unaudited) |
|
|||
|
Cash and cash equivalents |
|
$ |
106 |
|
$ |
— |
|
$ |
194,212 |
|
|
Total assets |
|
$ |
996,676 |
|
$ |
942,729 |
|
$ |
4,173,407 |
|
|
Total debt |
|
$ |
411,763 |
|
$ |
443,893 |
|
$ |
2,396,312 |
|
|
Total shareholder’s equity |
|
$ |
480,633 |
|
$ |
437,580 |
|
$ |
1,084,437 |
|
|
|
|
For the Years Ended
|
|
For the Nine
|
|
|||||||
|
Other Data (unaudited): |
|
2010 |
|
2009 |
|
2008 |
|
2011 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||||
|
Ratio of earnings to fixed charges (1) |
|
2.24 |
|
— |
|
— |
|
— |
|
|||
|
Deficiency of earnings to fixed charges (1) |
|
— |
|
$ |
(6,014 |
) |
$ |
(267,280 |
) |
$ |
(36,008 |
) |
(1) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes, plus fixed charges. Fixed charges consist of interest incurred on all indebtedness, including capitalized interest and the imputed interest component of rental expense under noncancelable operating leases.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Introduction
The pro forma information has been prepared in accordance with the rules and regulations of the SEC. The following unaudited pro forma condensed combined statements of operations give effect to the Acquisition and the other transactions contemplated by the Merger Agreement and the issuance by HSS of $1.1 billion of its 6½% Secured Notes due 2019 and $900 million of its 7 5 / 8 % Unsecured Notes due 2021, as if the Acquisition and related financing transactions had been completed on January 1, 2010.
The unaudited pro forma adjustments are based on historical information and certain assumptions that we believe are reasonable. The unaudited pro forma condensed combined financial information is for informational purposes only and does not purport to reflect the results of operations that would have occurred if the Acquisition and related financings had been consummated on the date indicated above; nor does it purport to represent or be indicative of the results of operations of HSS for any future dates or periods. The historical consolidated results of operations of HSS include Hughes Communications’ results of operations subsequent to the Acquisition. A pro forma balance sheet is not included within this financial information as the effect of the Acquisition is reflected in the September 30, 2011 consolidated balance sheet of HSS included in this prospectus.
HSS
Unaudited Pro Forma Condensed Combined Statements of Operations
|
|
|
For the Nine Months Ended September 30, 2011 |
|
||||||||||
|
|
|
HSS
|
|
Pre-Acquisition
|
|
Pro Forma
|
|
Total |
|
||||
|
|
|
(In thousands) |
|
||||||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
||||
|
Services and other revenue |
|
$ |
331,775 |
|
$ |
385,620 |
|
$ |
(1,682 |
)(a) |
$ |
715,713 |
|
|
Services and other revenue - DISH Network |
|
160,457 |
|
— |
|
— |
|
160,457 |
|
||||
|
Equipment revenue |
|
83,444 |
|
81,351 |
|
— |
|
164,795 |
|
||||
|
Equipment revenue - DISH Network |
|
97 |
|
— |
|
— |
|
97 |
|
||||
|
Total revenue |
|
575,773 |
|
466,971 |
|
(1,682 |
) |
1,041,062 |
|
||||
|
Costs and Expenses: (exclusive of depreciation shown below) |
|
|
|
|
|
|
|
|
|
||||
|
Cost of sales - services and other |
|
185,277 |
|
240,436 |
|
(56,470 |
)(b) |
369,243 |
|
||||
|
Cost of sales - equipment |
|
68,541 |
|
83,925 |
|
(4,329 |
)(a)(b) |
148,137 |
|
||||
|
Selling, general and administrative expenses |
|
93,029 |
|
138,029 |
|
(39,314 |
)(a)(b) |
191,744 |
|
||||
|
Depreciation and amortization |
|
163,976 |
|
1,237 |
|
5,515 |
(c) |
231,413 |
|
||||
|
|
|
|
|
|
|
60,685 |
(b) |
|
|
||||
|
Total costs and expenses |
|
510,823 |
|
463,627 |
|
(33,913 |
) |
940,537 |
|
||||
|
Operating income (loss) |
|
64,950 |
|
3,344 |
|
32,231 |
|
100,525 |
|
||||
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
||||
|
Interest income |
|
1,823 |
|
666 |
|
— |
|
2,489 |
|
||||
|
Interest expense, net of amounts capitalized |
|
(50,904 |
) |
(21,983 |
) |
(44,267 |
)(d) |
(117,154 |
) |
||||
|
Acquisition costs |
|
(35,230 |
) |
— |
|
35,230 |
(a) |
— |
|
||||
|
Other, net |
|
9,703 |
|
(248 |
) |
— |
|
9,455 |
|
||||
|
Total other income (expense) |
|
(74,608 |
) |
(21,565 |
) |
(9,037 |
) |
(105,210 |
) |
||||
|
Income (loss) before income taxes |
|
(9,658 |
) |
(18,221 |
) |
23,194 |
|
(4,685 |
) |
||||
|
Income tax (provision) benefit, net |
|
1,697 |
|
(3,316 |
) |
1 |
(e) |
(1,618 |
) |
||||
|
Net income (loss) |
|
(7,961 |
) |
(21,537 |
) |
23,195 |
|
(6,303 |
) |
||||
|
Less: Net income (loss) attributable to noncontrolling interests |
|
357 |
|
(254 |
) |
— |
|
103 |
|
||||
|
Net income (loss) attributable to the HSS common shareholder |
|
$ |
(8,318 |
) |
$ |
(21,283 |
) |
$ |
23,195 |
|
$ |
(6,406 |
) |
The accompanying notes are an integral part of the
Unaudited Pro Forma Condensed Combined Financial Information.
|
|
|
For the Year Ended December 31, 2010 |
|
||||||||||
|
|
|
HSS
|
|
Pre-Acquisition
|
|
Pro Forma
|
|
Total |
|
||||
|
|
|
(In thousands) |
|
||||||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
||||
|
Services and other revenue |
|
$ |
53,815 |
|
$ |
791,324 |
|
$ |
(5,718 |
)(a) |
$ |
839,421 |
|
|
Services and other revenue - DISH Network |
|
208,364 |
|
— |
|
— |
|
208,364 |
|
||||
|
Equipment revenue |
|
— |
|
252,003 |
|
— |
|
252,003 |
|
||||
|
Total revenue |
|
262,179 |
|
1,043,327 |
|
(5,718 |
) |
1,299,788 |
|
||||
|
Costs and Expenses: (exclusive of depreciation shown below) |
|
|
|
|
|
|
|
|
|
||||
|
Cost of sales - services and other |
|
65,469 |
|
493,023 |
|
(100,909 |
)(b) |
457,583 |
|
||||
|
Cost of sales - equipment |
|
— |
|
234,805 |
|
(16,395 |
)(a)(b) |
218,410 |
|
||||
|
Selling, general and administrative expenses |
|
12,072 |
|
226,791 |
|
(18,980 |
)(a)(b) |
219,883 |
|
||||
|
Depreciation and amortization |
|
95,069 |
|
3,084 |
|
127,912 |
(c) |
337,352 |
|
||||
|
|
|
|
|
|
|
111,287 |
(b) |
|
|
||||
|
Total costs and expenses |
|
172,610 |
|
957,703 |
|
102,915 |
|
1,233,228 |
|
||||
|
Operating income (loss) |
|
89,569 |
|
85,624 |
|
(108,633 |
) |
66,560 |
|
||||
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
||||
|
Interest income |
|
26 |
|
2,043 |
|
— |
|
2,069 |
|
||||
|
Interest expense, net of amounts capitalized |
|
(23,640 |
) |
(59,345 |
) |
(80,190 |
)(d) |
(163,175 |
) |
||||
|
Other, net |
|
1,289 |
|
374 |
|
— |
|
1,663 |
|
||||
|
Total other income (expense) |
|
(22,325 |
) |
(56,928 |
) |
(80,190 |
) |
(159,443 |
) |
||||
|
Income (loss) before income taxes |
|
67,244 |
|
28,696 |
|
(188,823 |
) |
(92,883 |
) |
||||
|
Income tax (provision) benefit, net |
|
(24,812 |
) |
(5,716 |
) |
69,676 |
(e) |
39,148 |
|
||||
|
Net income (loss) |
|
42,432 |
|
22,980 |
|
(119,147 |
) |
(53,735 |
) |
||||
|
Less: Net income (loss) attributable to noncontrolling interests |
|
— |
|
193 |
|
— |
|
193 |
|
||||
|
Net income (loss) attributable to the HSS common shareholder |
|
$ |
42,432 |
|
$ |
22,787 |
|
$ |
(119,147 |
) |
$ |
(53,928 |
) |
The accompanying notes are an integral part of the
Unaudited Pro Forma Condensed Combined Financial Information.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
(a) Represents pro forma adjustments necessary to reflect the Acquisition and related financing transactions, including (i) the reduction of revenue and the associated expenses on the pro forma condensed combined statements of operations to reflect elimination of deferred revenue and subscriber acquisition costs in the preliminary purchase price allocation; and (ii) the removal of material nonrecurring charges related to (a) compensation arrangements with executive management and (b) direct and incremental transaction costs associated with the Acquisition that are recorded in the historical financial statements of HSS.
(b) Represents the pro forma re-classification adjustments to conform Hughes Communications’ accounting policies to those of HSS, including but not limited to, depreciation expense which is no longer recorded as a component of cost of sales, or selling general and administrative expenses based on the nature of the underlying long-lived asset but is presented in the caption depreciation and amortization.
(c) Represents net incremental depreciation and amortization expense of $128 million and $6 million for the year ended December 31, 2010 and the nine months ended September 30, 2011, respectively, as a result of the allocation of purchase price to identified intangible assets. Estimated future amortization over the next five years for identifiable intangible assets is as follows:
|
Year Subsequent to the Acquisition |
|
Amortization |
|
|
|
|
|
(In thousands) |
|
|
|
1 |
|
$ |
114,282 |
|
|
2 |
|
$ |
57,953 |
|
|
3 |
|
$ |
53,524 |
|
|
4 |
|
$ |
50,185 |
|
|
5 |
|
$ |
39,628 |
|
(d) Represents the estimated net increase in interest expense incurred on the $2.0 billion in Old Notes issued in connection with the Acquisition based on a weighted average interest rate of 7.01%.
|
|
|
For the Nine Months
|
|
For the Year Ended
|
|
||
|
|
|
(In thousands) |
|
||||
|
Interest on new debt instruments |
|
$ |
(58,385 |
) |
$ |
(140,125 |
) |
|
Hughes Communications historical interest expense elimination |
|
21,983 |
|
59,345 |
|
||
|
Amortization of deferred financing costs and changes in capitalized interest |
|
(7,865 |
) |
590 |
|
||
|
Total |
|
$ |
(44,267 |
) |
$ |
(80,190 |
) |
(e) Represents the tax effect of pro forma adjustments using the HSS blended federal, state and international statutory tax rates adjusted for permanent differences.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and notes to the financial statements included elsewhere in this prospectus. This management’s discussion and analysis is intended to help provide an understanding of our financial condition, changes in financial condition and results of our operations and contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in this prospectus, including under the captions “Risk Factors” and “Disclosure Regarding Forward-Looking Statements.”
EXECUTIVE SUMMARY
HSS is a holding company and a direct, wholly-owned subsidiary of EchoStar Corporation, a publicly traded company listed on the Nasdaq Global Select Market under the symbol “SATS.” HSS was formed under Colorado law in March 2011 as EH Holding Corporation, and was renamed Hughes Satellite Systems Corporation in October 2011. Its common stock is held by EchoStar Corporation.
On June 8, 2011, EchoStar completed its acquisition of Hughes Communications, pursuant to which a wholly owned subsidiary of EchoStar Corporation merged with and into Hughes Communications, with Hughes Communications becoming an indirect wholly owned subsidiary of EchoStar Corporation and a direct wholly owned subsidiary of HSS. The cash portion of the Acquisition, related costs and repayment of certain indebtedness of Hughes Communications, including of its wholly owned subsidiary HNS, was financed with a combination of the net proceeds from the offering of the Old Notes and existing cash balances and marketable securities at EchoStar Corporation and Hughes Communications. The principal operating subsidiaries of HSS currently include ESS and Hughes Communications.
The following discussion and analysis of our consolidated results of operations, financial condition and liquidity are presented on a historical basis. Our historical financial statements prior to the Acquisition and related financing transactions reflect the historical financial position and results of combined operations of entities included in the consolidated financial statements of EchoStar that generally represent EchoStar’s satellite services business. The assets and liabilities included in these historical financial statements were contributed to HSS, effective March 2011. Our results of operations for the nine months ended September 30, 2011 also include those of Hughes Communications from June 8, 2011, the date of completion of the Acquisition. Therefore, our results of operations for the nine months ended September 30, 2011 are not comparable to our results of operations for the nine months ended September 30, 2010.
Following the Acquisition, we operate two segments: the EchoStar Satellite Services segment, consisting of ESS, and the Hughes segment, consisting of Hughes Communications.
EchoStar Satellite Services Segment
Our EchoStar Satellite Services segment uses ten of our owned and leased in-orbit satellites and related FCC licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, U.S. government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers. Furthermore, we continue to pursue expanding our business offerings by providing value added services such as telemetry, tracking and control services to third parties. However, there can be no assurance that we will be able to effectively compete against our competitors due to their significant resources and operating history.
As of September 30, 2011, our EchoStar Satellite Services segment had contracted revenue backlog attributable to satellites currently in orbit of approximately $905 million and contracted backlog attributable to satellites under construction of $1.053 billion, including QuetzSat-1, which provide significant visibility into future revenue.
Dependence on DISH Network. We depend on DISH Network for a substantial portion of the revenue for our EchoStar Satellite Services segment. Therefore, our results of operations are and will for the foreseeable future be closely linked to the performance of DISH Network’s satellite pay-TV business.
While we expect to continue to provide satellite services to DISH Network for the foreseeable future, its satellite capacity requirements may change for a variety of reasons, including the launch of its own additional satellites. Any termination or reduction in the services we provide to DISH Network would increase excess capacity on our satellites and require that we aggressively pursue alternative sources of revenue for this business.
In addition, because the number of potential new customers for our EchoStar Satellite Services segment is small, 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 EchoStar continues to share with DISH Network.
Additional Challenges for Our EchoStar Satellite Services Segment. Our ability to expand revenues in the EchoStar Satellite Services segment will likely require that we displace incumbent suppliers that generally have well established business models and often benefit from long-term contracts with their customers. As a result, to grow our EchoStar Satellite Services segment we may need to develop or otherwise acquire access to new satellite-delivered services so that we may offer differentiated services to prospective customers. However, there can be no assurance that we would be able to develop or otherwise acquire access to such differentiated services or develop the sales and marketing expertise necessary to sell such services profitably.
In addition, as our satellite fleet ages, we will be required to evaluate replacement alternatives such as acquiring, leasing or constructing additional satellites, with or without customer commitments for capacity, which may require us to seek additional financing. However, there can be no assurance that such financing will be available to fund any such replacement alternatives on terms that would be attractive to us or at all.
Hughes Segment
On June 8, 2011, we acquired all of the outstanding equity of Hughes Communications, Inc. pursuant to the Merger Agreement, following which Hughes Communications, Inc. became a direct, wholly-owned subsidiary of HSS. Pursuant to the Merger Agreement, each issued and outstanding share of common stock and vested stock options of Hughes Communications, Inc. was converted into the right to receive $60.70 (minus any applicable exercise price) in cash and substantially all of the outstanding debt of Hughes Communications was repaid. In addition, each share of unvested restricted stock and unvested stock option of Hughes Communications, Inc. was converted into the right