# EchoStar CORP: Form 10-Q for the period ended Sep 30, 2016 - Company: [EchoStar CORP](/companies/echo.md) (CIK 1415404) - Form: 10-Q - Filed: 2016-11-08 - Accepted by EDGAR: Nov 7, 2016, 19:35 ET - Period: 2016-09-30 - Accession: 0001415404-16-000033 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1415404/000141540416000033/sats_093016x10qdocument.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1415404/000141540416000033/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2016-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2016-07-01 to 2016-09-30 | $742.3m | us-gaap:SalesRevenueNet | | Revenue | 9 months, 2016-01-01 to 2016-09-30 | $2.32bn | us-gaap:SalesRevenueNet | | Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $201.0m | us-gaap:CostOfGoodsSold | | Cost of revenue | 9 months, 2016-01-01 to 2016-09-30 | $710.7m | us-gaap:CostOfGoodsSold | | Research and development | 3 months, 2016-07-01 to 2016-09-30 | $20.6m | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 9 months, 2016-01-01 to 2016-09-30 | $61.8m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $101.5m | us-gaap:SellingGeneralAndAdministrativeExpense | | Selling, general and administrative | 9 months, 2016-01-01 to 2016-09-30 | $296.4m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2016-07-01 to 2016-09-30 | $82.0m | us-gaap:OperatingIncomeLoss | | Operating income | 9 months, 2016-01-01 to 2016-09-30 | $258.3m | us-gaap:OperatingIncomeLoss | | Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $37.4m | us-gaap:InterestExpense | | Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $80.5m | us-gaap:InterestExpense | | Income tax | 3 months, 2016-07-01 to 2016-09-30 | $19.5m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 9 months, 2016-01-01 to 2016-09-30 | $75.1m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2016-07-01 to 2016-09-30 | $36.8m | us-gaap:NetIncomeLoss | | Net income | 9 months, 2016-01-01 to 2016-09-30 | $141.7m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.39 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $1.52 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.39 | us-gaap:EarningsPerShareBasic | | Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $1.53 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 94,401,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 94,189,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $533.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2016-09-30 | $2.22bn | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2016-09-30 | $3.72bn | us-gaap:AssetsCurrent | | Total assets | at 2016-09-30 | $8.98bn | us-gaap:Assets | | Current liabilities | at 2016-09-30 | $548.2m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2016-09-30 | $5.00bn | us-gaap:Liabilities | | Long-term debt | at 2016-09-30 | $3.36bn | us-gaap:LongTermDebt | | Shareholders' equity | at 2016-09-30 | $3.89bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 5,828 characters. ### EchoStar Technologies Segment Our EchoStar Technologies segment designs, develops and distributes secure end-to-end video technology solutions including digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunication companies. The primary customer for our digital set-top boxes is DISH Network Corporation and its subsidiaries (“DISH Network”), and we also sell our digital set-top boxes to Bell TV, a direct-to-home satellite service provider in Canada, and Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture that we entered into in 2008. We depend on DISH Network for a substantial portion of our EchoStar Technologies segment revenue and we expect that DISH Network will continue to be the primary source of revenue for our EchoStar Technologies segment. In addition, our equipment revenue from DISH Network depends on the timing of orders for set-top boxes and related accessories from DISH Network based on its actual and projected subscriber growth. Therefore, the results of operations of our EchoStar Technologies segment are, and are likely to continue to be, closely linked to the performance of DISH Network’s pay-TV service. Our EchoStar Technologies segment offers multiple set-top boxes with different price points depending on their capabilities and functionalities. The revenue and associated margins we earn on sales are determined largely through the receiver agreement, effective January 2012, between us and DISH Network (the “2012 Receiver Agreement”) which could result in prices reflecting, among other things, the set-top boxes and other equipment that meet DISH Network’s current sales and marketing priorities, the product and service alternatives available from other equipment suppliers, our ability to respond to DISH Network’s requirements, and our ability to differentiate ourselves from other equipment suppliers on bases other than pricing. In addition, products containing new technologies and features typically have higher initial prices, which reduce over time as a result of manufacturing efficiencies. Volume of unit sales could continue to reduce over time as a result of continued demand decreases or as DISH Network increases the deployment of refurbished units as opposed to new units purchased from us. Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network and Dish Mexico. In addition, we provide our TV Anywhere technology through Slingbox units directly to consumers via retail outlets and online, as well as to the pay-TV operator market. Our EchoStar Technologies segment also includes Move Networks, our over-the-top (“OTT”), Streaming Video on Demand (“SVOD”) platform business, which licenses technology and provides services to DISH Network’s Sling TV service (“Sling TV”) (see Note 16 in our notes to condensed consolidated financial statements). During the second quarter of 2015, our EchoStar Technologies segment contributed several of its European subsidiaries to SmarDTV SA (“SmarDTV”), a Swiss subsidiary of Kudelski SA that offers set-top boxes and conditional access modules, in exchange for a 22.5% interest in the equity and subordinated debt of SmarDTV. We and SmarDTV also entered into a services agreement pursuant to which our EchoStar Technologies segment purchases certain engineering services from SmarDTV. We continue to focus on building and strengthening our brand recognition by providing unique and technologically advanced features and products. Products containing new technologies and features typically have higher initial selling prices, margins and volumes. As products mature and new products are in the late stages of development, volumes typically decrease as our customers, primarily DISH Network, increase deployment of refurbished set-top boxes as opposed to purchasing new units from us. The market for our digital set-top boxes, like other electronic products, has also been characterized by regular reductions in selling prices and production costs. Our ability to sustain or increase profitability also depends in large part on our ability to control or reduce our costs of producing digital set-top boxes. Based on our experience, we expect our cost of manufacturing a specific set-top box model to decline over time as our contract manufacturers generate efficiencies with scale of production and engineering cost reductions. Overall, our success depends heavily on our ability to bring advanced technologies to market to continue to be a market leader and innovator. The number of potential new customers for our set-top box business in our EchoStar Technologies segment is small and may be limited as prospective customers that have been competitors of DISH Network may continue to view us as a competitor due to our common ownership with DISH Network. Our customers face emerging competition from other providers of digital media and potential government action preventing them from using security systems in connection with set-top boxes. In particular, programming offered over the internet has become more prevalent as the speed and quality of broadband networks have improved. Additionally, the FCC is considering adopting regulations enabling consumer electronics manufacturers, innovators and other developers to build devices or software solutions that may provide access to multichannel video programming with the use of user interfaces and without the use of any set-top box. As a result, consumers may then be able to access content provided by DISH Network and other customers using products produced by our competitors and without using our set-top ## Market risk As filed, 7,779 characters. ### Market Risks Associated with Financial Instruments and Foreign Currency Our investments and debt are exposed to market risks, discussed below. ### Cash, Cash Equivalents and Current Marketable Investment Securities As of September 30, 2016, our cash, cash equivalents and current marketable investment securities had a fair value of $3.02 billion. Of this amount, a total of $2.96 billion was invested in: (a) cash; (b) commercial paper and corporate notes with an overall average maturity of less than one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating organizations; (c) debt instruments of the U.S. government and its agencies; and/or (d) instruments with similar risk, duration and credit quality characteristics to the commercial paper and corporate obligations described above. The primary purpose of these investing activities has been to preserve principal until the cash is required to, among other things, fund operations, make strategic investments and expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is received and used in our business. The value of this portfolio may be negatively impacted by credit losses; however, this risk is mitigated through diversification that limits our exposure to any one issuer. ### Interest Rate Risk A change in interest rates would not affect the fair value of our cash, or materially affect the fair value of our cash equivalents due to their maturities of less than 90 days. A change in interest rates would affect the fair value of our current marketable debt securities portfolio; however, we normally hold these investments to maturity. Based on our current non-strategic investment portfolio of $2.96 billion as of September 30, 2016, a hypothetical 10% change in average interest rates during 2016 would not have a material impact on the fair value of our cash, cash equivalents and debt securities portfolio due to the limited duration of our investments. Our cash, cash equivalents and current marketable debt securities had an average annual rate of return for the nine months ended September 30, 2016 of 1.0%. A change in interest rates would affect our future annual interest income from this portfolio, since funds would be re-invested at different rates as the instruments mature. A hypothetical 10% decrease in average interest rates during 2016 would have resulted in a decrease of approximately $1.7 million in annual interest income. ### Strategic Marketable Investment Securities As of September 30, 2016, we held current strategic investments in the publicly traded common stock of several companies with a fair value of $59.7 million. These investments, which are held for strategic and financial purposes, are concentrated in a small number of companies, are highly speculative and have experienced and continue to experience volatility. The fair value of these investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. In general, our strategic marketable investment securities portfolio is not significantly impacted by interest rate fluctuations as it currently consists solely of equity securities, the value of which is more closely related to factors specific to the underlying business. A hypothetical 10% adverse change in the market price of our public strategic equity investments would result in a decrease of approximately $6.0 million in the fair value of these investments. ### Restricted cash and marketable investment securities and investments in unconsolidated entities ### Restricted cash and marketable investment securities As of September 30, 2016, we had $13.7 million of restricted cash and marketable investment securities invested in: (a) cash; (b) debt instruments of the U.S. government and its agencies; (c) commercial paper and corporate notes with an overall average maturity of less than one year and rated in one of the four highest rating categories by at least two nationally recognized statistical rating organizations; (d) mutual funds; and (e) instruments with similar risk, duration and credit quality characteristics to the commercial paper described above. Based on our investment portfolio as of September 30, 2016, a hypothetical 10% increase in average interest rates would not have a material impact on the fair value of our restricted cash and marketable investment securities. ### Investments in unconsolidated entities As of September 30, 2016, we had $202.3 million of noncurrent equity instruments that we hold for strategic business purposes and account for under the cost or equity methods of accounting. The fair value of these instruments is not readily determinable. We periodically review these investments and estimate fair value when there are indications of impairment. A hypothetical adverse change equal to 10% of the carrying amount of these equity instruments would result in a decrease of approximately $20.2 million in the value of these investments. Our ability to realize value from our strategic investments in companies that are privately held depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them. ### Foreign Currency Exchange Risk We generally conduct our business in U.S. dollars. Our international business is conducted in a variety of foreign currencies with our largest exposures being to the Brazilian real, the Indian rupee, and the British pound. This exposes us to fluctuations in foreign currency exchange rates. Transactions in foreign currencies are converted into U.S. dollars using exchange rates in effect on the dates of the transactions. Our objective in managing our exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, we may enter into foreign currency forward contracts, or take other measures, to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. As of September 30, 2016, we had $6.0 million of net foreign currency denominated receivables and payables outstanding, and foreign currency forward contracts with a notional value of $0.6 million in place to partially mitigate foreign currency exchange risk. The estimated fair values of the foreign exchange contracts were not material as of September 30, 2016. The impact of a hypothetical 10% adverse change in exchange rates on the carrying amount of the net assets and liabilities of our foreign subsidiaries would be an estimated loss to the cumulative translation adjustment of $36.2 million as of September 30, 2016. ### Derivative Financial Instruments We generally do not use derivative financial instruments for speculative purposes and we generally do not apply hedge accounting treatment to our derivative financial instruments. We evaluate our derivative financial instruments from time to time but there can be no assurance that we will not enter into additional foreign currency forward contracts, or take other measures, in the future to mitigate our foreign exchange risk. ## Controls and procedures As filed, 1,587 characters. ### Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report such that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. ### Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the third quarter of 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We continue to review our internal control over financial reporting, and may from time to time make changes aimed at enhancing its effectiveness and to ensure that our systems evolve with our business. ## Risk factors As filed, 24,258 characters. Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2015 includes a detailed discussion of our risk factors. Except as provided below, for the nine months ended September 30, 2016, there were no material changes in our risk factors as previously disclosed. ### GENERAL RISKS AFFECTING OUR BUSINESS ***We currently derive a significant portion of our revenue from our primary customer, DISH Network. The loss of, or a significant reduction in, orders from, or a decrease in selling prices of digital set-top boxes, broadband equipment and services, provision of satellite services and digital broadcast services, and/or other products, components or services to DISH Network would significantly reduce our revenue and materially adversely impact our results of operations.*** DISH Network accounted for 53.5%, 57.3% and 58.8% of our total revenue for the years ended December 31, 2015, 2014 and 2013, respectively. DISH Network is currently our primary customer of digital set-top boxes, digital broadcast operation services and our satellite services. These products and services are provided pursuant to contracts that expire on December 31, 2017. DISH Network is also a wholesale distributor of the Hughes satellite internet service, and in connection with such wholesale distribution, purchases certain broadband equipment from us to support the sale of the Hughes service. In addition, DISH Network has no obligations to continue to purchase our products and only certain obligations to continue to purchase certain of our services. Therefore, our relationship with DISH Network could be terminated or substantially curtailed with little or no advance notice. Any material reduction in or termination of our sales to DISH Network or reduction in the prices it pays for the products and services it purchases from us could have a material adverse effect on our business, results of operations, and financial position. Additionally, the FCC is considering adopting a regulatory regime whereby consumer electronics manufacturers, innovators, and other developers would be able to build devices or software solutions that may provide access to multichannel video programming with the use of user interfaces and without the use of any set-top box. As a result, consumers may then be able to access content provided by DISH Network using products produced by our competitors and without using our set-top boxes or other products, which may result in lower sales to DISH Network. DISH Network is involved in several legal proceedings relating to products, components and services purchased from us. Adverse decisions against DISH Network in these proceedings could decrease the number of products, components and/or services we provide to DISH Network, which could have a material adverse effect on our business, results of operations, and financial position. In addition, because a significant portion of our revenue is derived from DISH Network, our success also depends to a significant degree on the continued success of DISH Network in attracting new subscribers and marketing programming packages and other services and features to subscribers that will result in the purchase of new digital set-top boxes, and in particular, new digital set-top boxes at the high-end of our product range that incorporate high-definition, multiple tuners, and other advanced technology. In addition, the timing of orders for digital set-top boxes from DISH Network could vary significantly depending on equipment promotions offered to its subscribers, changes in technology, and its use of remanufactured digital set-top boxes, which may cause our revenue to vary significantly quarter over quarter and could expose us to the risks of inventory shortages or excess inventory. These inventory risks are particularly acute during product end-of-life transitions in which a new generation of digital set-top boxes is being deployed and inventory of older generation digital set-top boxes is at a higher risk of obsolescence. This in turn could cause our operating results to fluctuate significantly. There are a relatively small number of potential new customers for our digital set-top boxes and digital broadcast operations, and we expect this customer concentration to continue for the foreseeable future. If we lose DISH Network as a customer, it may be difficult for us to replace, in whole or in part, our historical revenue from DISH Network as we have had limited success in attracting such potential new customers in the past. Furthermore, because of the maturing and competitive nature of the digital set-top box business, the limited number of potential new customers, and the short-term nature of our purchase orders with DISH Network, we have experienced, and could in the future continue to experience, downward pricing pressure on our digital set-top boxes sold to DISH Network, which in turn would adversely affect our gross margins and profitability. Historically, many potential customers have perceived us as a competitor due to our affiliation with DISH Network. There can be no assurance that we will be successful in entering into any commercial relationships with potential new 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 certain shared services). 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. ***If significant numbers of television viewers are unwilling to pay for pay-TV services that utilize digital set-top boxes, we may not be able to sustain our current revenue level.*** We are substantially dependent upon the ability of our customers to promote the delivery of pay-TV services, including, among others, premium programming packages and services that utilize technology incorporated into our digital set-top boxes, such as HD technology and IPTV, to generate future revenue. Our customers face emerging competition from other providers of digital media and potential government action preventing them from using security systems in connection with set-top boxes. In particular, programming offered over the internet has become more prevalent as the speed and quality of broadband networks have improved. Additionally, the FCC is considering adopting a regulatory regime whereby consumer electronics manufacturers, innovators, and other developers would be able to build devices or software solutions that may provide access to multichannel video programming with the use of user interfaces and without the use of any set-top box. As a result, consumers may then be able to access content provided by DISH Network and other customers using products produced by our competitors and without using our set-top boxes or other products. Our customers may be unsuccessful in promoting value-added services or may promote alternative packages, such as free programming packages, in lieu of promoting packages that utilize our high-end digital set-top box offerings. If our customers are unable to develop and effectively market compelling reasons for their subscribers to continue to purchase their pay-TV services that utilize our more advanced digital set-top boxes, it will be difficult for us to sustain our historical revenue. Furthermore, as technologies develop, other means of delivering information and entertainment to television viewers have evolved and contributed to, and will likely continue to evolve and contribute to, increasing consumer demand for online platforms that provide for the distribution and viewing of movies, television and other video programming that competes with our customers’ pay-TV services. To the extent that these online platforms and other new technologies compete successfully against our customers for viewers, the ability of our existing customer base to attract and retain subscribers may be adversely affected. As a result, demand for our satellite television digital set-top boxes could decline, and we may not be able to sustain our current revenue levels. ***The failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment could harm our results of operations.*** Our Hughes segment has made substantial contractual commitments for satellite capacity based on our existing customer contracts and backlog. If our existing customer contracts were to be terminated prior to their respective expiration dates, we may be committed to maintaining excess satellite capacity for which we will have insufficient revenue to cover our costs, which would have a negative impact on our margins and results of operations. Alternatively, we may not have sufficient satellite capacity to meet demand. We have satellite capacity commitments, generally for two to five year terms, with third parties to cover different geographical areas or support different applications and features; therefore, we may not be able to quickly or easily adjust our capacity to changes in demand. We generally only purchase satellite capacity based on existing contracts and bookings. Therefore, capacity for certain types of coverage in the future may not be readily available 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 for those services. At present, until the launch and operation of additional satellites, there is limited availability of capacity on the frequencies we use in North America, including within our own fleet of satellites. Our ability to provide additional capacity for subscriber growth in our North American consumer market could also be adversely affected by regulations in the U.S. recently adopted by the FCC. The FCC has enabled the use of a portion of the frequency bands, including without limitation, the Ka-band, where we operate our broadband gateway earth stations, for 5G mobile terrestrial services. In addition, the FSS industry has seen consolidation in the past decade, and today, the 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 satellite 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 problems experienced by these FSS providers, our business and results of operations could be adversely affected. ***We may not be able to generate cash to meet our debt service needs or fund our operations.*** As of September 30, 2016, our total indebtedness was approximately $3.67 billion. Our ability to make payments on or to refinance our indebtedness and to fund our operations will depend on our ability to generate cash in the future, which is subject in part to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may need to raise additional debt in order to fund ongoing operations or to capitalize on business opportunities. We may not be able to generate sufficient cash flow from operations and future borrowings may not be available in amounts sufficient to enable us to service our indebtedness or to fund our operations or other liquidity needs. If we are unable to generate sufficient cash, we may be forced to take actions such as revising or delaying our strategic plans, reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We may not be able to implement any of these actions on satisfactory terms, or at all. The indentures governing the 2019 Senior Secured Notes, the 2021 Senior Unsecured Notes and the 2026 Notes limit our ability to dispose of assets and use the proceeds from such dispositions. Therefore, we may not be able to consummate those dispositions on satisfactory terms, or at all, or to use those proceeds in a manner we may otherwise prefer. In addition, conditions in the financial markets could make it difficult for us to access capital markets at acceptable terms or at all. Instability or other conditions 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 or increased economic weaknesses or pressures or new economic conditions 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 economic conditions. 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. ### Covenants in our indentures restrict our business in many ways. The indentures governing the 2019 Senior Secured Notes, the 2021 Senior Unsecured Notes, and the 2026 Notes contain various covenants, subject to certain exceptions, that limit our ability and/or our restricted subsidiaries’ ability to, among other things: - incur additional debt; - pay dividends or make distributions on our capital stock or repurchase HSS’ capital stock; - make certain investments; - create liens or enter into sale and leaseback transactions; - enter into transactions with affiliates; - merge or consolidate with another company; - transfer and sell assets; and - allow to exist certain restrictions on the ability of certain of HSS’ subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to HSS or its subsidiaries. Failure to comply with these and certain other financial covenants, if not cured or waived, may result in an event of default under the indentures, which could have a material adverse effect on our business, financial condition, results of operations or prospects. If an event of default occurs and is continuing under the respective indenture, the trustee under that indenture or the requisite holders of the notes under that indenture may declare all such notes to be immediately due and payable and, in the case of the indentures governing any of our secured notes, could proceed against the collateral that secures the applicable secured notes. We and certain of our subsidiaries have pledged a significant portion of our assets as collateral to secure the 2019 Senior Secured Notes and the 2026 Senior Secured Notes. If we do not have enough cash to service our debt or fund other liquidity needs, we may be required to take actions such as requesting a waiver from the holders of the notes, reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of the existing debt, or seeking additional equity capital. We cannot assure you that any of these remedies can be implemented on commercially reasonable terms or at all, which could result in the trustee declaring the notes to be immediately due and payable and/or foreclosing on the collateral. ***We may be subject to risks relating to the referendum of the United Kingdom’s membership of the European Union.*** In June 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved an exit from the EU, commonly referred to as the “Brexit.” As a result of the referendum, it is expected that the U.K. government will begin negotiating the terms of the U.K.’s future relationship with the EU. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and EU countries. Additionally, with the U.K. no longer being a part of the EU, we anticipate that there may be certain regulatory changes that may impact the regulatory regime under which we operate in both the U.K. and the EU. These and other changes, implications and consequences of the Brexit may adversely affect our business and results of operations. ### 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.*** Satellite construction and launch are subject to significant risks, including delays, anomalies, 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, launch anomalies and launch failure are usually greater when the launch vehicle does not have a track record of previous successful flights. Launch anomalies and failures can 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. Such significant delays could materially and adversely affect our business, expenses and results of operations, our ability to meet regulatory or contractual required milestones, the availability and our use of other or replacement satellite resources and our ability to provide services to customers as capacity becomes full on existing satellites. In addition, significant delays in a satellite program could give customers who have purchased or reserved capacity on that satellite a right to terminate their service contracts relating to the satellite. We may not be able to accommodate affected customers on other satellites until a replacement satellite is available. A customer’s termination of its service contracts with us as a result of a launch delay or failure would reduce our contracted backlog and our ability to generate revenue. One of our launch services providers is a Russian Federation state-owned company. Recent ongoing political events, including the imposition of sanctions, have created uncertainty as to the stability of U.S. and Russian Federation relations. This could add to risks relative to scheduling uncertainties and timing. Historically, we have not always carried launch insurance for the launch of our satellites. If a launch delay, anomaly or failure were to occur, it could result in the revocation of the applicable license to operate the satellite, undermine our ability to implement our business strategy or develop or pursue existing or future business opportunities with applicable licenses and otherwise have a material adverse effect on our business, expenses, assets, revenue, results of operations and ability to fund future satellite procurement and launch opportunities. In addition, the occurrence of launch anomalies and failures, whether on our satellites or those of others, may significantly reduce our ability to place launch insurance for our satellites or make launch insurance 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 U.S. by the FCC, and other federal, state and local entities, and in foreign countries by similar entities and internationally by the International Telecommunications Union. These regulations are subject to the administrative and political process and do change, for political and other reasons, from time to time. For example, the FCC recently adopted an order in its “Spectrum Frontiers” proceeding under which a portion of the Ka-band, in which we operate our broadband gateway earth stations, has been enabled for 5G mobile terrestrial services. Other countries in which we currently, or may in the future, operate are also considering regulations that could limit access to the Ka band. Additionally, the FCC is considering adopting a regulatory regime whereby consumer electronics manufacturers, innovators, and other developers would be able to build devices or software solutions that may provide access to multichannel video programming with the use of user interfaces and without the use of any set-top box. If adopted, these regulations could have a material adverse effect on our business, results of operations, and financial position. 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 other telecommunication facilities/networks 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 may also occur, and there can be no assurance that our business and the business of our subsidiaries and affiliates will not be adversely affected by future legislation, new regulation or deregulation. The failure to obtain or comply with the authorizations and regulations governing our operations could have a material adverse effect on our ability to generate revenue and our overall competitive position and could result in our suffering serious harm to our reputation. ### OTHER RISKS ***Our articles of incorporation designate the Eighth Judicial District Court of Clark County of the State of Nevada as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.*** Our articles of incorporation provide that, unless we consent in writing to an alternative forum, the Eighth Judicial District Court of Clark County of the State of Nevada will be the sole and exclusive forum for any and all actions, suits or proceedings, whether civil, administrative or investigative or that asserts any claim or counterclaim brought in our name or on our behalf, asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, arising or asserting a claim arising pursuant to any provision of the Nevada Restated Statutes Chapters 78 or 92A, our articles of incorporation or our bylaws, interpreting, applying, enforcing or determining the validity of our articles of incorporation or bylaws or asserting a claim that is governed by the internal affairs doctrine. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our articles of incorporation. This choice of forum provision may limit our stockholders’ ability to bring certain claims, including claims against our directors, officers or employees, in a judicial forum that the stockholder finds favorable and therefore the choice of forum provision may discourage lawsuits with respect to such claims. Stockholders who do bring a claim in the Eighth Judicial District Court of Clark County could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Nevada. The Eighth Judicial District Court of Clark County may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to find this provision of our articles of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of operations. Filed Nov 8, 2016. Source: SEC EDGAR, the filing index for accession 0001415404-16-000033. Last ingested by Listed: Nov 3, 2026, 08:39 ET. No prices; not investment advice.