# EchoStar CORP: Form 10-Q for the period ended Jun 30, 2009

- Company: [EchoStar CORP](/companies/echo.md) (CIK 1415404)
- Form: 10-Q
- Filed: 2009-08-10
- Accepted by EDGAR: Aug 10, 2009, 10:04 ET
- Period: 2009-06-30
- Accession: 0000950123-09-032474
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1415404/000095012309032474/d68709e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1415404/000095012309032474/

## Management's discussion and analysis

As filed, 7,124 characters.

### LIQUIDITY AND CAPITAL RESOURCES

### Cash, Cash Equivalents and Marketable Investment Securities

We consider all liquid investments purchased within 90 days of their maturity to be cash equivalents. See “Item 3. — Quantitative and Qualitative Disclosures about Market Risk” for further discussion regarding our marketable investment securities. As of June 30, 2009, our cash, cash equivalents and current marketable investment securities totaled $950 million compared to $829 million as of December 31, 2008. As of June 30, 2009 our $950 million of cash, cash equivalents and current marketable investment securities included $197 million of securities of a single issuer. The $121 million increase in cash, cash equivalents and current marketable investment securities was primarily related to an increase in the value of certain marketable investment securities and cash generated from operations, partially offset by capital expenditures, purchases of marketable investment securities, repayment of debt and repurchases of our Class A common stock.

We have investments in various debt and equity instruments including corporate bonds, corporate equity securities, government bonds, and variable rate demand notes (“VRDNs”). VRDNs are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. Our VRDN portfolio is comprised of many municipalities and financial institutions that serve as the pledged liquidity source. While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated on a same day or on a five business day settlement basis. As of June 30, 2009 and December 31, 2008, we held VRDNs with fair values of $450 million and $622 million, respectively.

The following discussion highlights our cash flow activities during the six months ended June 30, 2009.

### Cash Flow

### Cash flows from operating activities

For the six months ended June 30, 2009, we reported net cash flows from operating activities of $118 million. This amount primarily includes net income adjusted for “Depreciation and amortization” and “Unrealized (gains) losses on investments accounted for at fair value, net” of $105 million and changes in working capital.

### Cash flows from investing activities

For the six months ended June 30, 2009, we reported net cash outflows from investing activities of $45 million primarily related to capital expenditures of $106 million and purchases of strategic investments of $31 million, partially offset by net sales of marketable investment securities of $94 million. The capital expenditures include $62 million of satellite related capital expenditures and $44 million of other corporate capital expenditures.

### Cash flows from financing activities

For the six months ended June 30, 2009, we reported net cash outflows from financing activities of $33 million primarily resulting from debt repayments and repurchases of our Class A common stock.

### Future Capital Sources

We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow generated through operations to fund our investment needs. Since we currently depend on DISH Network for a substantial portion of our revenue, our cash flow from operations depend heavily on their needs for equipment and services. As a result, there can be no assurances that we will always have positive cash flows from operations and should our cash flows turn negative, our existing cash and marketable investment securities balances may be reduced. In addition, if we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful in developing and deploying potential new alternative technology and we are unable to reach a license agreement with Tivo on reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR functionality. In that event, our sales of digital set-top boxes to DISH Network and others would likely significantly decrease and could even potentially cease for a period of time. Furthermore, the inability to offer DVR functionality would place us at a significant disadvantage to our competitors and make it even more difficult for us to penetrate new markets for digital set-top boxes. The adverse effect on our financial position and results of operations if the District Court’s contempt order is upheld is likely to be significant.

If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in defending against any subsequent claim that our original alternative technology or any potential new alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs. In that event we would be at a significant disadvantage to our competitors who could continue offering DVR functionality and the adverse effect on our business could be material.

Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for substantially all liability arising from this lawsuit. We have agreed to contribute an amount equal to our $5 million intellectual property liability limit under the Receiver Agreement. We and DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise under the Receiver Agreement. Therefore, during the three months ended June 30, 2009, we recorded a charge included in “General and administrative expenses — DISH Network” on our Condensed Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this contribution. We and DISH Network also agreed that we would each be entitled to joint ownership of, and a cross-license to use, any intellectual property developed in connection with any potential new alternative technology.

Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these damages and sanctions not paid by DISH Network. Any amounts that DISH Network may be required to pay could impair its ability to pay us and also negatively impact our future liquidity.

If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at a time and in circumstances in which we would normally not raise capital. Therefore, any capital we raise may be on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and initiatives.

## Market risk

As filed, 2,707 characters.

companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. A hypothetical 10% adverse change in the price of our public strategic debt and equity investments would result in approximately a $30 million decrease in the fair value of these investments.

*Marketable and Other Investment Securities.* We are exposed to equity risk as it relates to changes in the market value of our other investments which totaled $315 million as of June 30, 2009. We invest in equity instruments of public and private companies for operational, financial and strategic business purposes. These securities are subject to significant fluctuations in market value due to volatility of the stock market and the industry in which the companies operate. A hypothetical 10% adverse change in the price of these equity instruments would result in an approximate $32 million decrease in the value of these investments.

Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

*Interest Rate Risk*. Our cash, cash equivalents and marketable investment securities had an average annual return for the six months ended June 30, 2009 of 4.0%. A hypothetical 10% decrease in the average interest rates would result in a decrease of approximately $3 million in annual interest income. The value of certain of the investments in this portfolio can be impacted by, among other things, the risk of adverse changes in securities and economic markets, as well as the risks related to the performance of the companies whose commercial paper and other instruments we hold. The value of these investments can also be impacted by interest rate fluctuations.

*Long Term Debt.* As of June 30, 2009, we had $322 million of long-term debt, of which $314 million represents our capital lease obligations, which are not subject to the requirements of Financial Accounting Standards Board Statement No. 107 “Disclosures about Fair Value of Financial Instruments” (“FAS 107”).

### Derivative Financial Instruments

In general, we do not use derivative financial instruments for hedging or speculative purposes, but we may do so in the future.

## Controls and procedures

As filed, 1,684 characters.

The following matters were voted upon at the annual meeting of our shareholders held on May 11, 2009:

a. The election of Joseph P. Clayton, R. Stanton Dodge, Michael T. Dugan, Charles W. Ergen, David K. Moskowitz, Tom A. Ortolf, and C. Michael Schroeder as directors to serve until the 2010 annual meeting of shareholders;

b. Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009;

c. Approval to amend and restate our Employee Stock Purchase Plan; and

d. Approval of amendments to existing equity plans to allow for stock award exchange programs.

All matters voted on at the annual meeting were approved. The voting results were as follows:

| Election as directors: | Votes For | Against/ Withheld | Abstain | Broker Non-Votes |
| --- | ---: | ---: | ---: | ---: |
| Joseph P. Clayton | 505,117,587 | 3,443,434 | — | — |
| R. Stanton Dodge | 496,594,546 | 11,966,475 | — | — |
| Michael T. Dugan | 496,858,585 | 11,702,436 | — | — |
| Charles W. Ergen | 502,118,805 | 6,442,216 | — | — |
| David K. Moskowitz | 496,596,350 | 11,964,671 | — | — |
| Tom A. Ortolf | 505,093,090 | 3,467,931 | — | — |
| C. Michael Schroeder | 505,096,251 | 3,464,770 | — | — |
| Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009 | 508,026,393 | 57,226 | 477,402 | — |
| Approval to amend and restate our Employee Stock Purchase Plan | 500,742,401 | 3,346,425 | 585,418 | 3,886,777 |
| Approval of amendments to existing equity plans to allow for stock award exchange programs | 488,777,173 | 19,191,552 | 592,296 | — |

## Risk factors

As filed, 5,829 characters.

Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2008 includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Annual Report on Form 10-K for 2008.

***If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful in developing and deploying potential new alternative technology and we are unable to reach a license agreement with Tivo on reasonable terms, we would be subject to substantial liability and would be prohibited from offering DVR functionality that would in turn place us at a significant disadvantage to our competitors and significantly decrease sales of digital set-top boxes to DISH Network and others.***

In June 2009, the U.S. District Court granted Tivo’s motion for contempt finding that our next-generation DVRs continue to infringe Tivo’s intellectual property and awarded Tivo an additional $103 million dollars in supplemental damages.

If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful in developing and deploying potential new alternative technology and we are unable to reach a license agreement with Tivo on reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR functionality. In that event, our sales of digital set-top boxes to DISH Network and others would likely significantly decrease and could even potentially cease for a period of time. Furthermore, the inability to offer DVR functionality would place us at a significant disadvantage to our competitors and make it even more difficult for us to penetrate new markets for digital set-top boxes. The adverse effect on our financial position and results of operations if the District Court’s contempt order is upheld is likely to be significant.

If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in defending against any subsequent claim that our original alternative technology or any potential new alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs. In that event we would be at a significant disadvantage to our competitors who could continue offering DVR functionality and the adverse effect on our business could be material.

Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for substantially all liability arising from this lawsuit. We have agreed to contribute an amount equal to our $5 million intellectual property liability limit under the Receiver Agreement. We and DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise under the Receiver Agreement. Therefore, during the three months ended June 30, 2009, we recorded a charge included in “General and administrative expenses — DISH Network” on our Condensed Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this contribution. We and DISH Network also agreed that we would each be entitled to joint ownership of, and a cross-license to use, any intellectual property developed in connection with any potential new alternative technology.

Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these damages and sanctions not paid by DISH Network. Any amounts that DISH Network may be required to pay could impair its ability to pay us and also negatively impact our future liquidity. If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at a time and in circumstances in which we would normally not raise capital. Therefore, any capital we raise may be on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and initiatives.

***The average selling price and gross margins of our digital set-top boxes has been decreasing and may decrease even further, which could negatively impact our financial position and results of operations.***

The average selling price and gross margins of our digital set-top boxes has been decreasing and may decrease even further due to, among other things, an increase in the sales of lower-priced digital set top boxes to DISH Network and increased pricing pressure on our average selling prices, including sales to Bell TV as a result of the February 6, 2009 amendment to our agreement with Bell TV. Furthermore, our ability to increase the average selling prices of our digital set-top boxes is limited and our average selling price may decrease even further in response to competitive pricing pressures, new product introductions by us or our competitors or other factors. If we are unable to increase or at least maintain the average selling prices of our digital set-top boxes, or if such selling prices further decline, and we are unable to respond in a timely manner by developing and introducing new products and continually reducing our product costs, our revenues and gross margin may be negatively affected, which will harm our financial position and results of operations.

Filed Aug 10, 2009.
Source: SEC EDGAR, the filing index for accession 0000950123-09-032474. Last ingested by Listed: Nov 3, 2026, 08:39 ET. No prices; not investment advice.