# EchoStar CORP: Form 10-Q for the period ended Mar 31, 2009

- Company: [EchoStar CORP](/companies/echo.md) (CIK 1415404)
- Form: 10-Q
- Filed: 2009-05-11
- Accepted by EDGAR: May 11, 2009, 10:00 ET
- Period: 2009-03-31
- Accession: 0000950134-09-010199
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1415404/000095013409010199/d67655e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1415404/000095013409010199/

## Management's discussion and analysis

As filed, 35,977 characters.

*You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and notes to the financial statements included elsewhere in this quarterly report. 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 our Annual Report on Form 10-K for the year ended December 31, 2008, under the caption “Item 1A. Risk Factors.”*

### EXECUTIVE SUMMARY

### Overview

Effective January 1, 2008, DISH Network Corporation (“DISH Network”) completed its distribution to us (the “Spin-off”) of its set-top box business and certain infrastructure and other assets, including certain of its satellites, uplink and satellite transmission assets, real estate and other assets and related liabilities. We currently operate two primary business units: (i) our “Digital Set-Top Box” business, and (ii) our “Satellite Services” business.

### “Digital Set-Top Box” Business

Our “Digital Set-Top Box” business designs, develops and distributes digital set-top boxes and related products and technology, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers, telecommunication and cable companies and, with respect to Slingboxes, directly to consumers via retail outlets. Most of our digital set-top boxes are sold to DISH Network, but we also sell a significant number of digital set-top boxes to Bell TV in Canada and other international customers. As part of the Spin-off, DISH Network contributed Sling Media, Inc., a leading innovator in the digital-lifestyle space, to us to complement our existing product line. Slingbox “placeshifting” technology allows consumers to watch and control their home digital video and audio content anywhere in the world via a broadband internet connection.

Our “Digital Set-Top Box” business also provides digital broadcast operations including satellite uplinking/downlinking, transmission services, signal processing, conditional access management and other services provided primarily to DISH Network.

We believe opportunities exist to expand our business by selling equipment and services in both the U.S. and international markets. As a result of our extensive experience with digital set-top boxes and digital broadcast operations, we can provide end-to-end pay TV delivery systems incorporating our satellite and backhaul capacity, customized digital set-top boxes and related components, and network design and management.

During November 2008, we entered into a joint venture for a direct-to-home, or DTH, service in Mexico known as DISH Mexico, S. de R.L. de C.V., or DISH Mexico. In accordance with the terms of the arrangements, we provide certain broadcast services and transponder services and may sell hardware such as digital set-top boxes and related equipment to DISH Mexico. Subject to a number of conditions, including regulatory approvals and compliance with various other arrangements, we committed to provide approximately $112 million of value over an initial ten year period, of which $26 million has been satisfied in the form of cash, equipment and services, leaving $86 million remaining under this commitment. Of the remaining commitment approximately $37 million is expected to be paid in cash and the remaining amounts may be satisfied in the form of certain services or equipment.

***Dependence on DISH Network***. We currently depend on DISH Network for a substantial portion of the revenue for our “Digital Set-Top Box” business and we expect for the foreseeable future that DISH Network will continue to be the primary source of revenue for each of our businesses. 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. In addition, because the number of potential new customers for our “Digital Set-Top Box” business is small and may be limited by our common ownership and related management with DISH Network, our current customer concentration is likely to continue for the foreseeable future.

Changes in DISH Network subscriber growth could have a material adverse affect on our digital set-top box sales. In particular, weaknesses in the economy and other factors adversely affecting DISH Network, such as the decision by AT&T to terminate its distribution agreement with DISH Network effective January 31, 2009, may have an adverse impact on us. According to DISH Network’s Form 10-K for the year ended December 31, 2008 and Form 10-Q for the three months ended March 31, 2009, its relationship with AT&T accounted for approximately 17% and 5%, respectively, of DISH Network’s gross subscriber additions. Furthermore, DISH Network has in recent quarters experienced declining and negative subscriber growth. To the extent that this trend continues or intensifies as a result of deteriorating economic conditions in the United States or otherwise, sales of our digital set-top boxes to DISH Network may decline. Because DISH Network’s current digital set-top box inventory is at higher-than-historical levels, we may see fewer orders for digital set-top boxes from DISH Network in the near term.

The impact to us of declining DISH Network subscriber growth may be offset over the near term by an increase in sales to DISH Network resulting from the upgrade of DISH Network subscribers to advanced products such as high definition (“HD”) receivers, digital video recorders (“DVRs”) and HD DVRs, as well as by the upgrade of DISH Network digital set-top boxes to new technologies such as MPEG-4 digital compression technology or Slingbox placeshifting technology. However, there can be no assurance that any of these factors will mitigate declining subscriber growth at DISH Network. In addition, although we expect DISH Network to continue to purchase products and services from us, there can be no assurance that DISH Network will continue to purchase products and services from us in the future.

We may experience significant pressure on margins we earn on the sale of digital set-top boxes and other equipment, including on sales to DISH Network. This pressure may be due to current economic conditions, advancements in the technology and functionality of digital set-top boxes and other equipment. The margins we earn on sales are determined largely through periodic negotiations that could result in pricing reflecting, among other things, the digital set-top boxes and other equipment that best meet our customers’ current sales and marketing priorities, the product and service alternatives available from other equipment suppliers, and our ability to respond to customer requirements and to differentiate ourselves from other equipment suppliers on bases other than pricing.

Our future success may also depend on the extent to which prospective customers that have been competitors of DISH Network are willing to purchase products and services from us. Many of these customers may continue to view us as a competitor as a result of common ownership and related management with DISH Network. If we do not develop relationships with new customers, we may not be able to expand our customer base and our ability to increase or even maintain our revenue will be impacted.

***Additional Challenges for our “Digital Set-Top Box” Business.*** We believe that our best opportunities for developing potential new customers for our “Digital Set-Top Box” business over the near term lie in international markets, and we therefore expect our performance in international markets to be a significant factor in determining whether we will be able to generate revenue and income growth in future periods. However, there can be no assurance that we will be able to sustain or grow our international business. In particular, we have noticed an increase in new market entrants, primarily located in Asia, that offer low cost set-top boxes, including set-top boxes that are modeled after our products or products of our principal competitors. The entry of these new competitors may result in pricing pressure in international markets that we hope to enter. If market prices in international markets are substantially reduced by such new entrants, it may be difficult for us to make profitable sales in international markets.

Furthermore, if we do not continue to distinguish our products through distinctive, technologically advanced features and design, as well as continue to build and strengthen our brand recognition, our business could be harmed as we may not be able to effectively compete on price alone in both domestic and international markets against low cost competitors that are principally located in Asia. If we do not otherwise compete effectively, demand for our products could decline, our gross margins could decrease, we could lose market share, our revenues and earnings may decline and our growth prospects would be diminished.

The current economic downturn and tightened credit markets may cause certain suppliers that we rely on to cease operations which, in turn, may cause us to suffer disruptions to our supply chain or incur higher production costs.

Our ability to sustain or increase profitability will also depend in large part on our ability to control or reduce our costs of producing digital set-top boxes. The market for our digital set-top boxes, like other electronic products, has been characterized by regular reductions in selling prices and production costs. Therefore, we will likely be required to reduce production costs in order to maintain the margins we earn on digital set-top boxes and the profitability of our “Digital Set-Top Box” business.

### “Satellite Services” Business

Our satellite services segment consists principally of transponder leasing provided primarily to DISH Network, and secondarily to government entities, internet service providers, broadcast news organizations and private enterprise customers. We began operating the “Satellite Services” business following the completion of the Spin-off using our owned and leased in-orbit satellites, multiple digital broadcast centers and other transmission assets. We are also pursuing expanding our business offerings by providing value added services such as telemetry, tracking and control services to third parties. However, there can be no assurance that we will be able to effectively compete against our competitors due to their significant resources and operating history.

***Dependence on DISH Network***. We currently depend on DISH Network for a substantial portion of the revenue for our “Satellite Services” business. Therefore, our results of operations are and will for the foreseeable future be closely linked to the performance of DISH Network’s satellite pay-TV business.

While we expect to continue to provide satellite services to DISH Network for the foreseeable future, its satellite capacity requirements may change for a variety of reasons, including the launch of 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 “Satellite Services” business is small and may be limited by our relationship with DISH Network, our current customer concentration is likely to continue for the foreseeable future. Our future success may also depend on the extent to which prospective customers that have been competitors of DISH Network are willing to purchase services from us. Many of these customers may continue to view us as a competitor given the common ownership and management team we continue to share with DISH Network.

***Additional Challenges for our “Satellite Services” Business.*** Our ability to expand revenues in the “Satellite Services” business will likely require that we displace incumbent suppliers that generally have well established business models and often benefit from long term contracts with customers. As a result, in order to grow our “Satellite Services” business we may need to develop or otherwise acquire access to new satellite-delivered services so that we may offer customers differentiated services. However, there can be no assurance that we would be able to develop successful alternative services or the sales and marketing expertise necessary to sell these services profitably.

### Adverse Economic Conditions

Our ability to grow or maintain our business may be adversely affected by weakening global and domestic economic conditions, including wavering consumer confidence and constraints on discretionary purchasing, unemployment, tight credit markets, declines in global and domestic stock markets, falling home prices and other factors that may adversely affect the markets in which we operate. Our ability to increase our income or to generate additional revenues will depend in part on our ability to organically grow our business, identify and successfully exploit opportunities to acquire other businesses or technologies, and enter into strategic partnerships. These activities may require significant additional capital that may not be available on terms that would be attractive to us or at all. In particular, current dislocations in the credit markets, which have significantly impacted the availability and cost of financing, specifically in the leveraged finance markets, may significantly constrain our ability to obtain financing to support our growth initiatives. These developments in the credit markets may increase our cost of financing and impair our liquidity position. In addition, these developments may cause us to defer or abandon business strategies and transactions that we would otherwise pursue if financing were available on acceptable terms.

Furthermore, unfavorable events in the economy, including a continuation or further deterioration in the credit and equity markets could cause consumer demand for pay-TV services and consequently sales of our digital set-top boxes to DISH Network, Bell TV and other international customers to decline materially because consumers may delay purchasing decisions or reduce or reallocate their discretionary spending.

### 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. If these events were to occur, it may become necessary for us to seek financing, and such financing may not be available to us. Furthermore, the current state of credit markets would make such financing even more difficult to obtain on acceptable terms or at all.

### Other Risks

Our profitability is also affected by costs associated with our efforts to expand our sales, marketing, product development and general and administrative capabilities in all of our businesses, as well as other expenses that we incur as a separate publicly-traded company. These costs are associated with, among other things, financial reporting, information technology, complying with federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002), tax administration and human resources related functions. As we expand internationally, we may also incur additional costs to conform our digital set-top boxes to comply with local laws or local specifications and to ship our digital set-top boxes to our international customers.

### EXPLANATION OF KEY METRICS AND OTHER ITEMS

***Equipment*** **revenue —** ***DISH Network. “***Equipment revenue — DISH Network” primarily includes sales of digital set-top boxes and related components to DISH Network, including Slingboxes and related hardware products.

***Equipment revenue — other. “***Equipment revenue — other” primarily includes sales of digital set-top boxes and related components to Bell TV and other international customers, including sales of Slingboxes and related hardware products.

***Services and other revenue — DISH Network. “***Services and other revenue — DISH Network” primarily includes revenue associated with satellite and transponder leasing, satellite uplinking/downlinking, signal processing, conditional access management, telemetry, tracking and control, professional services, facilities rental revenue and other services provided to DISH Network.

***Services and other revenue — other. “***Services and other revenue — other” primarily includes revenue associated with satellite and transponder leasing, satellite uplinking/downlinking and other services provided to customers other than DISH Network.

***Cost of sales — equipment. “***Cost of sales — equipment” principally includes costs associated with digital set-top boxes and related components sold to DISH Network, Bell TV and other international customers, including costs associated with Slingboxes and related hardware products.

***Cost of sales — services and other. “***Cost of sales — services and other” principally includes costs associated with satellite and transponder leasing, satellite uplinking/downlinking, signal processing, conditional access management, telemetry, tracking and control, professional services, facilities rental revenue, and other services.

***Research and development expenses. “***Research and development expenses” consist primarily of costs associated with the design and development of our digital set-top boxes, Slingboxes and related components, including among other things, salaries and consulting fees.

***Selling, general and administrative expenses. “***Selling, general and administrative expenses” consists primarily of selling and marketing costs and employee-related costs associated with administrative services (i.e., information systems, human resources and other services), including non-cash, stock-based compensation expense. It also includes professional fees (i.e., legal, information systems and accounting services) and other items associated with facilities and administration provided by DISH Network and other third parties.

***Impairments of goodwill, indefinite-lived and long-lived assets. “***Impairments of goodwill, indefinite-lived and long-lived assets” consists primarily of impairments of goodwill, FCC authorizations and satellites.

***Interest income. “***Interest income” consists primarily of interest earned on our cash, cash equivalents and marketable investment securities, including accretion on debt securities.

***Interest expense. “***Interest expense” primarily includes interest expense associated with our capital lease obligations.

***Unrealized and realized gains (losses) on marketable investment securities and other investments. “***Unrealized and realized gains (losses) on marketable investment securities and other investments” consists primarily of gains and losses realized on the sale or exchange of investments and “other-than-temporary” impairments of marketable and other investment securities.

***Unrealized gains (losses) on investments accounted for at fair value, net. “***Unrealized gains (losses) on investments accounted for at fair value, net” consists of unrealized gains and losses from changes in fair value of marketable and other strategic investments accounted for at fair value.

***Other, net.*** The main component of “Other, net” is primarily equity in earnings and losses of our affiliates.

***Earnings before interest, taxes, depreciation and amortization (“EBITDA”).*** EBITDA is defined as “Net income (loss)” plus “Interest expense” net of “Interest income,” “Income taxes” and “Depreciation and amortization.” This “non-GAAP measure” is reconciled to net income (loss) in our discussion of “Results of Operations” below.

### RESULTS OF OPERATIONS

*Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008.*

*(In thousands)*

| Statements of Operations Data Revenue: | For the Three Months Ended March 31, 2009 | 2008 | Variance Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Equipment revenue — DISH Network | $320,319 | $371,694 | $(51,375) | (13.8) |
| Equipment revenue — other | 56,911 | 74,822 | (17,911) | (23.9) |
| Services and other revenue — DISH Network | 91,885 | 92,470 | (585) | (0.6) |
| Services and other revenue — other | 10,432 | 15,585 | (5,153) | (33.1) |
| Total revenue | 479,547 | 554,571 | (75,024) | (13.5) |
| **Costs and Expenses:** |  |  |  |  |
| Cost of sales — equipment | 327,017 | 382,425 | (55,408) | (14.5) |
| **% of Total equipment revenue** | 86.7% | 85.6% |  |  |
| Cost of sales — services and other | 52,784 | 52,516 | 268 | 0.5 |
| **% of Total services and other revenue** | 51.6% | 48.6% |  |  |
| Research and development expenses | 10,970 | 10,587 | 383 | 3.6 |
| **% of Total revenue** | 2.3% | 1.9% |  |  |
| Selling, general and administrative expenses | 29,175 | 34,412 | (5,237) | (15.2) |
| **% of Total revenue** | 6.1% | 6.2% |  |  |
| Depreciation and amortization | 61,949 | 60,970 | 979 | 1.6 |
| Impairments of goodwill, indefinite-lived and long-lived assets | — | 12,799 | (12,799) | (100.0) |
| Total costs and expenses | 481,895 | 553,709 | (71,814) | (13.0) |
| Operating income (loss) | (2,348) | 862 | (3,210) | NM |
| **Other Income (Expense):** |  |  |  |  |
| Interest income | 9,289 | 21,369 | (12,080) | (56.5) |
| Interest expense, net of amounts capitalized | (7,286) | (8,283) | 997 | 12.0 |
| Unrealized and realized gains (losses) on marketable investment securities and other investments | 1,323 | (1,043) | 2,366 | NM |
| Unrealized gains (losses) on investments accounted for at fair value, net | 6,887 | — | 6,887 | NM |
| Other, net | (2,585) | (2,242) | (343) | (15.3) |
| Total other income (expense) | 7,628 | 9,801 | (2,173) | (22.2) |
| Income (loss) before income taxes | 5,280 | 10,663 | (5,383) | (50.5) |
| Income tax (provision) benefit, net | (5,925) | (4,962) | (963) | (19.4) |
| **Effective tax rate** | 112.2% | 46.5% |  |  |
| Net income (loss) | $(645) | $5,701 | $(6,346) | (111.3) |
| **Other Data:** |  |  |  |  |
| EBITDA | $65,226 | $58,547 | $6,679 | 11.4 |

33

***Equipment revenue — DISH Network. “***Equipment revenue — DISH Network” totaled $320 million during the three months ended March 31, 2009, a decrease of $51 million or 13.8% compared to the same period in 2008. This change resulted primarily from an 11% decrease in unit sales of set-top boxes and a 13% decline in average revenue per unit sold. The change in average revenue per unit was associated with a change in the mix of receivers sold and a reduction in costs for set-top boxes that we sell for a fixed margin.

In the near term, we expect DISH Network to remain the primary customer of our “Digital Set-Top Box” business and the primary source of our total revenue. Pursuant to the commercial agreements we entered into with DISH Network, we are obligated to sell digital set-top boxes to DISH Network at cost plus a fixed margin through January 1, 2011, although DISH Network has no obligation to purchase digital set-top boxes from us during or after this period. Because DISH Network’s current set-top box inventory is at higher-than-historical levels, we may see fewer orders for digital set-top boxes from DISH Network in the near term. In addition, if DISH Network’s subscriber growth continues to decline, it may have a material adverse effect on our financial position and results of operations.

***Equipment revenue — other. “***Equipment revenue — other” totaled $57 million during the three months ended March 31, 2009, a decrease of $18 million or 23.9% compared to the same period in 2008. This change resulted primarily from a 75% decrease in hardware sales to international customers other than Bell TV, partially offset by a 6% increase in sales to Bell TV. While unit sales to Bell TV increased versus the same quarter in 2008, the average revenue per unit decreased due to a change in mix of equipment and as a result of a February 6, 2009 amendment to our agreement with Bell TV that reduced certain prices to Bell TV in exchange, among other things, for Bell TV making us their exclusive provider for certain set-top boxes. Our sales to international customers other than Bell TV were adversely impacted by low cost competitors that are principally located in Asia.

A substantial majority of our international revenue during the three months ended March 31, 2009 was attributable to sales of equipment to Bell TV. In early 2009, we completed a multi-year contract extension with Bell TV that makes us the exclusive provider of certain digital set-top boxes to Bell TV. The agreement includes fixed pricing over the term of the agreement as well as providing future engineering development for enhanced Bell TV service offerings. There can be no assurance that sales to Bell TV will continue at historical levels, and any decline could adversely affect our gross margins and profitability.

***Services and other revenue — DISH Network. “***Services and other revenue — DISH Network” totaled $92 million during the three months ended March 31, 2009, a decrease of less than $1 million or 0.6% compared to the same period during 2008. This change resulted from DISH Network leasing fewer transponders which was offset by revenue associated with an increase in satellite uplinking/downlinking services provided to DISH Network.

***Services and other revenue — other. “***Services and other revenue — other” totaled $10 million during the three months ended March 31, 2009, a decrease of $5 million or 33.1% compared to the same period during 2008. The variance was driven primarily by revenue from several non-recurring sources recognized during the three months ended March 31, 2008.

***Cost of sales — equipment. “***Cost of sales — equipment” totaled $327 million during the three months ended March 31, 2009, a decrease of $55 million or 14.5% compared to the same period in 2008. This change primarily resulted from a decrease in sales of digital set-top boxes and related components to DISH Network and to international customers other than Bell TV, partially offset by an increase in the sales of digital set-top boxes and related components to Bell TV. “Cost of sales — equipment” represented 86.7% and 85.6% of total equipment sales during the three months ended March 31, 2009 and 2008, respectively. The increase in the expense to revenue ratio principally resulted from a decline in margins on sales of digital set-top boxes and related components to DISH Network, Bell TV and other international customers.

***Cost of sales — services and other. “***Cost of sales — services and other” totaled $53 million during each of the three months ended March 31, 2009 and 2008. “Cost of sales — services and other” represented 51.6% and 48.6% of total “Services and other revenue” during the three months ended March 31, 2009 and 2008, respectively. The increase in this expense to revenue ratio was mostly driven by the revenue from several non-recurring sources in the first quarter 2008 that had minimal associated costs.

***Selling, general and administrative expenses. “***Selling, general and administrative expenses” totaled $29 million during the three months ended March 31, 2009, a decrease of $5 million or 15.2% compared to the same period in 2008. This decrease was attributable to a reduction of our marketing and advertising expenses for Slingboxes and related products and the collection of a previously reserved receivable. “Selling, general and administrative expenses” represented 6.1% and 6.2% of “Total revenue” during the three months ended March 31, 2009 and 2008, respectively. The decrease in the ratio of those expenses to “Total revenue” was primarily attributable to a decrease in “Selling, general and administrative expenses” relative to the decline in revenue, discussed previously.

***Impairments of goodwill, indefinite-lived and long-lived assets. “***Impairments of goodwill, indefinite-lived and long-lived assets” totaled $13 million during the three months ended March 31, 2008. In connection with the AMC-14 launch anomaly, we wrote-off certain deposits, capitalized interest and insurance costs, net of insurance proceeds.

***Interest income. “***Interest income” totaled $9 million during the three months ended March 31, 2009, a $12 million decrease compared to the same period in 2008. This decrease principally resulted from lower cash and marketable investment securities balances and lower total percentage returns earned on our cash and marketable investment securities during the first quarter of 2009.

***Unrealized gains (losses) on investment accounted for at fair value, net. “***Unrealized gains (losses) on investments accounted for at fair value, net” totaled $7 million during the three months ended March 31, 2009 primarily attributable to the change in valuation of our fair value investments.

***Earnings before interest, taxes, depreciation and amortization.*** EBITDA was $65 million during the three months ended March 31, 2009, an increase of $7 million compared to the same period in 2008. The following table reconciles EBITDA to the accompanying financial statements.

*(In thousands)*

|  | For the Three Months Ended March 31, 2009 | 2008 |
| --- | ---: | ---: |
| EBITDA | $65,226 | $58,547 |
| Less: |  |  |
| Interest expense, net | (2,003) | (13,086) |
| Income tax provision (benefit), net | 5,925 | 4,962 |
| Depreciation and amortization | 61,949 | 60,970 |
| Net income (loss) | $(645) | $5,701 |

EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United States, or GAAP, and should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP. Conceptually, EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding liquidity and the underlying operating performance of our business. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in the digital set-top box industry.

***Income tax (provision) benefit, net.*** Our income tax provision was $6 million during the three months ended March 31, 2009, an increase of $1 million compared to the same period in 2008. The increase in the provision was primarily related to the establishment of valuation allowances against certain deferred tax assets that are capital in nature.

***Net income (loss).*** Our net loss was less than $1 million during the three months ended March 31, 2009, a decrease of $6 million compared to the same period in 2008. This decrease was primarily attributable to the changes in revenue and expenses discussed above.

### 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 March 31, 2009, our cash, cash equivalents and current marketable investment securities totaled $930 million compared to $829 million as of December 31, 2008. As of March 31, 2009 our $930 million of cash, cash equivalents and current marketable investment securities included $179 million of securities of a single issuer. The $101 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 operating cash flows, partially offset by capital expenditures, purchases of strategic investments and the repayment of debt.

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. 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 March 31, 2009 and December 31, 2008, we held VRDNs with fair values of $488 million and $622 million, respectively.

The following discussion highlights our cash flow activities during the three months ended March 31, 2009.

### Cash Flow

### Cash flows from operating activities

For the three months ended March 31, 2009, we reported net cash flows from operating activities of $36 million. This amount includes net loss adjusted for depreciation and amortization of $61 million, offset by the timing of receivables from DISH Network of $18 million and an $8 million non-cash gain on investments.

### Cash flows from investing activities

For the three months ended March 31, 2009, we reported cash flows from investing activities of $101 million primarily related to the net sale of marketable investment securities of $144 million, partially offset by $12 million of satellite related capital expenditures, $23 million of other capital expenditures and $9 million of strategic investment purchases.

### Cash flows from financing activities

For the three months ended March 31, 2009, we reported net cash outflows from financing activities of $14 million primarily resulting from the repayment of debt.

### 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. If these events were to occur, it may become necessary for us to seek financing, and such financing may not be available to us. Furthermore, the current state of credit markets would make such financing even more difficult to obtain on acceptable terms or at all.

### Off-Balance Sheet Arrangements

In general, we do not engage in off-balance sheet financing activities.

## Market risk

As filed, 4,967 characters.

### Market Risks Associated With Financial Instruments

Our investments and debt are exposed to market risks, discussed below.

### Interest Rate Risk

*Cash, Cash Equivalents and Marketable Investment Securities.* As of March 31, 2009, our restricted and unrestricted cash, cash equivalents and current marketable investment securities had a fair value of $933 million. Of that amount, a total of $687 million was invested in: (a) cash; (b) debt instruments of the U.S. Government and its agencies; (c) commercial paper and 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; and (d) instruments with similar risk characteristics to the commercial paper 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. As of March 31, 2009, all of the $687 million was invested in fixed or variable rate instruments. The value of these investments can be impacted by interest rate fluctuations, but while an increase in interest rates would ordinarily adversely impact the fair value of fixed rate investments, we normally hold these investments to maturity. Further, the value could be lowered by credit losses should economic conditions worsen.

*Strategic Marketable Investment Securities*. In general, our marketable investment securities portfolio includes debt and equity of public companies we hold for strategic and financial purposes. As of March 31, 2009, we held strategic and financial debt and equity investments of public companies with a fair value of $246 million. These investments, which are concentrated in a small number of companies, are highly speculative and have experienced and continue to experience volatility. The fair value of our strategic and financial debt and equity investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. A hypothetical 10% adverse change in the price of our public strategic debt and equity investments would result in approximately a $25 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 $183 million as of March 31, 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 $18 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 three months ended March 31, 2009 of 5.4%. A hypothetical 10% decrease in the average interest rates would result in a decrease of approximately $4 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 March 31, 2009, we had $333 million of long-term debt, of which $325 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, 846 characters.

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) under the Securities Exchange Act of 1934) 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.

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 265 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. During the three months ended March 31, 2009, there were no material changes in risk factors as previously disclosed.

Filed May 11, 2009.
Source: SEC EDGAR, the filing index for accession 0000950134-09-010199. Last ingested by Listed: Nov 3, 2026, 08:39 ET. No prices; not investment advice.