10-Q 1 a12-19932_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

Form 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012.

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     .

 

Commission File Number:  0-26176

 

DISH Network Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

88-0336997

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

 

 

9601 South Meridian Boulevard

 

 

Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip code)

 

(303) 723-1000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of October 19, 2012, the registrant’s outstanding common stock consisted of 212,995,425 shares of Class A common stock and 238,435,208 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Disclosure Regarding Forward-Looking Statements

 

i

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2012 and December 31, 2011 (Unaudited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2012 and 2011 (Unaudited)

 

3

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

4

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

48

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

69

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

71

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

72

 

 

 

 

 

Item 1A.

 

Risk Factors

 

79

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

80

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

None

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

None

 

 

 

 

 

Item 5.

 

Other Information

 

None

 

 

 

 

 

Item 6.

 

Exhibits

 

80

 

 

 

 

 

 

 

Signatures

 

81

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

We make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 throughout this report.  Whenever you read a statement that is not simply a statement of historical fact (such as when we describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or “anticipate” will occur, and other similar statements), you must remember that our expectations may not be achieved, even though we believe they are reasonable.  We do not guarantee that any future transactions or events described herein will happen as described or that they will happen at all.  You should read this report completely and with the understanding that actual future results may be materially different from what we expect.  Whether actual events or results will conform with our expectations and predictions is subject to a number of risks and uncertainties.  The risks and uncertainties include, but are not limited to, the following:

 

Competition and Economic Risks Affecting our Business

 

·                  We face intense and increasing competition from satellite television providers, cable companies and telecommunications companies, especially as the pay-TV industry matures, which may require us to increase subscriber acquisition and retention spending or accept lower subscriber activations and higher subscriber churn.

 

·                  Competition from digital media companies that provide or facilitate the delivery of video content via the Internet may reduce our gross new subscriber activations and may cause our subscribers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us.

 

·                  Economic weakness, including higher unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.

 

·                  Our competitors may be able to leverage their relationships with programmers to reduce their programming costs and offer exclusive content that will place them at a competitive advantage to us.

 

·                  We face increasing competition from other distributors of foreign language programming that may limit our ability to maintain our foreign language programming subscriber base.

 

Operational and Service Delivery Risks Affecting our Business

 

·                  If we do not continue improving our operational performance and customer satisfaction, our gross new subscriber activations may decrease and our subscriber churn may increase.

 

·                  If our gross new subscriber activations decrease, or if subscriber churn, subscriber acquisition costs or retention costs increase, our financial performance will be adversely affected.

 

·                  Programming expenses are increasing and could adversely affect our future financial condition and results of operations.

 

·                  We depend on others to provide the programming that we offer to our subscribers and, if we lose access to this programming, our gross new subscriber activations may decline and subscriber churn may increase.

 

·                  We may be required to make substantial additional investments to maintain competitive programming offerings.

 

·                  Any failure or inadequacy of our information technology infrastructure could harm our business.

 

·                  We currently depend on EchoStar Corporation and its subsidiaries, or EchoStar, to design, develop and manufacture all of our new set-top boxes and certain related components, and to provide transponder capacity, digital broadcast operations and other services to us.  Our business would be adversely affected if EchoStar ceases to provide these products and services to us and we are unable to obtain suitable replacement products and services from third parties.

 

·                  We operate in an extremely competitive environment and our success may depend in part on our timely introduction and implementation of, and effective investment in, new competitive products and services, the failure of which could negatively impact our business.

 

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Table of Contents

 

·                  Technology in our industry changes rapidly and our inability to offer new subscribers and upgrade existing subscribers with more advanced equipment could cause our products and services to become obsolete.

 

·                  We rely on a single vendor or a limited number of vendors to provide certain key products or services to us such as information technology support, billing systems, and security access devices, and the inability of these key vendors to meet our needs could have a material adverse effect on our business.

 

·                  Our sole supplier of new set-top boxes, EchoStar, relies on a few suppliers and in some cases a single supplier, for many components of our new set-top boxes, and any reduction or interruption in supplies or significant increase in the price of supplies could have a negative impact on our business.

 

·                  Our programming signals are subject to theft, and we are vulnerable to other forms of fraud that could require us to make significant expenditures to remedy.

 

·                  We depend on third parties to solicit orders for our services that represent a significant percentage of our total gross new subscriber activations.

 

·                  Our local programming strategy faces uncertainty because we may not be able to obtain necessary retransmission consent agreements at acceptable rates (or at all) from local network stations.

 

·                  We have limited owned and leased satellite capacity and failures or reduced capacity could adversely affect our business.

 

·                  Our owned and leased satellites are subject to construction, launch, operational and environmental risks that could limit our ability to utilize these satellites.

 

·                  We generally do not have commercial insurance coverage on the satellites we use and could face significant impairment charges if one of our satellites fails.

 

·                  We may have potential conflicts of interest with EchoStar due to our common ownership and management.

 

·                  We rely on key personnel and the loss of their services may negatively affect our businesses.

 

Acquisition and Capital Structure Risks Affecting our Business

 

·                  We made a substantial investment to acquire certain wireless spectrum licenses and other assets from DBSD North America and TerreStar.  These licenses are subject to a pending Federal Communications Commission (“FCC”) proposed rulemaking proceeding, the outcome and timing of which we cannot predict.  Depending, among other things, upon the outcome and timing of this regulatory proceeding, we will be required to make significant additional investments or partner with others to commercialize these assets.

 

·                  We made a substantial investment to acquire certain 700 MHz wireless spectrum licenses and will be required to make significant additional investments or partner with others to commercialize these licenses.

 

·                  Our Blockbuster business, and retail stores in particular, face risks, including, among other things, operational challenges and increasing competition from video rental kiosk, streaming and mail order businesses that may negatively impact the business, financial condition or results of operations of Blockbuster.

 

·                  We may pursue acquisitions and other strategic transactions to complement or expand our business that may not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.

 

·                  We may need additional capital, which may not be available on acceptable terms or at all, to continue investing in our business and to finance acquisitions and other strategic transactions.

 

·                  A portion of our investment portfolio is invested in securities that have experienced limited or no liquidity and may not be immediately accessible to support our financing needs.

 

·                  We have substantial debt outstanding and may incur additional debt.

 

·                  It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders, because of our ownership structure.

 

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Table of Contents

 

·                  We are controlled by one principal stockholder who is also our Chairman.

 

Legal and Regulatory Risks Affecting our Business

 

·                  Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others.

 

·                  We are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property.

 

·                  Increased distribution of video content via the Internet could expose us to regulatory risk.

 

·                  Changes in the Cable Act, and/or the FCC’s rules that implement the Cable Act, may limit our ability to access programming from cable-affiliated programmers at non-discriminatory rates.

 

·                  The injunction against our retransmission of distant networks, which is currently waived, may be reinstated.

 

·                  We are subject to significant regulatory oversight, and changes in applicable regulatory requirements, including any adoption or modification of laws or regulations relating to the Internet, could adversely affect our business.

 

·                  Our business depends on FCC licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted.

 

·                  We are subject to digital high-definition (“HD”) “carry-one, carry-all” requirements that cause capacity constraints.

 

·                  There can be no assurance that there will not be deficiencies leading to material weaknesses in our internal control over financial reporting.

 

·                  We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission, or SEC.

 

All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear.  Investors should consider the risks described herein and should not place undue reliance on any forward-looking statements.  We assume no responsibility for updating forward-looking information contained or incorporated by reference herein or in other reports we file with the SEC.

 

Unless otherwise required by the context, in this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network Corporation and its subsidiaries, “EchoStar” refers to EchoStar Corporation and its subsidiaries, and “DISH DBS” refers to DISH DBS Corporation and its subsidiaries, a wholly-owned, indirect subsidiary of DISH Network.

 

iii



Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,087,639

 

$

609,108

 

Marketable investment securities (Note 5)

 

3,312,437

 

1,431,745

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $14,959 and $12,350, respectively

 

805,061

 

778,443

 

Trade accounts receivable - EchoStar, net of allowance for doubtful accounts of zero

 

16,149

 

16,374

 

Inventory

 

628,817

 

707,151

 

Deferred tax assets

 

82,023

 

73,014

 

Other current assets

 

403,792

 

131,988

 

Total current assets

 

8,335,918

 

3,747,823

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities (Note 5)

 

134,173

 

132,435

 

Property and equipment, net of accumulated depreciation of $2,999,768 and $2,862,626, respectively (Note 7 and 8)

 

4,368,488

 

3,169,891

 

FCC authorizations (Note 7 and 8)

 

3,272,665

 

1,391,441

 

Marketable and other investment securities (Note 5)

 

114,391

 

112,132

 

Investment in DBSD North America (Note 8)

 

 

1,297,614

 

TerreStar Transaction (Note 8)

 

 

1,345,000

 

Other noncurrent assets, net

 

288,622

 

273,895

 

Total noncurrent assets

 

8,178,339

 

7,722,408

 

Total assets

 

$

16,514,257

 

$

11,470,231

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

215,792

 

$

225,556

 

Trade accounts payable - EchoStar

 

264,664

 

229,852

 

Deferred revenue and other

 

851,410

 

832,390

 

Accrued programming

 

1,162,901

 

1,067,625

 

Accrued interest

 

202,888

 

124,907

 

Litigation accrual (Note 11)

 

746,999

 

65,580

 

Other accrued expenses

 

663,479

 

638,956

 

Current portion of long-term debt and capital lease obligations (Note 9)

 

33,932

 

35,645

 

Total current liabilities

 

4,142,065

 

3,220,511

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

Long-term debt and capital lease obligations, net of current portion (Note 9)

 

10,356,799

 

7,458,134

 

Deferred tax liabilities

 

1,623,021

 

974,414

 

Long-term deferred revenue, distribution and carriage payments and other long-term liabilities

 

242,788

 

236,175

 

Total long-term obligations, net of current portion

 

12,222,608

 

8,668,723

 

Total liabilities

 

16,364,673

 

11,889,234

 

 

 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 268,961,785 and 264,732,074 shares issued, 212,843,525 and 208,613,814 shares outstanding, respectively

 

2,690

 

2,647

 

Class B common stock, $.01 par value, 800,000,000 shares authorized, 238,435,208 shares issued and outstanding

 

2,384

 

2,384

 

Class C common stock, $.01 par value, 800,000,000 shares authorized, none issued and outstanding

 

 

 

Additional paid-in capital

 

2,400,150

 

2,274,005

 

Accumulated other comprehensive income (loss)

 

57,809

 

82,043

 

Accumulated earnings (deficit)

 

(784,409

)

(1,211,990

)

Treasury stock, at cost

 

(1,569,459

)

(1,569,459

)

Total DISH Network stockholders’ equity (deficit)

 

109,165

 

(420,370

)

Noncontrolling interest

 

40,419

 

1,367

 

Total stockholders’ equity (deficit)

 

149,584

 

(419,003

)

Total liabilities and stockholders’ equity (deficit)

 

$

16,514,257

 

$

11,470,231

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscriber-related revenue

 

$

3,267,380

 

$

3,229,345

 

$

9,787,676

 

$

9,739,784

 

Equipment and merchandise sales, rental and other revenue

 

251,905

 

362,088

 

872,899

 

648,107

 

Equipment sales, services and other revenue - EchoStar

 

4,062

 

11,218

 

16,407

 

29,052

 

Total revenue

 

3,523,347

 

3,602,651

 

10,676,982

 

10,416,943

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses (exclusive of depreciation shown separately below - Note 7):

 

 

 

 

 

 

 

 

 

Subscriber-related expenses

 

1,810,756

 

1,702,661

 

5,399,317

 

5,125,315

 

Satellite and transmission expenses:

 

 

 

 

 

 

 

 

 

EchoStar

 

104,631

 

108,442

 

321,567

 

332,713

 

Other

 

10,915

 

9,769

 

31,772

 

29,788

 

Cost of sales - equipment, merchandise, services, rental and other

 

120,852

 

150,356

 

393,175

 

262,026

 

Subscriber acquisition costs:

 

 

 

 

 

 

 

 

 

Cost of sales - subscriber promotion subsidies - EchoStar

 

66,689

 

69,003

 

200,543

 

186,297

 

Other subscriber promotion subsidies

 

262,314

 

234,495

 

723,003

 

673,285

 

Subscriber acquisition advertising

 

123,995

 

91,320

 

331,988

 

232,936

 

Total subscriber acquisition costs

 

452,998

 

394,818

 

1,255,534

 

1,092,518

 

General and administrative expenses - EchoStar

 

20,763

 

14,327

 

47,635

 

39,457

 

General and administrative expenses

 

309,601

 

368,293

 

986,571

 

830,209

 

Litigation expense (Note 11)

 

730,457

 

 

730,457

 

(316,949

)

Depreciation and amortization (Note 7)

 

235,403

 

229,146

 

743,220

 

695,892

 

Total costs and expenses

 

3,796,376

 

2,977,812

 

9,909,248

 

8,090,969

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(273,029

)

624,839

 

767,734

 

2,325,974

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

34,304

 

8,527

 

61,597

 

23,414

 

Interest expense, net of amounts capitalized

 

(143,818

)

(155,601

)

(391,132

)

(419,344

)

Other, net

 

69,831

 

20,298

 

172,665

 

12,137

 

Total other income (expense)

 

(39,683

)

(126,776

)

(156,870

)

(383,793

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(312,712

)

498,063

 

610,864

 

1,942,181

 

Income tax (provision) benefit, net

 

149,383

 

(179,085

)

(188,471

)

(739,039

)

Net income (loss)

 

(163,329

)

318,978

 

422,393

 

1,203,142

 

Less: Net income (loss) attributable to noncontrolling interest

 

(4,868

)

(121

)

(5,188

)

(111

)

Net income (loss) attributable to DISH Network

 

$

(158,461

)

$

319,099

 

$

427,581

 

$

1,203,253

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

451,042

 

446,133

 

449,547

 

445,034

 

Diluted

 

451,042

 

447,731

 

452,319

 

446,476

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share attributable to DISH Network

 

$

(0.35

)

$

0.72

 

$

0.95

 

$

2.70

 

Diluted net income (loss) per share attributable to DISH Network

 

$

(0.35

)

$

0.71

 

$

0.95

 

$

2.70

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(163,329

)

$

318,978

 

$

422,393

 

$

1,203,142

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

3,990

 

(892

)

5,278

 

(7,792

)

Unrealized holding gains (losses) on available-for-sale securities

 

141,781

 

(132,065

)

123,409

 

(38,996

)

Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)

 

(68,899

)

(56

)

(152,921

)

(1,694

)

Deferred income tax (expense) benefit

 

 

 

 

 

Total other comprehensive income (loss), net of tax

 

76,872

 

(133,013

)

(24,234

)

(48,482

)

Comprehensive income (loss)

 

(86,457

)

185,965

 

398,159

 

1,154,660

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(4,868

)

(121

)

(5,188

)

(111

)

Comprehensive income (loss) attributable to DISH Network

 

$

(81,589

)

$

186,086

 

$

403,347

 

$

1,154,771

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months
Ended September 30,

 

 

 

2012

 

2011

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

422,393

 

$

1,203,142

 

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

743,220

 

695,892

 

Realized and unrealized losses (gains) on investments

 

(171,203

)

(14,092

)

Non-cash, stock-based compensation

 

36,957

 

25,595

 

Deferred tax expense (benefit)

 

395,079

 

590,849

 

Other, net

 

20,043

 

14,471

 

Change in noncurrent assets

 

(77,437

)

(62,646

)

Change in long-term deferred revenue, distribution and carriage payments and other long-term liabilities

 

(4,141

)

27,651

 

Changes in current assets and current liabilities, net

 

669,131

 

(489,706

)

Net cash flows from operating activities

 

2,034,042

 

1,991,156

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(3,292,823

)

(5,101,420

)

Sales and maturities of marketable investment securities

 

1,618,843

 

4,793,861

 

Purchases of property and equipment

 

(681,925

)

(593,912

)

Change in restricted cash and marketable investment securities

 

(1,739

)

24,097

 

DBSD North America Transaction, less cash acquired of $5,230 (Note 8)

 

(40,015

)

(1,127,098

)

TerreStar Transaction (Note 8)

 

(36,942

)

(1,345,000

)

Purchase of Blockbuster assets, net of cash acquired of $107,061

 

 

(126,523

)

Purchase of other strategic investments

 

(10,000

)

(9,275

)

Proceeds from sale of strategic investments

 

 

11,327

 

Other

 

(46,553

)

(542

)

Net cash flows from investing activities

 

(2,491,154

)

(3,474,485

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

2,900,000

 

2,000,000

 

Debt issuance costs

 

(6,681

)

(27,167

)

Repayment of long-term debt and capital lease obligations

 

(28,599

)

(26,206

)

Repurchases of 6 3/8% Senior Notes due 2011

 

 

(85,358

)

Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan

 

61,404

 

26,924

 

Other

 

7,572

 

4,296

 

Net cash flows from financing activities

 

2,933,696

 

1,892,489

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

1,947

 

(4,316

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

2,478,531

 

404,844

 

Cash and cash equivalents, beginning of period

 

609,108

 

640,672

 

Cash and cash equivalents, end of period

 

$

3,087,639

 

$

1,045,516

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

385,518

 

$

351,506

 

Capitalized interest

 

$

72,061

 

$

 

Cash received for interest

 

$

26,209

 

$

25,583

 

Cash paid for income taxes

 

$

270,042

 

$

30,777

 

Employee benefits paid in Class A common stock

 

$

22,280

 

$

24,803

 

Satellites and other assets financed under capital lease obligations

 

$

850

 

$

3,583

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Organization and Business Activities

 

Principal Business

 

DISH Network Corporation is a holding company.  Its subsidiaries (which together with DISH Network Corporation are referred to as “DISH Network,” the “Company,” “we,” “us” and/or “our,” unless otherwise required by the context) operate three primary segments.

 

·                  DISH.  The DISH® branded direct broadcast satellite (“DBS”) pay-TV service had 14.042 million subscribers in the United States as of September 30, 2012.  The DISH branded pay-TV service consists of Federal Communications Commission (“FCC”) licenses authorizing us to use DBS and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a third-party leased fiber network, in-home service and call center operations, and certain other assets utilized in our operations.

 

·                  Blockbuster.  On April 26, 2011, we completed the acquisition of most of the assets of Blockbuster, Inc. (the “Blockbuster Acquisition”).  The financial results of our Blockbuster operations are included in our financial results beginning April 26, 2011.  Blockbuster primarily offers movies and video games for sale and rental through multiple distribution channels such as retail stores, by-mail, digital devices, the blockbuster.com website and the BLOCKBUSTER On Demand® service.

 

·                  Wireless Spectrum.  In 2008, we paid $712 million to acquire certain 700 MHz wireless spectrum licenses, which were granted to us by the FCC in February 2009 subject to certain build-out requirements.  On March 9, 2012, we completed the acquisitions of 100% of the equity of reorganized DBSD North America, Inc. (“DBSD North America”) and substantially all of the assets of TerreStar Networks, Inc. (“TerreStar”), pursuant to which we acquired, among other things, 40 MHz of 2 GHz wireless spectrum licenses held by DBSD North America and TerreStar.  The financial results of DBSD North America and TerreStar were included in our financial results as of March 9, 2012.  The total consideration to acquire these assets was approximately $2.860 billion.  This amount includes $1.364 billion for DBSD North America (the “DBSD Transaction”), $1.382 billion for TerreStar (the “TerreStar Transaction”), and the net payment of $114 million to Sprint pursuant to the Sprint Settlement Agreement.  See Note 8 for further information.

 

We currently generate an immaterial amount of revenue and incur operating expenses associated with certain satellite operations and regulatory compliance matters from our wireless spectrum assets.  As we review our options for the commercialization of this wireless spectrum, we may incur significant additional expenses and may have to make significant investments related to, among other things, research and development, wireless testing and construction of a wireless network.

 

On March 21, 2012, the FCC released a notice of proposed rulemaking (“NPRM”) that could result in the elimination of the Mobile-Satellite Service (“MSS”) “integrated service” and other requirements that attach to the 2 GHz licenses.  Among other things, the FCC has proposed to modify our licenses to allow us to offer single-mode terrestrial terminals to customers who do not desire satellite functionality.  We submitted filings in the initial comment round and in the reply comment round.  We cannot predict the outcome or timing of the NPRM, including, without limitation, any associated build-out requirements with which we may need to comply to avail ourselves of any changes to the rules.  See Note 11 for further information.

 

4



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Recent Developments

 

Voom Settlement Agreement

 

On October 21, 2012, we entered into a confidential settlement agreement and release (the “Voom Settlement Agreement”) with Voom HD Holdings LLC (“Voom”) and CSC Holdings, LLC (“Cablevision”), and for certain limited purposes, MSG Holdings, L.P., The Madison Square Garden Company and EchoStar.  See further discussion regarding litigation in Note 11.  The Voom Settlement Agreement resolved the litigation between the parties relating to the Voom programming services.  Pursuant to the terms of the Voom Settlement Agreement, among other things:  (i) the litigation between the parties relating to the Voom programming services was dismissed with prejudice and the parties released each other for all claims against each other related thereto; (ii) we agreed to pay $700 million in cash to Voom; (iii) DISH Media Holdings Corporation, our wholly-owned subsidiary, agreed to enter into an agreement to transfer its ownership interest in Voom to Rainbow Programming Holdings, LLC, an affiliate of Voom; and (iv) an affiliate of Cablevision agreed to enter into an agreement to transfer certain of its wireless multichannel video distribution and data service licenses (the “MVDDS Licenses”) to us.  The transfer of the MVDDS Licenses is subject to FCC and other regulatory approvals.  On October 23, 2012, we paid Voom $700 million.

 

Separately, we entered into a multi-year affiliation agreement with AMC Network Entertainment LLC, WE: Women’s Entertainment LLC, The Independent Film Channel, The Sundance Channel L.L.C, each of which are subsidiaries of AMC Networks Inc., and Fuse Channel LLC, a subsidiary of The Madison Square Garden Company, for the carriage of AMC, WE, IFC, Sundance Channel and the Fuse channel.

 

Since the Voom Settlement Agreement and the multi-year affiliation agreement were entered into contemporaneously, we accounted for all components of both agreements at fair value in the context of the Voom Settlement Agreement.  We have determined the fair value of the multi-year affiliation agreement and the MVDDS Licenses using a market-based approach and a probability-weighted discounted cash flow analysis, respectively.  Based on market data and similar agreements we have with other content providers, we allocated $54 million of the payments under the multi-year affiliation agreement to the fair value of the Voom Settlement Agreement.  Evaluating all potential uses for the MVDDS Licenses, we assessed their fair value at $24 million.  The fair value of the MVDDS Licenses will be recorded during the fourth quarter 2012.  The Voom Settlement Agreement is considered a Type I subsequent event and our $730 million estimated fair value of this settlement is recorded as “Litigation expense” on our Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2012.  Additionally, $676 million and $54 million are recorded on our Condensed Consolidated Balance Sheets as “Litigation accrual” and “Accrued Programming,” respectively.  The resulting liability related to the multi-year affiliation agreement will be amortized as contra “Subscriber-related expenses” on a straight-line basis over the term of the agreement.

 

2.                                      Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 10-K”).  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

5



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary.  Non-majority owned investments are accounted for using the equity method when we have the ability to significantly influence the operating decisions of the investee.  When we do not have the ability to significantly influence the operating decisions of an investee, the cost method is used.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period.  Estimates are used in accounting for, among other things, allowances for doubtful accounts, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, the useful lives and residual value surrounding our rental library inventory, estimated accruals related to revenue-sharing titles that are subject to performance guarantees, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, fair value of multi-element arrangements, capital leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, asset retirement obligations, retailer incentives, programming expenses, subscriber lives and royalty obligations.  Weak economic conditions have increased the inherent uncertainty in the estimates and assumptions indicated above.  Actual results may differ from previously estimated amounts, and such differences may be material to the Condensed Consolidated Financial Statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.

 

Fair Value Measurements

 

We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs.  We apply the following hierarchy in determining fair value:

 

·       Level 1, defined as observable inputs being quoted prices in active markets for identical assets, including U.S. treasury notes;

 

·       Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

·      Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants therefore requiring assumptions based on the best information available.

 

As of September 30, 2012 and December 31, 2011, the carrying value for cash and cash equivalents, marketable investment securities, trade accounts receivable, net of allowance for doubtful accounts, and current liabilities, excluding the “Current portion of long-term debt and capital lease obligations,” is equal to or approximates fair value due to their short-term nature or proximity to current market rates.  See Note 5.

 

6



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Fair values for our publicly traded debt securities are based on quoted market prices, when available.  The fair values of private debt are estimated based on an analysis in which we evaluate market conditions, related securities, various public and private offerings, and other publicly available information.  In performing this analysis, we make various assumptions regarding, among other things, credit spreads, and the impact of these factors on the value of the notes.  See Note 9 for the fair value of our long-term debt.

 

3.                                      Basic and Diluted Net Income (Loss) Per Share

 

We present both basic earnings per share (“EPS”) and diluted EPS.  Basic EPS excludes potential dilution and is computed by dividing “Net income (loss) attributable to DISH Network” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if stock awards were exercised.  The potential dilution from stock awards was computed using the treasury stock method based on the average market value of our Class A common stock.  The following table presents earnings per share amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.

 

 

 

For the Three Months
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) attributable to DISH Network

 

$

(158,461

)

$

319,099

 

$

427,581

 

$

1,203,253

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

451,042

 

446,133

 

449,547

 

445,034

 

Dilutive impact of stock awards outstanding

 

 

1,598

 

2,772

 

1,442

 

Diluted

 

451,042

 

447,731

 

452,319

 

446,476

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share attributable to DISH Network

 

$

(0.35

)

$

0.72

 

$

0.95

 

$

2.70

 

Diluted net income (loss) per share attributable to DISH Network

 

$

(0.35

)

$

0.71

 

$

0.95

 

$

2.70

 

 

We had a net loss for the three months ended September 30, 2012; therefore, the effect of stock awards is excluded from the computations of diluted earnings (loss) per share since the effect is anti-dilutive.  As of September 30, 2012 and 2011, there were stock awards to purchase 3.2 million and 5.3 million shares, respectively, of Class A common stock outstanding, not included in the weighted-average common shares outstanding above, as their effect is anti-dilutive.

 

Vesting of options and rights to acquire shares of our Class A common stock granted pursuant to our performance-based stock incentive plans (“Restricted Performance Units”) is contingent upon meeting certain goals, some of which are not yet probable of being achieved.  As a consequence, the following are also not included in the diluted EPS calculation.

 

 

 

As of September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Performance-based options

 

7,943

 

11,028

 

Restricted Performance Units

 

1,190

 

1,376

 

Total

 

9,133

 

12,404

 

 

7



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

4.                                      Other Comprehensive Income (Loss)

 

The following table presents the tax effects on each component of “Other comprehensive income (loss).”  A full valuation allowance has been established against any deferred tax assets that are capital in nature.

 

 

 

For the Three Months 
Ended September 30,

 

 

 

2012

 

2011

 

 

 

Before
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net
of Tax
Amount

 

Before
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net
of Tax
Amount

 

 

 

(In thousands)

 

Foreign currency translation adjustments

 

$

3,990

 

$

 

$

3,990

 

$

(892

)

$

 

$

(892

)

Unrealized holding gains (losses) on available-for-sale securities

 

141,781

 

 

141,781

 

(132,065

)

 

(132,065

)

Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)

 

(68,899

)

 

(68,899

)

(56

)

 

(56

)

Other comprehensive income (loss)

 

$

76,872

 

$

 

$

76,872

 

$

(133,013

)

$

 

$

(133,013

)

 

 

 

For the Nine Months 
Ended September 30,

 

 

 

2012

 

2011

 

 

 

Before

 

Tax

 

Net

 

Before

 

Tax

 

Net

 

 

 

Tax

 

(Expense)

 

of Tax

 

Tax

 

(Expense)

 

of Tax

 

 

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

 

 

 

(In thousands)

 

Foreign currency translation adjustments

 

$

5,278

 

$

 

$

5,278

 

$

(7,792

)

$

 

$

(7,792

)

Unrealized holding gains (losses) on available-for-sale securities

 

123,409

 

 

123,409

 

(38,996

)

 

(38,996

)

Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)

 

(152,921

)

 

(152,921

)

(1,694

)

 

(1,694

)

Other comprehensive income (loss)

 

$

(24,234

)

$

 

$

(24,234

)

$

(48,482

)

$

 

$

(48,482

)

 

The “Accumulated other comprehensive income (loss)” is detailed in the following table.

 

Accumulated Other Comprehensive Income (Loss)

 

Foreign
Currency
Translation
Adjustment

 

Unrealized /
Recognized
Gains
(Losses)

 

Total

 

 

 

 

 

(In thousands)

 

 

 

Balance as of December 31, 2011

 

$

(9,139

)

$

91,182

 

$

82,043

 

Current period activity

 

5,278

 

(29,512

)

(24,234

)

Tax (expense) benefit

 

 

 

 

Balance as of September 30, 2012

 

$

(3,861

)

$

61,670

 

$

57,809

 

 

8



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

5.                                      Marketable Investment Securities, Restricted Cash and Cash Equivalents, and Other Investment Securities

 

Our marketable investment securities, restricted cash and cash equivalents, and other investment securities consist of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

130,670

 

$

160,555

 

Current marketable investment securities - strategic

 

1,119,071

 

360,052

 

Current marketable investment securities - other

 

2,062,696

 

911,138

 

Total current marketable investment securities

 

3,312,437

 

1,431,745

 

Restricted marketable investment securities (1)

 

46,314

 

65,843

 

Noncurrent marketable investment securities - ARS and MBS (2)

 

101,512

 

109,327

 

Total marketable investment securities

 

3,460,263

 

1,606,915

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

87,859

 

66,592

 

 

 

 

 

 

 

Other investment securities:

 

 

 

 

 

Other investment securities - cost method (2)

 

12,879

 

2,805

 

Investment in DBSD North America (Note 8)

 

 

1,297,614

 

Total other investment securities

 

12,879

 

1,300,419

 

 

 

 

 

 

 

Total marketable investment securities, restricted cash and cash equivalents, and other investment securities

 

$

3,561,001

 

$

2,973,926

 

 


(1)          Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” on our Condensed Consolidated Balance Sheets.

(2)          Noncurrent marketable investment securities — auction rate securities (“ARS”), mortgage backed securities (“MBS”) and other investment securities are included in “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets.

 

Marketable Investment Securities

 

Our marketable investment securities portfolio consists of various debt and equity instruments, all of which are classified as available-for-sale, except as specified below.

 

Current Marketable Investment Securities - VRDNs

 

Variable rate demand notes (“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 mainly of investments in municipalities, which are backed by financial institutions or other highly rated obligors that serve as the pledged liquidity source.  While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.

 

9



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Current Marketable Investment Securities - Strategic

 

Our current strategic marketable investment securities include strategic and financial investments in public companies that are highly speculative and have experienced and continue to experience volatility.  As of September 30, 2012, our strategic investment portfolio consisted of securities of a small number of issuers, and as a result the value of that portfolio depends on the value of those issuers.  In addition, a significant portion of the value of these investments is concentrated in the debt securities of a single issuer.  The adjusted cost of the securities of that single issuer as of September 30, 2012 and December 31, 2011 was $745 million and $16 million, respectively.  The fair value of the securities of that single issuer as of September 30, 2012 and December 31, 2011 was $790 million and $17 million, respectively.  That single issuer has indicated that it will need substantial additional capital to meet its business and financial obligations beyond the next 12 months.  The fair value of certain of the debt securities in our investment portfolio, including those of that single issuer, can be adversely impacted by, among other things, the issuers’ respective performance and ability to obtain any necessary additional financing on acceptable terms, or at all.

 

Current Marketable Investment Securities - Other

 

Our current marketable investment securities portfolio includes investments in various debt instruments including corporate and government bonds.

 

Restricted Cash and Marketable Investment Securities

 

As of September 30, 2012 and December 31, 2011, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds and for litigation (See Note 11).

 

Noncurrent Marketable Investment Securities — ARS and MBS

 

We have investments in ARS and MBS which are either classified as available-for-sale securities or are accounted for under the fair value method.  Previous events in the credit markets reduced or eliminated current liquidity for certain of our ARS and MBS investments.  As a result, we classify these investments as noncurrent assets, as we intend to hold these investments until they recover or mature.

 

The valuation of our ARS and MBS investments portfolio is subject to uncertainties that are difficult to estimate.  Due to the lack of observable market quotes for identical assets, we utilize analyses that rely on Level 2 and/or Level 3 inputs, as defined in “Fair Value Measurements.”  These inputs include, among other things, observed prices on similar assets as well as our assumptions and estimates related to the counterparty credit quality, default risk underlying the security and overall capital market liquidity.  These securities were also compared, when possible, to other observable market data for financial instruments with similar characteristics.

 

Fair Value Election.  As of September 30, 2012, our ARS and MBS noncurrent marketable investment securities portfolio of $102 million includes $58 million of securities accounted for under the fair value method.

 

Other Investment Securities

 

We have strategic investments in certain debt and equity securities that are included in noncurrent “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets and accounted for using the cost, equity and/or fair value methods of accounting.

 

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, on acceptable terms or at all, to

 

10



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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.

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

As of September 30, 2012 and December 31, 2011, we had accumulated net unrealized gains of $62 million and $91 million, both net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  A full valuation allowance has been established against any deferred taxes that are capital in nature.  The components of our available-for-sale investments are summarized in the table below.

 

 

 

As of September 30, 2012

 

As of December 31, 2011

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

130,670

 

$

 

$

 

$

 

$

160,555

 

$

 

$

 

$

 

ARS and MBS

 

43,025

 

1,775

 

(9,762

)

(7,987

)

46,657

 

848

 

(14,486

)

(13,638

)

ARS fair value election

 

58,487

 

 

 

 

62,670

 

 

 

 

Other (including restricted)

 

2,943,654

 

52,808

 

(4,850

)

47,958

 

994,021

 

5,526

 

(6,565

)

(1,039

)

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

284,427

 

27,786

 

(6,087

)

21,699

 

343,012

 

89,044

 

(61,934

)

27,110

 

Subtotal

 

3,460,263

 

82,369

 

(20,699

)

61,670

 

1,606,915

 

95,418

 

(82,985

)

12,433

 

Investment in DBSD North America (1)

 

 

 

 

 

839,009

 

78,749

 

 

78,749

 

Total

 

$

3,460,263

 

$

82,369

 

$

(20,699

)

$

61,670

 

$

2,445,924

 

$

174,167

 

$

(82,985

)

$

91,182

 

 


(1)          Of our total investment in DBSD North America of $1.298 billion as of December 31, 2011, $839 million was invested in 7.5% Convertible Senior Secured Notes due 2009, which were accounted for as available-for-sale investments prior to the DBSD Transaction.

 

As of September 30, 2012, restricted and non-restricted marketable investment securities include debt securities of $1.635 billion with contractual maturities of one year or less and $1.541 billion with contractual maturities greater than one year.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have been in an unrealized loss position, aggregated by investment category.  As of September 30, 2012, the unrealized losses on our investments in equity securities represent investments in broad-based indexes and companies in the telecommunications and technology industries.  We are not aware of any specific factors which indicate the unrealized losses in these investments are due to anything other than temporary market fluctuations.  As of September 30, 2012 and December 31, 2011, the unrealized losses on our investments in debt securities primarily represent investments in auction rate and mortgage backed securities.  We have the ability to hold and do not intend to sell our investments in these debt securities before they recover or mature, and it is more likely than not that we will hold these investments until that time.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these marketable investment securities are related to temporary market fluctuations.

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

Debt Securities:

 

 

 

 

 

 

 

 

 

Less than 12 months

 

$

585,153

 

$

(3,926

)

$

694,199

 

$

(4,793

)

12 months or more

 

89,948

 

(10,686

)

98,240

 

(16,258

)

Equity Securities:

 

 

 

 

 

 

 

 

 

Less than 12 months

 

46,361

 

(6,087

)

247,683

 

(61,934

)

12 months or more

 

 

 

 

 

Total

 

$

721,462

 

$

(20,699

)

$

1,040,122

 

$

(82,985

)

 

Our investments measured at fair value on a recurring basis were as follows:

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Cash equivalents (including restricted)

 

$

2,885,056

 

$

70,454

 

$

2,814,602

 

$

 

$

397,777

 

$

46,371

 

$

351,406

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

130,670

 

$

 

$

130,670

 

$

 

$

160,555

 

$

 

$

160,555

 

$

 

ARS and MBS

 

101,512

 

 

1,024

 

100,488

 

109,327

 

 

3,412

 

105,915

 

Other (including restricted)

 

2,943,654

 

9,249

 

2,934,405

 

 

994,021

 

 

994,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

284,427

 

284,427

 

 

 

343,012

 

343,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

3,460,263

 

293,676

 

3,066,099

 

100,488

 

1,606,915

 

343,012

 

1,157,988

 

105,915

 

Investment in DBSD North America (1)

 

 

 

 

 

839,009

 

 

 

839,009

 

Total

 

$

3,460,263

 

$

293,676

 

$

3,066,099

 

$

100,488

 

$

2,445,924

 

$

343,012

 

$

1,157,988

 

$

944,924

 

 


(1)          Of our total investment in DBSD North America of $1.298 billion as of December 31, 2011, $839 million was invested in 7.5% Convertible Senior Secured Notes due 2009, which were accounted for as available-for-sale investments prior to the DBSD Transaction.

 

As of September 30, 2012 and December 31, 2011, our Level 3 investments consist predominately of ARS and MBS.  On a quarterly basis we evaluate the reasonableness of significant unobservable inputs used in those measurements.  The valuation models used for some of our ARS investments require an evaluation of the underlying

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

instruments held by the trusts that issue these securities.  For our other ARS and MBS securities, our evaluation uses, among other things, the terms of the underlying instruments, the credit ratings of the issuers, current market conditions, and other relevant factors.  Based on these factors, we assess the risk of realizing expected cash flows and we apply an observable discount rate that reflects this risk.  We may also reduce our valuations to reflect other claims to trust assets or to reflect a liquidity discount based on the lack of an active market for these securities.

 

Changes in Level 3 instruments are as follows:

 

 

 

Level 3

 

 

 

Investment

 

 

 

Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2011

 

$

944,924

 

Net realized and unrealized gains (losses) included in earnings

 

74,799

 

Net realized and unrealized gains (losses) included in other comprehensive income (loss)

 

(73,156

)

Purchases

 

 

Settlements (1)

 

(846,079

)

Issuances

 

 

Transfers from level 2 to level 3

 

 

Balance as of September 30, 2012

 

$

100,488

 

 


(1)         For the nine months ended September 30, 2012, this amount primarily relates to the conversion of our DBSD North America 7.5% Convertible Senior Secured Notes due 2009 in connection with the completion of the DBSD Transaction.  See Note 8 for further information.

 

During the nine months ended September 30, 2012, we had no transfers in and out of Level 1 and Level 2 fair value measurements.

 

Gains and Losses on Sales and Changes in Carrying Values of Investments

 

“Other, net” income and expense included on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes other changes in the carrying amount of our marketable and non-marketable investments as follows:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Other Income (Expense):

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Marketable investment securities - gains (losses) on sales/exchanges

 

$

111,709

 

$

11,668

 

$

119,445

 

$

13,400

 

Marketable investment securities - unrealized gains (losses) on investments accounted for at fair value

 

667

 

12,361

 

(2,395

)

(7,147

)

Marketable investment securities - gains (losses) on conversion of DBSD North America Notes (1)

 

 

 

99,445

 

 

Other investment securities - gains (losses) on sales/exchanges

 

 

 

 

10,000

 

Marketable investment securities - other-than-temporary impairments

 

(42,811

)

(2,161

)

(45,292

)

(2,161

)

Other

 

266

 

(1,570

)

1,462

 

(1,955

)

Total

 

$

69,831

 

$

20,298

 

$

172,665

 

$

12,137

 

 


(1)         During the nine months ended September 30, 2012, we recognized a $99 million non-cash gain related to the conversion of our DBSD North America 7.5% Convertible Senior Secured Notes due 2009 in connection with the completion of the DBSD Transaction.  See Note 8 for further information.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

6.             Inventory

 

Inventory consists of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

DISH:

 

 

 

 

 

Finished goods - DBS

 

$

251,344

 

$

295,058

 

Raw materials

 

134,429

 

183,711

 

Work-in-process

 

75,400

 

31,536

 

Total DISH inventory

 

461,173

 

510,305

 

Blockbuster:

 

 

 

 

 

Rental library

 

83,015

 

104,238

 

Merchandise

 

83,169

 

92,608

 

Total Blockbuster inventory

 

166,184

 

196,846

 

Wireless Spectrum:

 

 

 

 

 

Finished goods

 

1,460

 

 

Total Wireless Spectrum inventory

 

1,460

 

 

Total inventory

 

$

628,817

 

$

707,151

 

 

7.             Property and Equipment and FCC Authorizations

 

“Property and equipment, net” on our Condensed Consolidated Balance Sheets totaled $4.368 billion as of September 30, 2012, a $1.199 billion increase compared to December 31, 2011.  This increase was primarily related to the closing of the DBSD Transaction and the TerreStar Transaction and the associated purchase price allocation to the assets acquired and the liabilities assumed.  See Note 8 for further information.

 

As we prepare for commercialization of our 2 GHz wireless spectrum licenses which are recorded in FCC Authorizations, interest expense related to its carrying value is being capitalized within “Property and equipment, net” on our Condensed Consolidated Balance Sheets.  During the three months ended September 30, 2012 and 2011, we recorded capitalized interest of $33 million and zero, respectively.  During the nine months ended September 30, 2012 and 2011, we recorded capitalized interest of $72 million and zero, respectively.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense consists of the following:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Equipment leased to customers

 

$

165,959

 

$

180,080

 

$

481,876

 

$

552,097

 

Satellites

 

38,782

 

32,087

 

111,235

 

96,265

 

Buildings, furniture, fixtures, equipment and other

 

30,662

 

16,979

 

82,333

 

47,530

 

148 degree orbital location (1)

 

 

 

67,776

 

 

Total depreciation and amortization

 

$

235,403

 

$

229,146

 

$

743,220

 

$

695,892

 

 


(1)  See “FCC Authorizations” below.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Cost of sales and operating expense categories included in our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) do not include depreciation expense related to satellites or equipment leased to customers.

 

DBS Satellites

 

We currently utilize 13 DBS satellites in geostationary orbit approximately 22,300 miles above the equator, six of which we own and depreciate over the useful life of each satellite.  We currently utilize capacity on five DBS satellites from EchoStar, which are accounted for as operating leases.  See Note 13 for further discussion of our satellite leases with EchoStar.  We also lease two DBS satellites from third parties, which are accounted for as capital leases and are depreciated over the shorter of the economic life of the satellite or the term of the satellite agreement.

 

S-band Satellites

 

As a result of the DBSD Transaction and the TerreStar Transaction, three S-band satellites were added to our satellite fleet, including two in-orbit satellites and one satellite under construction, discussed below.  We are currently evaluating our options for these satellites.

 

D1.  D1, formerly known as EchoStar G1, was launched in April 2008 by DBSD North America and is currently located at the 92.85 degree orbital location.  D1 was designed to meet a minimum 15-year useful life.

 

T1.  T1, formerly known as EchoStar T1, was launched in July 2009 by TerreStar and currently operates at the 111.1 degree orbital location.  T1 was designed to meet a minimum 15-year useful life.  Prior to the TerreStar Transaction, this satellite experienced certain solar array anomalies.  While these anomalies did not reduce the estimated useful life of the satellite to less than 15 years or impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

T2.  In December 2007, TerreStar entered into an agreement with Space Systems/Loral, Inc. for the design and manufacture of T2, formerly known as EchoStar T2.  The construction of T2 is close to completion.

 

Satellite Anomalies

 

Operation of our pay-TV service requires that we have adequate DBS satellite transmission capacity for the programming we offer.  Moreover, current competitive conditions require that we continue to expand our offering of new programming, particularly by expanding local high definition (“HD”) coverage and offering more HD national channels.  While we generally have had in-orbit DBS satellite capacity sufficient to transmit our existing channels and some backup capacity to recover the transmission of certain critical programming, our backup capacity is limited.

 

In the event of a failure or loss of any of our satellites, we may need to acquire or lease additional satellite capacity or relocate one of our other satellites and use it as a replacement for the failed or lost satellite.  Such a failure could result in a prolonged loss of critical programming or a significant delay in our plans to expand programming as necessary to remain competitive and thus may have a material adverse effect on our business, financial condition and results of operations.

 

Prior to 2012, certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful life and/or commercial operation.  There can be no assurance that future anomalies will not further impact the remaining useful life and/or commercial operation of any of the satellites in our fleet.  See “Long-Lived DBS Satellite Assets” below for further discussion of evaluation of impairment.  There can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We generally do not carry insurance for any of the in-orbit satellites that we use, other than satellites leased

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

from third parties, and therefore, we will bear the risk associated with any uninsured in-orbit satellite failures.  Recent developments with respect to certain of our satellites are discussed below.

 

Owned Satellites

 

EchoStar I.  EchoStar I was designed to meet a minimum 12-year useful life. During the first quarter 2012, we determined that EchoStar I experienced a communications receiver anomaly.  While this anomaly did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not impact its future commercial operation.  EchoStar I was fully depreciated during 2007.

 

EchoStar XI.  EchoStar XI was designed to meet a minimum 12-year useful life.  During the first quarter 2012, we determined that EchoStar XI experienced solar array anomalies that reduced the total power available for use by the spacecraft.  While these anomalies did not reduce the estimated useful life of the satellite to less than 12 years or impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar XIV.  EchoStar XIV was designed to meet a minimum 15-year useful life.  During the third quarter 2011 and the first quarter 2012, we determined that EchoStar XIV experienced solar array anomalies that reduced the total power available for use by the spacecraft.  While these anomalies did not reduce the estimated useful life of the satellite to less than 15 years or impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

Leased Satellites

 

EchoStar VI.  Prior to 2012, EchoStar VI experienced solar array anomalies which impacted the commercial operation of the satellite.  EchoStar VI also previously experienced the loss of traveling wave tube amplifiers (“TWTAs”).  During the first quarter 2012, EchoStar determined that EchoStar VI experienced the loss of two additional TWTAs increasing the total number of TWTAs lost to five.  During the second quarter 2012, EchoStar VI lost an additional solar array string, which reduced the total power available for use by the spacecraft.  While the recent losses of TWTAs and the solar array string did not impact current commercial operation of the satellite, there can be no assurance that future anomalies will not impact its commercial operation.

 

EchoStar XII.  Prior to 2012, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays.  During September and November 2012, EchoStar XII experienced additional solar array anomalies, which could further reduce the electrical power available to operate EchoStar XII.  An investigation of the anomalies is continuing.  We currently operate EchoStar XII in spot beam mode.  If we continue to operate the satellite in the spot beam mode, despite this loss of electrical power, we are still able to maintain our current operational requirements.  Additional solar array anomalies are likely to continue to degrade operational capability in all of the possible modes.  Since the number of useable transponders on EchoStar XII depends on, among other things, whether EchoStar XII is operated in CONUS, spot beam, or hybrid CONUS/spot beam mode, we are unable to determine at this time the actual number of transponders that will be available at any given time or how many transponders can be used during the remaining estimated life of the satellite.

 

Satellites Under Construction

 

EchoStar XVIII.  On September 7, 2012, we entered into a contract for the construction of EchoStar XVIII, a DBS satellite, which is expected to be launched during 2015.  This satellite is expected to replace EchoStar X at the 110 degree orbital location.

 

Long-Lived DBS Satellite Assets.  We evaluate our DISH branded pay-TV DBS satellite fleet for impairment as one asset group and test for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  While certain of the anomalies discussed above, and previously disclosed, may be

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

considered to represent a significant adverse change in the physical condition of an individual satellite, based on the redundancy designed within each satellite and considering the asset grouping, these anomalies are not considered to be significant events that would require evaluation for impairment recognition.  Unless and until a specific satellite is abandoned or otherwise determined to have no service potential, the net carrying amount related to the satellite would not be written off.

 

FCC Authorizations

 

“FCC authorizations” on our Condensed Consolidated Balance Sheets totaled $3.273 billion as of September 30, 2012, a $1.881 billion increase compared to December 31, 2011.  This increase was related to the closing of the DBSD Transaction and the TerreStar Transaction and the associated purchase price allocation to the assets acquired and the liabilities assumed.  See Note 8 for further discussion of the DBSD Transaction and the TerreStar Transaction.

 

On May 31, 2012, the International Bureau of the FCC announced the termination of our license for use of the 148 degree orbital location associated with our DISH segment.  We have not had a satellite positioned at the 148 degree orbital location since the retirement of EchoStar V in August 2009.  Our license for use of the 148 degree orbital location had a $68 million carrying value.  This amount was recorded as “Depreciation and amortization” expense on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the second quarter 2012 due to the termination of this license by the FCC.

 

8.             Acquisitions

 

DBSD North America and TerreStar Transactions

 

On March 2, 2012, the FCC approved the transfer of 40 MHz of 2 GHz wireless spectrum licenses held by DBSD North America and TerreStar to us.  On March 9, 2012, we completed the DBSD Transaction and the TerreStar Transaction, pursuant to which we acquired, among other things, certain satellite assets and wireless spectrum licenses held by DBSD North America and TerreStar.  In addition, during the fourth quarter 2011, we and Sprint Nextel Corporation (“Sprint”) entered into a mutual release and settlement agreement (the “Sprint Settlement Agreement”) pursuant to which all disputed issues relating to the DBSD Transaction and the TerreStar Transaction were resolved between us and Sprint, including, but not limited to, issues relating to costs allegedly incurred by Sprint to relocate users from the spectrum then licensed to DBSD North America and TerreStar.  Pursuant to the Sprint Settlement Agreement, we made a net payment of approximately $114 million to Sprint.  The total consideration to acquire these assets was approximately $2.860 billion.  This amount includes $1.364 billion for the DBSD Transaction, $1.382 billion for the TerreStar Transaction, and the net payment of $114 million to Sprint pursuant to the Sprint Settlement Agreement.

 

Our consolidated FCC applications for approval of the license transfers from DBSD North America and TerreStar were accompanied by requests for waiver of the FCC’s MSS “integrated service” and spare satellite requirements and various technical provisions.  The FCC denied our requests for waiver of the integrated service and spare satellite requirements.  The FCC has not yet acted on the request for waiver of various technical provisions, and we cannot predict the outcome or timing of any action by the FCC with respect to that waiver request.  Waiver of the integrated service requirement would have allowed us to offer single-mode terrestrial terminals to customers who do not desire satellite functionality.  On March 21, 2012, the FCC released an NPRM that could result in the elimination of the integrated service and other requirements that attach to the 2 GHz licenses.  Among other things, the FCC has proposed to modify our licenses to allow us to offer single-mode terrestrial terminals to customers who do not desire satellite functionality.  The NPRM was published in the Federal Register on April 17, 2012.  Initial comments on the NPRM were due on or before May 17, 2012, and reply comments were due on or before June 1, 2012.  We submitted filings in the initial comment round and in the reply comment round.  While the FCC has indicated its intent to complete the NPRM during 2012, we cannot predict the outcome or timing of the NPRM, including, without limitation, any associated build-out requirements or other conditions with which we may need to comply to avail ourselves of any changes to the rules.  For example, the FCC may impose certain conditions on the

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

use of our 2 GHz licenses, including, among other things, more stringent out-of-band emission limits or a shift of the S-band uplink by 5 MHz from 2000 — 2020 MHz to 2005 — 2025 MHz.  If imposed, these conditions or others, in connection with other related events, could ultimately render a portion of our 2 GHz licenses unusable and may have a material adverse effect on our ability to commercialize these licenses.

 

As a result of the completion of the DBSD Transaction and the TerreStar Transaction, we will likely be required to make significant additional investments or partner with others to, among other things, finance the commercialization and build-out requirements of these licenses and our integration efforts including compliance with regulations applicable to the acquired licenses.  Depending on the nature and scope of such commercialization and build-out, any such investment or partnership could vary significantly.  Additionally, recent consolidation in the wireless telecommunications industry, may, among other things, limit our available options, including our ability to partner with others.  There can be no assurance that we will be able to develop and implement a business model that will realize a return on these spectrum investments or that we will be able to profitably deploy the assets represented by these spectrum investments, which may affect the carrying value of these assets and our future financial condition or results of operations.

 

For the purposes of acquisition accounting, management determined that the DBSD Transaction and the TerreStar Transaction, together with the net payment pursuant to the Sprint Settlement Agreement, should be accounted for as a single transaction.  In reaching this conclusion, management considered, among other things, the fact that the transactions occurred in contemplation of one another and the expectation that the acquired assets will be utilized as a single integrated service.  The total consideration of approximately $2.860 billion in connection with the DBSD Transaction and the TerreStar Transaction included $2.761 billion in cash and a $99 million non-cash gain related to the conversion of our DBSD North America 7.5% Convertible Senior Secured Notes due 2009.  Of this non-cash gain, $78 million was included as a component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” on our Condensed Consolidated Balance Sheets as of December 31, 2011.  We have recognized the acquired assets and assumed liabilities based on our preliminary estimates of fair value at their acquisition date.  We expense all transaction costs related to the acquisition as incurred.

 

 

 

Preliminary

 

 

 

Purchase

 

 

 

Price

 

 

 

Allocation

 

 

 

(In thousands)

 

Cash

 

$

5,230

 

Current and noncurrent assets

 

6,705

 

Property and equipment

 

1,206,663

 

Goodwill (1)

 

24,935

 

FCC authorizations

 

1,949,000

 

Current liabilities

 

(62,692

)

Noncurrent liabilities

 

(270,193

)

Total acquisition consideration

 

$

2,859,648

 

 


(1)          This amount is deductible for tax purposes and is included as a component of “Other noncurrent assets, net” on our Condensed Consolidated Balance Sheets.

 

The determination of the fair value of the acquired assets and assumed liabilities requires significant analysis and judgment.  As of the date of issuance of these financial statements, we have not completed our valuation analysis and calculations in sufficient detail necessary to finalize our estimates.  The assets acquired in the DBSD Transaction and the TerreStar Transaction consist primarily of certain satellite assets and wireless spectrum licenses.  The fair value of satellite assets and wireless spectrum licenses are the most significant areas not yet finalized.  We expect to complete our final fair value determinations no later than the first quarter 2013.  Our final fair value

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

determinations may be significantly different than those reflected in our Condensed Consolidated Financial Statements at September 30, 2012.

 

Pro forma revenue and earnings associated with the DBSD Transaction and the TerreStar Transaction are not included in this filing.  Due to the material ongoing modifications of the business, management has determined that insufficient information exists to accurately develop meaningful historical pro forma financial information.  Moreover, the historical results of operations of DBSD North America and TerreStar are not indicative of their potential prospective operations because DBSD North America and TerreStar were in bankruptcy proceedings and did not have significant operations in periods prior to the transactions.  As such, any historical pro forma information would not prove useful in assessing our post transaction earnings and cash flows.

 

9.             Long-Term Debt

 

4 5/8% Senior Notes due 2017

 

On May 16, 2012, we issued $900 million aggregate principal amount of our five-year, 4 5/8% Senior Notes due July 15, 2017 at an issue price of 100.0%.  Interest accrues at an annual rate of 4 5/8% and is payable semi-annually in cash, in arrears on January 15 and July 15 of each year, commencing on January 15, 2013.

 

The 4 5/8% Senior Notes are redeemable, in whole or in part, at any time at a redemption price equal to 100.0% of the principal amount plus a “make-whole” premium, as defined in the related indenture, together with accrued and unpaid interest.  Prior to July 15, 2015, we may also redeem up to 35.0% of each of the 4 5/8% Senior Notes at specified premiums with the net cash proceeds from certain equity offerings or capital contributions.

 

The 4 5/8% Senior Notes are:

 

·                  general unsecured senior obligations of DISH DBS;

·                  ranked equally in right of payment with all of DISH DBS’ and the guarantors’ existing and future unsecured senior debt; and

·                  ranked effectively junior to our and the guarantors’ current and future secured senior indebtedness up to the value of the collateral securing such indebtedness.

 

The indenture related to the 4 5/8% Senior Notes contains restrictive covenants that, among other things, impose limitations on the ability of DISH DBS and its restricted subsidiaries to:

 

·                  incur additional debt;

·                  pay dividends or make distributions on DISH DBS’ capital stock or repurchase DISH DBS’ 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; and

·                  transfer or sell assets.

 

In the event of a change of control, as defined in the related indenture, we would be required to make an offer to repurchase all or any part of a holder’s 4 5/8% Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon, to the date of repurchase.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

5 7/8% Senior Notes due 2022

 

On May 16, 2012, we issued $1.0 billion aggregate principal amount of our ten-year, 5 7/8% Senior Notes due July 15, 2022 at an issue price of 100.0%.  Interest accrues at an annual rate of 5 7/8% and is payable semi-annually in cash, in arrears on January 15 and July 15 of each year, commencing on January 15, 2013.

 

On July 26, 2012, we issued an additional $1.0 billion aggregate principal amount of our ten-year, 5 7/8% Senior Notes due July 15, 2022 at an issue price of 100.75% plus accrued interest from May 16, 2012.  These notes were issued as additional notes under the related indenture, pursuant to which we issued on May 16, 2012 $1.0 billion in aggregate principal amount of our 5 7/8% Senior Notes due 2022 discussed above.  These notes and the notes previously issued under the related indenture will be treated as a single class of debt securities under the related indenture.

 

The 5 7/8% Senior Notes are redeemable, in whole or in part, at any time at a redemption price equal to 100.0% of the principal amount plus a “make-whole” premium, as defined in the related indenture, together with accrued and unpaid interest.  Prior to July 15, 2015, we may also redeem up to 35.0% of each of the 5 7/8% Senior Notes at specified premiums with the net cash proceeds from certain equity offerings or capital contributions.

 

The 5 7/8% Senior Notes are:

 

·                  general unsecured senior obligations of DISH DBS;

·                  ranked equally in right of payment with all of DISH DBS’ and the guarantors’ existing and future unsecured senior debt; and

·                  ranked effectively junior to our and the guarantors’ current and future secured senior indebtedness up to the value of the collateral securing such indebtedness.

 

The indenture related to the 5 7/8% Senior Notes contains restrictive covenants that, among other things, impose limitations on the ability of DISH DBS and its restricted subsidiaries to:

 

·                  incur additional debt;

·                  pay dividends or make distributions on DISH DBS’ capital stock or repurchase DISH DBS’ 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; and

·                  transfer or sell assets.

 

In the event of a change of control, as defined in the related indenture, we would be required to make an offer to repurchase all or any part of a holder’s 5 7/8% Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon, to the date of repurchase.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Fair Value of our Long-Term Debt

 

The following table summarizes the carrying and fair values of our debt facilities:

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

 

 

(In thousands)

 

7 % Senior Notes due 2013 (1)

 

$

500,000

 

$

525,000

 

$

500,000

 

$

535,000

 

6 5/8% Senior Notes due 2014

 

1,000,000

 

1,077,500

 

1,000,000

 

1,060,000

 

7 3/4% Senior Notes due 2015

 

750,000

 

841,875

 

750,000

 

817,500

 

7 1/8% Senior Notes due 2016

 

1,500,000

 

1,653,750

 

1,500,000

 

1,593,750

 

4 5/8% Senior Notes due 2017

 

900,000

 

924,750

 

 

 

7 7/8% Senior Notes due 2019

 

1,400,000

 

1,624,000

 

1,400,000

 

1,589,000

 

6 3/4% Senior Notes due 2021

 

2,000,000

 

2,186,260

 

2,000,000

 

2,140,000

 

5 7/8% Senior Notes due 2022

 

2,000,000

 

2,065,000

 

 

 

Mortgages and other notes payable

 

90,423

 

90,423

 

71,871

 

71,871

 

Subtotal

 

10,140,423

 

$

10,988,558

 

7,221,871

 

$

7,807,121

 

Capital lease obligations (2)

 

250,308

 

NA

 

271,908

 

NA

 

Total long-term debt and capital lease obligations (including current portion)

 

$

10,390,731

 

 

 

$

7,493,779

 

 

 

 


(1)          Our 7% Senior Notes with an aggregate principal balance of $500 million mature on October 1, 2013.

(2)          Disclosure regarding fair value of capital leases is not required.

 

We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).

 

10.          Stock-Based Compensation

 

Stock Incentive Plans

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance and non-performance based stock incentives.  As of September 30, 2012, we had outstanding under these plans stock options to acquire 18.0 million shares of our Class A common stock and 1.2 million restricted stock units.  Stock options granted prior to and on September 30, 2012 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of approximately ten years.  While historically we have issued stock awards subject to vesting, typically at the rate of 20% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives.  As of September 30, 2012, we had 72.7 million shares of our Class A common stock available for future grant under our stock incentive plans.

 

On December 1, 2011, we paid a dividend in cash of $2.00 per share on our outstanding Class A and Class B common stock to shareholders of record on November 17, 2011.  In light of such dividend, during January 2012, the exercise price of 21.2 million stock options, affecting approximately 600 employees, was reduced by $2.00 per share (the “2012 Stock Option Adjustment”).  Except as noted below, all information discussed below reflects the 2012 Stock Option Adjustment.

 

On January 1, 2008, we completed the distribution of our technology and set-top box business and certain infrastructure assets (the “Spin-off”) into a separate publicly-traded company, EchoStar.  DISH Network and EchoStar operate as separate publicly-traded companies, and neither entity has any ownership interest in the other.  However, a substantial majority of the voting power of the shares of both companies is owned beneficially by Charles W. Ergen, our Chairman, or by certain trusts established by Mr. Ergen for the benefit of his family.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

In connection with the Spin-off, as permitted by our existing stock incentive plans and consistent with the Spin-off exchange ratio, each DISH Network stock option was converted into two stock options as follows:

 

·            an adjusted DISH Network stock option for the same number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.831219.

 

·            a new EchoStar stock option for one-fifth of the number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.843907.

 

Similarly, each holder of DISH Network restricted stock units retained his or her DISH Network restricted stock units and received one EchoStar restricted stock unit for every five DISH Network restricted stock units that they held.

 

Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award immediately following the Spin-off was equivalent to the fair value of such stock award immediately prior to the Spin-off.

 

The following stock awards were outstanding:

 

 

 

As of September 30, 2012

 

 

 

DISH Network Awards

 

EchoStar Awards

 

Stock Awards Outstanding

 

Stock
Options

 

Restricted
Stock
Units

 

Stock
Options

 

Restricted
Stock
Units

 

Held by DISH Network employees

 

15,610,119

 

1,095,081

 

1,181,965

 

45,620

 

Held by EchoStar employees

 

2,415,698

 

94,999

 

N/A

 

N/A

 

Total

 

18,025,817

 

1,190,080

 

1,181,965

 

45,620

 

 

We are responsible for fulfilling all stock awards related to DISH Network common stock and EchoStar is responsible for fulfilling all stock awards related to EchoStar common stock, regardless of whether such stock awards are held by our or EchoStar’s employees.  Notwithstanding the foregoing, our stock-based compensation expense, resulting from stock awards outstanding at the Spin-off date, is based on the stock awards held by our employees regardless of whether such stock awards were issued by DISH Network or EchoStar.  Accordingly, stock-based compensation that we expense with respect to EchoStar stock awards is included in “Additional paid-in capital” on our Condensed Consolidated Balance Sheets.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Stock Award Activity

 

Our stock option activity was as follows:

 

 

 

For the Nine Months

 

 

 

Ended September 30, 2012

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Total options outstanding, beginning of period (1)

 

21,336,159

 

$

20.53

 

Granted

 

556,500

 

$

31.99

 

Exercised

 

(3,320,846

)

$

17.69