10-Q 1 a13-13768_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 JUNE 30, 2013.

 

OR

 

£  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  £

 

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  £

 

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 £

 

 

 

Non-accelerated filer £

(Do not check if a smaller reporting company)

 

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  £ No  x

 

As of July 31, 2013, the registrant’s outstanding common stock consisted of 218,230,414 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 –
June 30, 2013 and December 31, 2012 (Unaudited)

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2013 and 2012 (Unaudited)

 

3

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

4

 

 

 

 

Item 2.

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

 

50

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

74

 

 

 

 

Item 4.

Controls and Procedures

 

76

 

 

 

 

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

76

 

 

 

 

Item 1A.

Risk Factors

 

82

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

82

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

None

 

 

 

 

Item 4.

Mine Safety Disclosures

 

None

 

 

 

 

Item 5.

Other Information

 

None

 

 

 

 

Item 6.

Exhibits

 

83

 

 

 

 

 

Signatures

 

84

 



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 has matured, 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.

 

·                  Sustained economic weakness, including continued high 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 unique programming services such as foreign language and sports programming that may limit our ability to maintain subscribers that desire these unique programming services.

 

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.

 

·                  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 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.

 

i



Table of Contents

 

·                  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.

 

·                  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.

 

·                  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 carry commercial insurance for any of the in-orbit satellites that we use, other than certain satellites leased from third parties, 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 AWS-4 wireless spectrum licenses and other assets from DBSD North America Inc. (“DBSD North America”) and TerreStar Networks, Inc. (“TerreStar”).  We will need to make significant additional investments or partner with others to commercialize these licenses and assets.

 

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

 

·                  To the extent we commercialize our wireless spectrum licenses, we will face certain risks entering and competing in the wireless services industry and operating a wireless services business.

 

·                  Our Blockbuster business faces risks, including, among other things, operational challenges and increasing competition from video rental kiosks and 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 businesses 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 businesses 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, including investments in public companies that are highly speculative and have experienced and continue to experience volatility.

 

·                  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.

 

ii



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.

 

·                  Our ability to distribute video content via the Internet involves regulatory risk.

 

·                  Changes in the Cable Act of 1992 (“Cable Act”), and/or the rules of the Federal Communications Commission (“FCC”) 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

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,093,822

 

$

3,606,140

 

Marketable investment securities

 

5,433,340

 

3,631,637

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $15,987 and $16,945, respectively

 

878,579

 

842,905

 

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

 

23,648

 

26,960

 

Inventory

 

577,288

 

623,720

 

Deferred tax assets

 

99,854

 

99,854

 

Prepaid income taxes

 

91,459

 

110,608

 

Other current assets (Note 2)

 

963,901

 

117,329

 

Total current assets

 

12,161,891

 

9,059,153

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

90,858

 

134,410

 

Property and equipment, net of accumulated depreciation of $3,130,717 and $3,043,609, respectively

 

3,990,025

 

4,402,360

 

FCC authorizations

 

3,296,665

 

3,296,665

 

Marketable and other investment securities

 

134,295

 

119,051

 

Other noncurrent assets, net

 

392,067

 

367,969

 

Total noncurrent assets

 

7,903,910

 

8,320,455

 

Total assets

 

$

20,065,801

 

$

17,379,608

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

294,390

 

$

298,722

 

Trade accounts payable - EchoStar

 

321,711

 

281,875

 

Deferred revenue and other

 

887,338

 

857,280

 

Accrued programming

 

1,186,807

 

1,096,908

 

Accrued interest

 

261,488

 

224,383

 

Litigation accrual

 

 

70,999

 

Other accrued expenses

 

524,329

 

556,599

 

Current portion of long-term debt and capital lease obligations

 

535,837

 

537,701

 

Total current liabilities

 

4,011,900

 

3,924,467

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

Long-term debt and capital lease obligations, net of current portion

 

13,633,032

 

11,350,399

 

Deferred tax liabilities

 

1,664,891

 

1,662,732

 

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

 

386,290

 

370,382

 

Total long-term obligations, net of current portion

 

15,684,213

 

13,383,513

 

Total liabilities

 

19,696,113

 

17,307,980

 

 

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 273,688,726 and 270,613,262 shares issued, 217,570,466 and 214,495,002 shares outstanding, respectively

 

2,737

 

2,706

 

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

 

2,517,367

 

2,440,626

 

Accumulated other comprehensive income (loss)

 

214,533

 

188,803

 

Accumulated earnings (deficit)

 

(823,647

)

(1,028,193

)

Treasury stock, at cost

 

(1,569,459

)

(1,569,459

)

Total DISH Network stockholders’ equity (deficit)

 

343,915

 

36,867

 

Noncontrolling interest

 

25,773

 

34,761

 

Total stockholders’ equity (deficit)

 

369,688

 

71,628

 

Total liabilities and stockholders’ equity (deficit)

 

$

20,065,801

 

$

17,379,608

 

 

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)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscriber-related revenue

 

$

3,456,536

 

$

3,295,831

 

$

6,809,086

 

$

6,520,296

 

Equipment and merchandise sales, rental and other revenue

 

140,611

 

270,257

 

341,145

 

620,994

 

Equipment sales, services and other revenue - EchoStar

 

8,986

 

5,678

 

11,126

 

12,345

 

Total revenue

 

3,606,133

 

3,571,766

 

7,161,357

 

7,153,635

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Subscriber-related expenses

 

1,924,020

 

1,823,665

 

3,835,613

 

3,584,917

 

Satellite and transmission expenses:

 

 

 

 

 

 

 

 

 

EchoStar

 

125,706

 

107,082

 

238,639

 

216,936

 

Other

 

10,190

 

9,178

 

20,438

 

20,857

 

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

 

76,783

 

130,061

 

176,309

 

272,323

 

Subscriber acquisition costs:

 

 

 

 

 

 

 

 

 

Cost of sales - subscriber promotion subsidies

 

67,745

 

51,500

 

145,232

 

136,269

 

Other subscriber acquisition costs

 

366,791

 

355,142

 

753,204

 

669,911

 

Total subscriber acquisition costs

 

434,536

 

406,642

 

898,436

 

806,180

 

General and administrative expenses - EchoStar

 

26,297

 

14,790

 

45,177

 

26,872

 

General and administrative expenses

 

249,879

 

312,877

 

501,443

 

676,970

 

Depreciation and amortization (Note 7)

 

300,474

 

299,119

 

534,801

 

507,817

 

Impairment of long-lived assets (Note 7)

 

437,575

 

 

437,575

 

 

Total costs and expenses

 

3,585,460

 

3,103,414

 

6,688,431

 

6,112,872

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

20,673

 

468,352

 

472,926

 

1,040,763

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

43,843

 

20,204

 

81,337

 

27,293

 

Interest expense, net of amounts capitalized

 

(214,870

)

(109,301

)

(376,256

)

(247,314

)

Other, net

 

97,241

 

(7,448

)

106,981

 

102,834

 

Total other income (expense)

 

(73,786

)

(96,545

)

(187,938

)

(117,187

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(53,113

)

371,807

 

284,988

 

923,576

 

Income tax (provision) benefit, net

 

38,039

 

(146,211

)

(89,386

)

(337,854

)

Net income (loss)

 

(15,074

)

225,596

 

195,602

 

585,722

 

Less: Net income (loss) attributable to noncontrolling interest

 

(4,022

)

(136

)

(8,944

)

(320

)

Net income (loss) attributable to DISH Network

 

$

(11,052

)

$

225,732

 

$

204,546

 

$

586,042

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

455,452

 

450,292

 

454,353

 

448,791

 

Diluted

 

455,452

 

453,077

 

457,405

 

451,425

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

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

 

$

(0.02

)

$

0.50

 

$

0.45

 

$

1.31

 

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

 

$

(0.02

)

$

0.50

 

$

0.45

 

$

1.30

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(15,074

)

$

225,596

 

$

195,602

 

$

585,722

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

2,862

 

(1,965

)

5,599

 

1,288

 

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

 

19,285

 

(69,393

)

37,068

 

(18,372

)

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

 

(6,706

)

(3,135

)

(5,344

)

(84,022

)

Deferred income tax (expense) benefit

 

(4,597

)

 

(11,593

)

 

Total other comprehensive income (loss), net of tax

 

10,844

 

(74,493

)

25,730

 

(101,106

)

Comprehensive income (loss)

 

(4,230

)

151,103

 

221,332

 

484,616

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(4,022

)

(136

)

(8,944

)

(320

)

Comprehensive income (loss) attributable to DISH Network

 

$

(208

)

$

151,239

 

$

230,276

 

$

484,936

 

 

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

 

2



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Six Months

 

 

 

Ended June 30,

 

 

 

2013

 

2012

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

195,602

 

$

585,722

 

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

 

 

 

 

 

Depreciation and amortization

 

534,801

 

507,817

 

Impairment of long-lived assets

 

437,575

 

 

Realized and unrealized losses (gains) on investments

 

(107,947

)

(101,638

)

Non-cash, stock-based compensation

 

15,362

 

30,199

 

Deferred tax expense (benefit)

 

(45,319

)

68,683

 

Other, net

 

49,959

 

7,841

 

Change in noncurrent assets

 

17,733

 

27,230

 

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

 

25,555

 

(29,170

)

Changes in current assets and current liabilities, net

 

107,946

 

251,380

 

Net cash flows from operating activities

 

1,231,267

 

1,348,064

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(3,590,433

)

(1,996,257

)

Sales and maturities of marketable investment securities

 

1,836,573

 

1,221,341

 

Purchases and prepaid funding of derivative financial instruments (Note 2)

 

(696,000

)

 

Purchases of property and equipment

 

(593,740

)

(420,185

)

Change in restricted cash and marketable investment securities

 

43,067

 

(1,535

)

DBSD North America Transaction, less cash acquired of $5,230

 

 

(40,015

)

TerreStar Transaction

 

 

(36,942

)

Other

 

(57,842

)

(15,867

)

Net cash flows from investing activities

 

(3,058,375

)

(1,289,460

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

2,300,000

 

1,900,000

 

Proceeds from issuance of restricted debt

 

2,600,000

 

 

Redemption of restricted debt

 

(2,600,000

)

 

Funding of restricted debt escrow

 

(2,596,750

)

 

Release of restricted debt escrow

 

2,596,771

 

 

Debt issuance costs

 

(11,427

)

(9,564

)

Repayment of long-term debt and capital lease obligations

 

(20,531

)

(18,949

)

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

 

37,071

 

49,852

 

Other

 

9,605

 

5,770

 

Net cash flows from financing activities

 

2,314,739

 

1,927,109

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

51

 

873

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

487,682

 

1,986,586

 

Cash and cash equivalents, beginning of period

 

3,606,140

 

609,108

 

Cash and cash equivalents, end of period

 

$

4,093,822

 

$

2,595,694

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

405,951

 

$

268,800

 

Capitalized interest

 

$

69,153

 

$

38,643

 

Cash received for interest

 

$

90,427

 

$

19,383

 

Cash paid for income taxes

 

$

115,130

 

$

243,861

 

Employee benefits paid in Class A common stock

 

$

24,229

 

$

22,280

 

Transfer of regulatory authorization from EchoStar

 

$

23,148

 

$

 

 

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 business segments.

 

·            DISH.  The DISH® branded direct broadcast satellite (“DBS”) pay-TV service had 14.014 million subscribers in the United States as of June 30, 2013.  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 leased fiber network, in-home service and call center operations, and certain other assets utilized in our operations.  In addition, we market broadband services under the dishNET™ brand.

 

·            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.  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 interim and final 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 AWS-4 wireless spectrum licenses held by DBSD North America (the “DBSD Transaction”) and TerreStar (the “TerreStar Transaction”).  The financial results of DBSD North America and TerreStar are included in our financial results beginning March 9, 2012.  The total consideration to acquire the DBSD North America and TerreStar assets was approximately $2.860 billion.  On February 15, 2013, the FCC issued an order, which became effective on March 7, 2013, modifying our AWS-4 licenses to expand our terrestrial operating authority.  The FCC’s order of modification has imposed certain limitations on the use of a portion of the spectrum and also mandated certain interim and final build-out requirements for the licenses.  See Note 8 for further information.

 

During the second quarter 2013, we ceased operations of our TerreStar Mobile Satellite Service (“MSS”) business, which had less than 2,000 customers and had less than $1 million of revenue for each of the three and six months ended June 30, 2013.  See Note 7 for further information. We currently generate an immaterial amount of revenue and incur 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 wireless network infrastructure.

 

4



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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, 2012 (“2012 10-K”).  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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.

 

5



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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; model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and derivative financial instruments indexed to marketable investment securities; 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 June 30, 2013 and December 31, 2012, the carrying value for cash and cash equivalents, marketable investment securities, trade accounts receivable (net of allowance for doubtful accounts), derivative financial instruments, 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 for the fair value of our marketable investment securities.

 

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 10 for the fair value of our long-term debt.

 

Derivative Financial Instruments

 

We may purchase and hold derivative financial instruments for, among other reasons, strategic or speculative purposes.  We record all derivative financial instruments on our Condensed Consolidated Balance Sheets at fair value as either assets or liabilities.  Changes in the fair values of derivative financial instruments are recognized in our results of operations and included in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  We currently have not designated any derivative financial instrument for hedge accounting.

 

During the first and second quarter 2013, we purchased derivative financial instruments that are indexed to the trading price of the common equity securities of Sprint Corporation (“Sprint”), which generally can be terminated at our option at any time.  Under the terms of these derivative financial instruments, we are entitled to any increase in value and are responsible to the counterparty for any decrease in value based on the change in the fair value of the underlying securities.  As of June 30, 2013, we held an aggregate notional amount of $592 million of these derivative financial instruments.  We had also made prepayments of $104 million prior to June 30, 2013, which may be used to purchase additional derivative financial instruments subsequent to June 30, 2013.  All amounts associated with these derivative financial instruments have been classified as “Other current assets” on our Condensed Consolidated Balance Sheets.

 

6



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

In addition to the $592 million of derivative financial instruments that are indexed to the trading price of the common equity securities of Sprint, we held common equity securities of Sprint with a fair value of $85 million as of June 30, 2013, which were included in “Marketable investment securities” on our Condensed Consolidated Balance Sheets.  The fair value of the derivative financial instruments and our investment in Sprint’s common equity is dependent on the market value of Sprint’s common equity which may be volatile and vary depending on, among other things, Sprint’s financial and operational performance and market conditions.

 

We recorded an unrealized gain of $76 million and $85 million on these derivative financial instruments included in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the three and six months ended June 30, 2013, respectively.  We held no derivative financial instruments as of December 31, 2012.

 

As of June 30, 2013, we held derivative financial instruments indexed to the trading price of the common equity securities of Sprint with a fair value of $677 million and common equity securities of Sprint with a fair value of $85 million.  On July 10, 2013, Sprint completed its merger with SoftBank Corp. (“SoftBank”).  As of July 10, 2013, these derivative financial instruments had a fair value of $699 million and our common equity securities of Sprint had a fair value of $87 million.  As a result of the merger, we received $544 million in cash attributed to these derivative financial instruments and continue to hold derivative financial instruments indexed to the trading price of the common equity securities of new Sprint with an aggregate notional amount of $155 million.  In addition, as a result of the merger, we received $68 million in cash and shares of new Sprint stock with a fair value of $19 million in exchange for the common equity securities we held.

 

Advertising Costs

 

Our advertising costs associated with acquiring new Pay-TV and Broadband subscribers and Blockbuster customers are expensed as incurred.  During the three months ended June 30, 2013 and 2012, we recorded advertising costs of $130 million and $131 million, respectively, and during the six months ended June 30, 2013 and 2012, we recorded advertising costs of $252 million and $230 million, respectively.  Advertising costs are included in “Other subscriber acquisition costs” and “General and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

Deferred Cost of Sales

 

On May 22, 2013, we launched a promotion whereby qualifying new Pay-TV subscribers may choose either an Apple® iPad® 2 or programming credits when they, among other things, commit to a two-year contract.  The costs of the iPad 2 are recorded as short-term or long-term deferred cost of sales expense within “Other current assets” and “Other noncurrent assets, net,” respectively, on our Condensed Consolidated Balance Sheets and are amortized on a straight-line basis over the related contract term to “Cost of sales — equipment, merchandise, services, rental and other” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

7



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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 EPS amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) attributable to DISH Network

 

$

(11,052

)

$

225,732

 

$

204,546

 

$

586,042

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

455,452

 

450,292

 

454,353

 

448,791

 

Dilutive impact of stock awards outstanding

 

 

2,785

 

3,052

 

2,634

 

Diluted

 

455,452

 

453,077

 

457,405

 

451,425

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

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

 

$

(0.02

)

$

0.50

 

$

0.45

 

$

1.31

 

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

 

$

(0.02

)

$

0.50

 

$

0.45

 

$

1.30

 

 

We had a net loss for the three months ended June 30, 2013; 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 June 30, 2013 and 2012, there were stock awards to purchase 1.7 million and 3.3 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 June 30,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Performance-based options

 

7,841

 

7,976

 

Restricted Performance Units

 

1,987

 

1,198

 

Total

 

9,828

 

9,174

 

 

8



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

4.                                      Other Comprehensive Income (Loss)

 

The following tables present the tax effect on each component of “Other comprehensive income (loss).”  A full valuation allowance was established against any deferred tax assets that were capital in nature during 2012.

 

 

 

For the Three Months

 

 

 

Ended June 30,

 

 

 

2013

 

2012

 

 

 

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

 

$

2,862

 

$

 

$

2,862

 

$

(1,965

)

$

 

$

(1,965

)

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

 

19,285

 

(4,597

)

14,688

 

(69,393

)

 

(69,393

)

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

 

(6,706

)

 

(6,706

)

(3,135

)

 

(3,135

)

Other comprehensive income (loss)

 

$

15,441

 

$

(4,597

)

$

10,844

 

$

(74,493

)

$

 

$

(74,493

)

 

 

 

For the Six Months

 

 

 

Ended June 30,

 

 

 

2013

 

2012

 

 

 

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

 

$

5,599

 

$

 

$

5,599

 

$

1,288

 

$

 

$

1,288

 

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

 

37,068

 

(11,593

)

25,475

 

(18,372

)

 

(18,372

)

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

 

(5,344

)

 

(5,344

)

(84,022

)

 

(84,022

)

Other comprehensive income (loss)

 

$

37,323

 

$

(11,593

)

$

25,730

 

$

(101,106

)

$

 

$

(101,106

)

 

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

 

 

 

Foreign

 

Unrealized/

 

 

 

 

 

Currency

 

Recognized

 

 

 

 

 

Translation

 

Gains

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

Adjustment

 

(Losses)

 

Total

 

 

 

(In thousands)

 

Balance as of December 31, 2012

 

$

(5,033

)

$

193,836

 

$

188,803

 

Other comprehensive income (loss) before reclassification

 

5,599

 

37,068

 

42,667

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(5,344

)

(5,344

)

Tax (expense) benefit

 

 

(11,593

)

(11,593

)

Balance as of June 30, 2013

 

$

566

 

$

213,967

 

$

214,533

 

 

9



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 consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

154,131

 

$

130,306

 

Current marketable investment securities - strategic

 

1,363,460

 

1,261,015

 

Current marketable investment securities - other

 

3,915,749

 

2,240,316

 

Total current marketable investment securities

 

5,433,340

 

3,631,637

 

Restricted marketable investment securities (1)

 

84,777

 

51,366

 

Noncurrent marketable investment securities - ARS and other (2)

 

119,191

 

106,172

 

Total marketable investment securities

 

5,637,308

 

3,789,175

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

6,081

 

83,044

 

 

 

 

 

 

 

Other investment securities:

 

 

 

 

 

Other investment securities - cost method (2)

 

15,104

 

12,879

 

Total other investment securities

 

15,104

 

12,879

 

 

 

 

 

 

 

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

 

$

5,658,493

 

$

3,885,098

 

 


(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”) 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.

 

Current Marketable Investment Securities - Strategic

 

Our current strategic marketable investment securities include strategic and financial debt and equity investments in public companies that are highly speculative and have experienced and continue to experience volatility.  As of June 30, 2013, our strategic investment portfolio consisted of securities of a small number of issuers, and as a result the

 

10



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

value of that portfolio depends, among other things, on the performance of those issuers.  For example, a significant portion of the value of these investments was concentrated in the debt securities of Clearwire Corporation (“Clearwire”).  The adjusted cost basis of these Clearwire securities as of June 30, 2013 and December 31, 2012 was $759 million and $751 million, respectively.  The fair value of these Clearwire securities as of June 30, 2013 and December 31, 2012 was $927 million and $951 million, respectively.  Clearwire has multiple call options on certain of these debt securities upon 30 days notice.  The call option price may be less than the fair market value of these debt securities and, if exercised, proceeds could be less than our recorded fair market value as of June 30, 2013 and therefore, reduce our unrealized gains recorded as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” on our Condensed Consolidated Balance Sheets.  The fair value of certain of the debt and equity securities in our investment portfolio, including those of Clearwire, 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 June 30, 2013 and December 31, 2012, 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.  During the first quarter 2013, we released $42 million of restricted cash related to litigation.  See Note 12 for further information.

 

Noncurrent Marketable Investment Securities — ARS and Other Investment Securities

 

We have investments in ARS and other investment securities 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 other investment securities.  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 other investment securities 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 June 30, 2013, our ARS and other noncurrent marketable investment securities portfolio of $119 million included $73 million of securities accounted for under the fair value method.

 

11



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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 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 June 30, 2013 and December 31, 2012, we had accumulated net unrealized gains of $214 million and $194 million, both net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  The components of our available-for-sale investments are summarized in the table below.

 

 

 

As of June 30, 2013

 

As of December 31, 2012

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

154,131

 

$

 

$

 

$

 

$

130,306

 

$

 

$

 

$

 

ARS and other

 

46,454

 

1,154

 

(4,485

)

(3,331

)

43,921

 

1,375

 

(8,033

)

(6,658

)

ARS fair value election

 

72,737

 

 

 

 

62,251

 

 

 

 

Other (including restricted)

 

4,927,741

 

174,293

 

(5,012

)

169,281

 

3,287,317

 

208,208

 

(1,203

)

207,005

 

Equity securities

 

436,245

 

74,203

 

(1,701

)

72,502

 

265,380

 

17,918

 

(11,537

)

6,381

 

Total

 

$

5,637,308

 

$

249,650

 

$

(11,198

)

$

238,452

 

$

3,789,175

 

$

227,501

 

$

(20,773

)

$

206,728

 

 

As of June 30, 2013, restricted and non-restricted marketable investment securities included debt securities of $3.291 billion with contractual maturities within one year, $1.734 billion with contractual maturities after one year through five years and $176 million with contractual maturities after ten years.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

12



Table of Contents

 

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 June 30, 2013, the unrealized losses on our investments in equity securities represent investments in companies in the telecommunications industry.  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 June 30, 2013 and December 31, 2012, the unrealized losses on our investments in debt securities primarily represent investments in ARS.  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

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

Debt Securities:

 

 

 

 

 

 

 

 

 

Less than 12 months

 

$

2,811,860

 

$

(4,404

)

$

761,551

 

$

(909

)

12 months or more

 

91,334

 

(5,093

)

72,395

 

(8,327

)

Equity Securities:

 

 

 

 

 

 

 

 

 

Less than 12 months

 

52,460

 

(1,701

)

154,566

 

(11,537

)

12 months or more

 

 

 

 

 

Total

 

$

2,955,654

 

$

(11,198

)

$

988,512

 

$

(20,773

)

 

Fair Value Measurements

 

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

 

 

 

As of

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Cash equivalents (including restricted)

 

$

3,752,515

 

$

4,886

 

$

3,747,629

 

$

 

$

3,386,929

 

$

67,833

 

$

3,319,096

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

154,131

 

$

 

$

154,131

 

$

 

$

130,306

 

$

 

$

130,306

 

$

 

ARS and other

 

119,191

 

 

807

 

118,384

 

106,172

 

 

955

 

105,217

 

Other (including restricted)

 

4,927,741

 

11,045

 

4,916,696

 

 

3,287,317

 

11,182

 

3,276,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

436,245

 

436,245

 

 

 

265,380

 

265,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

5,637,308

 

447,290

 

5,071,634

 

118,384

 

3,789,175

 

276,562

 

3,407,396

 

105,217

 

Purchases and prepaid funding of derivative financial instruments

 

780,531

 

103,985

 

676,546

 

 

 

 

 

 

Total

 

$

6,417,839

 

$

551,275

 

$

5,748,180

 

$

118,384

 

$

3,789,175

 

$

276,562

 

$

3,407,396

 

$

105,217

 

 

As of June 30, 2013 and December 31, 2012, our Level 3 investments consisted predominately of ARS and other investment securities.  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 instruments held by the trusts that issue these securities.  For our other ARS and other investment

 

13



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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 a liquidity discount based on the lack of an active market for these securities.

 

Changes in Level 3 instruments were as follows:

 

 

 

Level 3

 

 

 

Investment

 

 

 

Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2012

 

$

105,217

 

Net realized and unrealized gains (losses) included in earnings

 

10,565

 

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

 

3,528

 

Purchases

 

 

Settlements

 

(926

)

Issuances

 

 

Transfers from level 2 to level 3

 

 

Balance as of June 30, 2013

 

$

118,384

 

 

During the six months ended June 30, 2013, 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” within “Other Income (Expense)” included on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) included primarily changes in the carrying amount of our marketable and non-marketable investments as follows:

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

Other Income (Expense):

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

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

 

$

13,625

 

$

3,117

 

$

14,182

 

$

7,736

 

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

 

6,220

 

(11,541

)

10,486

 

(3,062

)

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

 

 

 

 

99,445

 

Derivative financial instruments - unrealized gains (losses) (2)

 

76,273

 

 

84,531

 

 

Marketable investment securities - other-than-temporary impairments

 

 

 

(1,919

)

(2,481

)

Other

 

1,123

 

976

 

(299

)

1,196

 

Total

 

$

97,241

 

$

(7,448

)

$

106,981

 

$

102,834

 

 


(1)         During the six months ended June 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.

(2)         During the three and six months ended June 30, 2013, we recorded unrealized gains of $76 million and $85 million, respectively, on our derivative financial instruments that are indexed to the trading price of the common equity securities of Sprint.

 

14



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

6.                                      Inventory

 

Inventory consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

DISH:

 

 

 

 

 

Finished goods - DBS

 

$

254,277

 

$

259,307

 

Raw materials

 

141,899

 

122,769

 

Work-in-process

 

99,962

 

82,361

 

Total DISH inventory

 

496,138

 

464,437

 

Blockbuster:

 

 

 

 

 

Rental library

 

41,565

 

81,956

 

Merchandise

 

39,585

 

76,180

 

Total Blockbuster inventory (1)

 

81,150

 

158,136

 

Wireless:

 

 

 

 

 

Finished goods

 

 

1,147

 

Total Wireless inventory

 

 

1,147

 

Total inventory

 

$

577,288

 

$

623,720

 

 


(1)         The decrease for the six months ended June 30, 2013 primarily related to the deconsolidation of Blockbuster UK on January 16, 2013 and Blockbuster domestic store closings during the six months ended June 30, 2013.  See Note 9 for further information.

 

7.                                      Property and Equipment and Intangible Assets

 

Property and Equipment

 

As we prepare for commercialization of our AWS-4  wireless spectrum licenses which are recorded in FCC Authorizations, interest expense related to their carrying value is being capitalized within “Property and equipment, net” on our Condensed Consolidated Balance Sheets based on our average borrowing rate for our debt.  During the three months ended June 30, 2013 and 2012, we recorded capitalized interest of $34 million and $39 million, respectively.  During the six months ended June 30, 2013 and 2012, we recorded capitalized interest of $69 million and $39 million, respectively.

 

Depreciation and amortization expense consisted of the following:

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

Equipment leased to customers

 

$

192,598

 

$

163,474

 

$

359,810

 

$

315,917

 

Satellites

 

33,866

 

38,616

 

67,732

 

72,453

 

Buildings, furniture, fixtures, equipment and other (1)

 

74,010

 

29,253

 

107,259

 

51,671

 

148 degree orbital location

 

 

67,776

 

 

67,776

 

Total depreciation and amortization

 

$

300,474

 

$

299,119

 

$

534,801

 

$

507,817

 

 


(1)         During the second quarter 2013, we ceased operations of our TerreStar MSS business.  As a result, we accelerated the depreciable lives of certain assets designed to support this business and the remaining net book value of $53 million was fully depreciated in the second quarter 2013.

 

15



Table of Contents

 

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 15 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 seven satellites from EchoStar, which are accounted for as operating leases.  See Note 14 for further discussion of our satellite leases with EchoStar.  We also lease two 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.

 

AWS-4 Satellites.  As a result of the DBSD Transaction and the TerreStar Transaction, three AWS-4 satellites were added to our satellite fleet, including two in-orbit satellites (D1 and T1) and one satellite under construction (T2).  Based on the FCC’s recently issued rules applicable to our AWS-4 authorizations no longer requiring an integrated satellite component or ground spare and on our evaluation of the satellite capacity needed for our wireless segment, among other things, we have now concluded that T2 and D1 represent excess satellite capacity for the potential commercialization of our wireless spectrum.  As a result, we have written down the net book value of T2 from $270 million to $40 million and the net book value of D1 from $358 million to $150 million, and have recorded an impairment charge in our wireless segment of $438 million in “Impairment of long-lived assets” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2013.  Our fair value estimates for these satellites were determined based upon, among other things, probability-weighted analyses utilizing the income and/or the cost approaches.  The estimates used in our fair value analysis are considered Level 3 in the fair value hierarchy.  While the FCC’s recently issued rules applicable to our AWS-4 authorizations no longer require an integrated satellite component or ground spare, we are currently planning on using T1 in the commercialization of our wireless spectrum or for other commercial purposes.  If T1 is not used in the commercialization of our wireless spectrum, we may need to impair it in the future.  As of June 30, 2013, the net book value for T1 was $366 million.

 

Satellite Anomalies.  Operation of our DISH branded 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.  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 2013, certain of our owned and leased 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 of our DISH branded pay-TV DBS satellite fleet.  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 commercial insurance for any of the in-orbit satellites that we use, other than certain satellites leased 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.

 

16



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Leased Satellites

 

EchoStar XII.  Prior to 2010, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays, which reduced the number of transponders that could be operated.  In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced the electrical power available.  EchoStar has informed us that EchoStar XII will likely experience further loss of available electrical power that will impact its operational capability, and EchoStar has reduced the remaining estimated useful life of the satellite to 18 months.  Pursuant to our satellite lease agreement with EchoStar, we are entitled to a reduction in our monthly recurring lease payments in the event of a partial loss of satellite capacity or complete failure of the satellite.  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.  This satellite is currently not in service and serves as an in-orbit spare.

 

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 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.

 

Intangible Assets

 

As of June 30, 2013 and December 31, 2012, our identifiable intangibles subject to amortization consisted of the following:

 

 

 

As of

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Intangible

 

Accumulated

 

Intangible

 

Accumulated

 

 

 

Assets

 

Amortization

 

Assets

 

Amortization

 

 

 

(In thousands)

 

Technology-based

 

$

35,078

 

$

(9,182

)

$

39,066

 

$

(8,345

)

Trademarks

 

18,236

 

(5,199

)

18,236

 

(3,907

)

Contract-based

 

11,283

 

(10,515

)

11,275

 

(10,127

)

Customer relationships

 

6,974

 

(6,710

)

6,974

 

(5,736

)

Total

 

$

71,571

 

$

(31,606

)

$

75,551

 

$

(28,115

)

 

Amortization of these intangible assets is recorded on a straight line basis over an average finite useful life primarily ranging from approximately one to ten years.  Amortization was $3 million and $3 million for the three months ended June 30, 2013 and 2012, respectively.  Amortization was $7 million and $6 million for the six months ended June 30, 2013 and 2012, respectively.

 

17



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Estimated future amortization of our identifiable intangible assets as of June 30, 2013 is as follows (in thousands):

 

For the Years Ended December 31,

 

 

 

2013 (remaining six months)

 

$

5,269

 

2014

 

9,871

 

2015

 

9,150

 

2016

 

8,362

 

2017

 

3,138

 

Thereafter

 

4,175

 

Total

 

$

39,965

 

 

Goodwill

 

The excess of our investments in consolidated subsidiaries over net tangible and identifiable intangible asset value at the time of the investment is recorded as goodwill and is not subject to amortization but is subject to impairment testing annually or whenever indicators of impairment arise.  In conducting our annual impairment test in 2012, we determined that the fair value is substantially in excess of the carrying value.  As of June 30, 2013 and December 31, 2012, our goodwill was $126 million, which primarily related to our wireless segment.

 

8.                                      Acquisitions

 

DBSD North America and TerreStar Transactions

 

On March 2, 2012, the FCC approved the transfer of 40 MHz of AWS-4 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 entered into a mutual release and settlement agreement (the “Sprint Settlement Agreement”) pursuant to which all issues then being disputed 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.  The total consideration to acquire the DBSD North America and TerreStar 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.  On March 21, 2012, the FCC released a Notice of Proposed Rule Making proposing the elimination of the integrated service, spare satellite and various technical requirements associated with the AWS-4 licenses.  On December 11, 2012, the FCC approved rules that eliminated these requirements and gave notice of its proposed modification of our AWS-4 authorizations to, among other things, allow us to offer single-mode terrestrial terminals to customers who do not desire satellite functionality.  On February 15, 2013, the FCC issued an order, which became effective on March 7, 2013, modifying our AWS-4 licenses to expand our terrestrial operating authority.  The FCC’s order of modification has imposed certain limitations on the use of a portion of this spectrum, including interference protections for other spectrum users and power and emission limits that we presently believe could render 5 MHz of our uplink spectrum (2000-2005 MHz) effectively unusable for terrestrial services and limit our ability to fully utilize the remaining 15 MHz of our uplink spectrum (2005-2020 MHz) for terrestrial services.  These limitations could, among other things, impact the ongoing development of technical standards associated with our wireless business, and may have a material adverse effect on our ability to commercialize these licenses.  The new rules also mandate certain interim and final build-out requirements for the licenses.  By March 2017, we must provide terrestrial signal coverage and offer terrestrial service to at least 40% of the aggregate population represented by all of the areas covered by the licenses (the “AWS-4 Interim Build-out

 

18



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Requirement”).  By March 2020, we must provide terrestrial signal coverage and offer terrestrial service to at least 70% of the population in each area covered by an individual license (the “AWS-4 Final Build-out Requirement”).  If we fail to meet the AWS-4 Interim Build-out Requirement, the AWS-4 Final Build-out Requirement will be accelerated by one year, from March 2020 to March 2019.  If we fail to meet the AWS-4 Final Build-out Requirement, our terrestrial authorization for each license area in which we fail to meet the requirement will terminate.  In addition, the FCC has adopted rules for a spectrum band that is adjacent to our AWS-4 licenses, known as the “H Block.”  Depending on the outcome of the standard-setting process for the H Block, the rules that the FCC adopted could further impact the remaining 15 MHz of our uplink spectrum (2005-2020 MHz), which may have a material adverse effect on our ability to commercialize the AWS-4 licenses.

 

We will need 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, build-out, and integration efforts, any such investment or partnership could vary significantly.  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 licenses or that we will be able to profitably deploy the assets represented by these spectrum licenses, which may affect the carrying value of these assets and our future financial condition or results of operations.

 

Sprint/Clearwire

 

On April 15, 2013, we submitted a merger proposal to Sprint for a total consideration of $25.5 billion.  On June 21, 2013, we decided to abandon our efforts to acquire Sprint, and Sprint completed its merger with SoftBank on July 10, 2013.  In addition, on May 30, 2013, we, through a wholly-owned subsidiary, commenced a tender offer to purchase all outstanding shares of Class A Common Stock of Clearwire, including any Class A Common Stock issued in respect of outstanding shares of Class B Common Stock, for $4.40 per share in cash.  We withdrew our tender offer on June 26, 2013, and Clearwire completed its merger with Sprint on July 9, 2013.

 

9.                                      Blockbuster UK Administration

 

Blockbuster Entertainment Limited and Blockbuster GB Limited, our Blockbuster operating subsidiaries in the United Kingdom (collectively, the “Blockbuster UK Operating Entities”), entered into administration proceedings in the United Kingdom on January 16, 2013 (the “Administration”).  Administrators were appointed by the English courts to sell or liquidate the assets of the Blockbuster UK Operating Entities for the benefit of their creditors.  Since we no longer exercise control over operating decisions for the Blockbuster UK Operating Entities, we were required to deconsolidate our Blockbuster entities in the United Kingdom (collectively, “Blockbuster UK”) on January 16, 2013.  As a result of the Administration, we wrote down the assets of Blockbuster UK to their estimated net realizable value on our Consolidated Balance Sheets as of December 31, 2012, and we recorded a charge to “Cost of sales - equipment, merchandise, services, rental and other” of $21 million during the year ended December 31, 2012 on our Consolidated Statements of Operations and Comprehensive Income (Loss).

 

As of December 31, 2012, we had intercompany receivables due from Blockbuster UK of approximately $37 million that were previously eliminated in consolidation on our Consolidated Balance Sheets.  As a result of deconsolidation of Blockbuster UK on January 16, 2013, the intercompany receivables are no longer eliminated in consolidation.  We believe we will not receive the entire amount for these intercompany receivables in the Administration and accordingly, we recorded a $25 million impairment charge related to these intercompany receivables, to adjust these amounts to their estimated net realizable value for the year ended December 31, 2012.  This impairment charge was recorded in “Other, net” within “Other Income (Expense)” on our Consolidated Statements of Operations and Comprehensive Income (Loss) and the resulting liability was recorded in “Other accrued expenses” on our Consolidated Balance Sheets as of December 31, 2012.  In total, we recorded charges described above of approximately $46 million on a pre-tax basis on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2012 related to the Administration.

 

19



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

As of December 31, 2012, Blockbuster UK had total assets and liabilities as follows (in thousands):

 

Cash

 

$

14,072

 

Trade accounts receivable

 

1,153

 

Inventory

 

34,937

 

Other current assets

 

10,243

 

Restricted cash and marketable securities

 

484

 

Property and equipment

 

186

 

Trade accounts payable

 

(13,081

)

Intercompany payable

 

(36,676

)

Deferred revenue and other

 

(1,369

)

Other accrued expenses

 

(9,949

)

Total net assets

 

$

 

 

Upon deconsolidation on January 16, 2013, the above amounts were combined into one net asset and the intercompany receivables of $37 million, net of the impairment liability of $25 million described above, were recorded in “Other noncurrent assets, net” on our Condensed Consolidated Balance Sheets as a component of our investment in Blockbuster UK.

 

On March 25, 2013, Gordon Brothers Europe purchased certain assets and assumed certain liabilities of the Blockbuster UK Operating Entities through the Administration.  As a result, we recorded an additional $2 million impairment charge related to the intercompany receivables, to adjust these amounts to their estimated net realizable value.  This impairment charge was recorded in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2013.  In total, as of June 30, 2013, we have recorded charges of approximately $48 million on a pre-tax basis related to the Administration.  The proceeds that we actually receive from the Administration and the actual impairment charge may differ from our estimates.

 

For the three and six months ended June 30, 2012, Blockbuster UK had $70 million and $140 million, respectively, of revenue and an operating loss of less than $1 million and $5 million, respectively.  Upon deconsolidation on January 16, 2013, the revenue and expenses related to the operations of Blockbuster UK are no longer recorded in our Condensed Consolidated Financial Statements.

 

10.                               Long-Term Debt

 

5% Senior Notes due 2017

 

On May 28, 2013, we issued $1.25 billion aggregate principal amount of our four-year, 5% Senior Notes due May 15, 2017 at an issue price of 100%.  The net proceeds from the 5% Senior Notes due 2017 were placed into escrow to finance a portion of the cash consideration for our proposed merger with Sprint.  On June 21, 2013, we abandoned our efforts to acquire Sprint and, on June 24, 2013, we redeemed all of the 5% Senior Notes due 2017 at a redemption price equal to 100% of the aggregate principal amount of the 5% Senior Notes due 2017, plus accrued and unpaid interest.

 

During each of the three and six months ended June 30, 2013, we recorded $7 million in interest expense and deferred financing costs related to the issuance and redemption of our 5% Senior Notes due 2017 as “Interest expense, net of amounts capitalized” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

20



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

4 1/4% Senior Notes due 2018

 

On April 5, 2013, we issued $1.2 billion aggregate principal amount of our five-year, 4 1/4% Senior Notes due April 1, 2018 at an issue price of 100%.  Interest accrues at an annual rate of 4 1/4% and is payable semi-annually in cash in arrears on April 1 and October 1 of each year, commencing on October 1, 2013.

 

The 4 1/4% Senior Notes due 2018 are redeemable, in whole or in part, at any time at a redemption price equal to 100% of the principal amount plus a “make-whole” premium, as defined in the related indenture, together with accrued and unpaid interest.  Prior to April 1, 2016, we may also redeem up to 35.0% of the 4 1/4% Senior Notes due 2018 at a specified premium with the net cash proceeds from certain equity offerings or capital contributions.

 

The 4 1/4% Senior Notes due 2018 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 DISH DBS’ 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 1/4% Senior Notes due 2018 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 1/4% Senior Notes due 2018 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.

 

5 1/8% Senior Notes due 2020

 

On April 5, 2013, we issued $1.1 billion aggregate principal amount of our seven-year, 5 1/8% Senior Notes due May 1, 2020 at an issue price of 100%.  Interest accrues at an annual rate of 5 1/8% and is payable semi-annually in cash in arrears on May 1 and November 1 of each year, commencing on November 1, 2013.

 

The 5 1/8% Senior Notes due 2020 are redeemable, in whole or in part, at any time at a redemption price equal to 100% of the principal amount plus a “make-whole” premium, as defined in the related indenture, together with accrued and unpaid interest.  Prior to May 1, 2016, we may also redeem up to 35.0% of the 5 1/8% Senior Notes due 2020 at a specified premium with the net cash proceeds from certain equity offerings or capital contributions.

 

21



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

The 5 1/8% Senior Notes due 2020 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 DISH DBS’ 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 1/8% Senior Notes due 2020 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 1/8% Senior Notes due 2020 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.

 

6 1/4% Senior Notes due 2023

 

On May 28, 2013, we issued $1.35 billion aggregate principal amount of our ten-year, 6 1/4% Senior Notes due May 15, 2023 at an issue price of 100%.  The net proceeds from the 6 1/4% Senior Notes due 2023 were placed into escrow to finance a portion of the cash consideration for our proposed merger with Sprint.  On June 21, 2013, we abandoned our efforts to acquire Sprint and, on June 24, 2013, we redeemed all of the 6 1/4% Senior Notes due 2023 at a redemption price equal to 101% of the aggregate principal amount of the 6 1/4% Senior Notes due 2023, plus accrued and unpaid interest.

 

During each of the three and six months ended June 30, 2013, we recorded $23 million in premiums, interest expense and deferred financing costs related to the issuance and redemption of our 6 1/4% Senior Notes due 2023 as “Interest expense, net of amounts capitalized” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

22



Table of Contents

 

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 June 30, 2013 and December 31, 2012:

 

 

 

As of

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

 

 

(In thousands)

 

7 % Senior Notes due 2013 (1)

 

$

500,000

 

$

505,950

 

$

500,000

 

$

521,875

 

6 5/8% Senior Notes due 2014

 

1,000,000

 

1,042,500

 

1,000,000

 

1,078,500

 

7 3/4% Senior Notes due 2015

 

750,000

 

811,875

 

750,000

 

844,725

 

7 1/8% Senior Notes due 2016

 

1,500,000

 

1,623,750

 

1,500,000

 

1,683,750

 

4 5/8% Senior Notes due 2017

 

900,000

 

906,750

 

900,000

 

940,500

 

4 1/4% Senior Notes due 2018

 

1,200,000

 

1,161,000

 

 

 

7 7/8% Senior Notes due 2019

 

1,400,000

 

1,555,750

 

1,400,000

 

1,669,500

 

5 1/8% Senior Notes due 2020

 

1,100,000

 

1,097,250

 

 

 

6 3/4% Senior Notes due 2021

 

2,000,000

 

2,130,000

 

2,000,000

 

2,280,000

 

5 7/8% Senior Notes due 2022

 

2,000,000

 

2,030,000

 

2,000,000

 

2,150,000

 

5% Senior Notes due 2023

 

1,500,000

 

1,447,500

 

1,500,000

 

1,548,750

 

Mortgages and other notes payable

 

84,657

 

84,657

 

88,955

 

88,955