Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

Form 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010.

 

OR

 

o

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

 

FOR THE TRANSITION PERIOD FROM                    TO                   .

 

Commission File Number:  0-26176

 

DISH Network Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

88-0336997

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

9601 South Meridian Boulevard

 

 

Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip code)

 

(303) 723-1000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

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

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 22, 2010, the registrant’s outstanding common stock consisted of 204,625,112 shares of Class A common stock and 238,435,208 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Disclosure Regarding Forward-Looking Statements

i

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets –
September 30, 2010 and December 31, 2009 (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the
Nine Months Ended September 30, 2010 and 2009 (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

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

34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

55

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

56

 

 

 

Item 1A.

Risk Factors

62

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

(Removed and Reserved)

None

 

 

 

Item 5.

Other Information

None

 

 

 

Item 6.

Exhibits

63

 

 

 

 

Signatures

64

 



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:

 

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

 

·                We face intense and increasing competition from satellite television providers, cable television providers and telecommunications companies which may require us to increase subscriber acquisition and retention spending or accept lower subscriber acquisitions and higher subscriber churn.

 

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

 

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

 

·                If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful in developing and deploying potential new alternative technology and we are unable to reach a license agreement with Tivo on reasonable terms, we would be subject to substantial liability and would be prohibited from offering DVR functionality that would result in a significant loss of subscribers and place us at a significant disadvantage to our competitors.

 

·                Emerging digital media competition including companies that provide/facilitate the delivery of video content via the Internet could materially adversely affect us.

 

·                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 additions may decline and subscriber churn may increase.

 

·                We may be required to make substantial additional investments to maintain competitive high definition, or HD, programming offerings.

 

·                Technology in our industry changes rapidly and could cause our services and products to become obsolete.

 

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

 

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

 

·                AT&T’s termination of its distribution agreement with us may increase churn.

 

·                As technology changes, and to remain competitive, we may have to upgrade or replace subscriber equipment and make substantial investments in our infrastructure.

 

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

 

·                We rely on one or a limited number of vendors, and the inability of these key vendors to meet our needs could have a material adverse effect on our business.

 

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Table of Contents

 

·                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 DISH Network services that represent a significant percentage of our total gross subscriber acquisitions.

 

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

 

·                We depend on the Cable Act for access to programming from cable-affiliate programmers at cost-effective rates.

 

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

 

·                Our local programming strategy faces uncertainty because we may not be able to obtain necessary retransmission consents from local network stations.

 

·                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.

 

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

 

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

 

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

 

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

 

·                Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.

 

·                Our owned and leased satellites have minimum design lives ranging from 12 to 15 years, but could fail or suffer reduced capacity before then.

 

·                We generally do not have commercial insurance coverage on the satellites we own 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.

 

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

 

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

 

·                Our business depends on Federal Communications Commission, or 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 HD “carry-one-carry-all” requirements that cause capacity constraints.

 

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

 

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·                We are controlled by one principal stockholder who is also our Chairman, President and Chief Executive Officer.

 

·                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.

 

In this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network Corporation and its subsidiaries, unless the context otherwise requires.  “EchoStar” refers to EchoStar Corporation and its subsidiaries.

 

iii



Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

714,357

 

$

105,844

 

Marketable investment securities

 

1,945,194

 

2,033,492

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $21,942 and $16,372, respectively

 

779,560

 

741,524

 

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

 

19,999

 

38,347

 

Inventory

 

522,838

 

295,950

 

Deferred tax assets

 

147,510

 

139,708

 

Other current assets

 

193,776

 

121,087

 

Total current assets

 

4,323,234

 

3,475,952

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

145,881

 

141,493

 

Property and equipment, net of accumulated depreciation of $2,657,707 and $2,487,092, respectively

 

3,195,564

 

3,042,262

 

FCC authorizations

 

1,391,441

 

1,391,441

 

Marketable and other investment securities

 

167,937

 

170,224

 

Other noncurrent assets, net

 

68,826

 

73,971

 

Total noncurrent assets

 

4,969,649

 

4,819,391

 

Total assets

 

$

9,292,883

 

$

8,295,343

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

165,944

 

$

146,824

 

Trade accounts payable - EchoStar

 

392,404

 

373,454

 

Deferred revenue and other

 

813,023

 

815,878

 

Accrued programming

 

1,051,652

 

985,928

 

Litigation accrual (Note 10)

 

545,566

 

393,566

 

Other accrued expenses

 

595,351

 

545,113

 

Current portion of long-term debt and capital lease obligations

 

26,170

 

26,518

 

Total current liabilities

 

3,590,110

 

3,287,281

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

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

 

6,489,201

 

6,470,046

 

Deferred tax liabilities

 

403,683

 

312,775

 

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

 

226,400

 

316,929

 

Total long-term obligations, net of current portion

 

7,119,284

 

7,099,750

 

Total liabilities

 

10,709,394

 

10,387,031

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 260,713,898 and 258,852,336 shares issued, 204,617,612 and 208,754,183 shares outstanding, respectively

 

2,607

 

2,589

 

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

 

2,167,144

 

2,120,211

 

Accumulated other comprehensive income (loss)

 

61,462

 

5,614

 

Accumulated earnings (deficit)

 

(2,081,504

)

(2,760,589

)

Treasury stock, at cost

 

(1,569,063

)

(1,462,380

)

Total DISH Network stockholders’ equity (deficit)

 

(1,416,970

)

(2,092,171

)

Noncontrolling interest

 

459

 

483

 

Total stockholders’ equity (deficit)

 

(1,416,511

)

(2,091,688

)

Total liabilities and stockholders’ equity (deficit)

 

$

9,292,883

 

$

8,295,343

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

1



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscriber-related revenue

 

$

3,185,515

 

$

2,862,554

 

$

9,362,974

 

$

8,605,608

 

Equipment sales and other revenue

 

11,894

 

23,393

 

42,231

 

74,876

 

Equipment sales - EchoStar

 

802

 

1,277

 

2,995

 

6,486

 

Services and other revenue - EchoStar

 

9,517

 

4,923

 

25,965

 

14,199

 

Total revenue

 

3,207,728

 

2,892,147

 

9,434,165

 

8,701,169

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

Subscriber-related expenses (exclusive of depreciation shown below - Note 6)

 

1,684,583

 

1,623,397

 

4,972,403

 

4,705,551

 

Satellite and transmission expenses (exclusive of depreciation shown below - Note 6):

 

 

 

 

 

 

 

 

 

EchoStar

 

107,524

 

78,911

 

316,109

 

246,866

 

Other

 

10,113

 

8,962

 

30,201

 

24,701

 

Equipment, services and other cost of sales

 

14,997

 

28,651

 

53,903

 

96,244

 

Subscriber acquisition costs:

 

 

 

 

 

 

 

 

 

Cost of sales - subscriber promotion subsidies - EchoStar (exclusive of depreciation shown below - Note 6)

 

57,173

 

56,293

 

123,809

 

152,215

 

Other subscriber promotion subsidies

 

286,206

 

310,844

 

866,317

 

776,575

 

Subscriber acquisition advertising

 

103,094

 

72,453

 

273,750

 

191,275

 

Total subscriber acquisition costs

 

446,473

 

439,590

 

1,263,876

 

1,120,065

 

General and administrative expenses - EchoStar

 

12,424

 

11,022

 

35,393

 

34,577

 

General and administrative expenses

 

143,001

 

146,626

 

425,868

 

415,857

 

Litigation expense (Note 10)

 

91,097

 

131,930

 

151,999

 

328,335

 

Depreciation and amortization (Note 6)

 

242,859

 

228,395

 

746,967

 

696,988

 

Total costs and expenses

 

2,753,071

 

2,697,484

 

7,996,719

 

7,669,184

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

454,657

 

194,663

 

1,437,446

 

1,031,985

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

6,265

 

7,591

 

18,356

 

23,637

 

Interest expense, net of amounts capitalized

 

(108,619

)

(98,857

)

(336,256

)

(273,926

)

Other, net

 

22,327

 

(1,915

)

23,254

 

(42,072

)

Total other income (expense)

 

(80,027

)

(93,181

)

(294,646

)

(292,361

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

374,630

 

101,482

 

1,142,800

 

739,624

 

Income tax (provision) benefit, net

 

(129,652

)

(20,989

)

(409,923

)

(283,027

)

Net income (loss)

 

244,978

 

80,493

 

732,877

 

456,597

 

Less: Net income (loss) attributable to noncontrolling interest

 

14

 

(69

)

(24

)

(69

)

Net income (loss) attributable to DISH Network common shareholders

 

$

244,964

 

$

80,562

 

$

732,901

 

$

456,666

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

244,978

 

$

80,493

 

$

732,877

 

$

456,597

 

Foreign currency translation adjustments

 

(13,476

)

 

(13,476

)

(106

)

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

 

17,542

 

55,599

 

13,833

 

100,406

 

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

 

1,871

 

(8

)

768

 

5,447

 

Deferred income tax (expense) benefit

 

5,067

 

 

5,067

 

128

 

Comprehensive income (loss)

 

255,982

 

136,084

 

739,069

 

562,472

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

14

 

(69

)

(24

)

(69

)

Comprehensive income (loss) attributable to DISH Network common shareholders

 

$

255,968

 

$

136,153

 

$

739,093

 

$

562,541

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

445,662

 

446,823

 

446,789

 

446,816

 

Diluted

 

446,332

 

447,431

 

447,575

 

448,313

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

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

 

$

0.55

 

$

0.18

 

$

1.64

 

$

1.02

 

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

 

$

0.55

 

$

0.18

 

$

1.64

 

$

1.02

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2010

 

2009

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

732,877

 

$

456,597

 

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

 

 

 

 

 

Depreciation and amortization

 

746,967

 

696,988

 

Equity in losses (earnings) of affiliates

 

 

4,149

 

Realized and unrealized losses (gains) on investments

 

(25,895

)

40,518

 

Non-cash, stock-based compensation

 

12,326

 

8,557

 

Deferred tax expense (benefit)

 

104,469

 

29,131

 

Other, net

 

14,315

 

4,117

 

Change in noncurrent assets

 

(412

)

6,769

 

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

 

(112,926

)

44,074

 

Changes in current assets and current liabilities, net

 

62,221

 

600,829

 

Net cash flows from operating activities

 

1,533,942

 

1,891,729

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(4,170,764

)

(4,056,711

)

Sales and maturities of marketable investment securities

 

4,288,546

 

2,116,604

 

Purchases of property and equipment

 

(832,280

)

(724,316

)

Launch service assigned from EchoStar (Note 11)

 

(102,913

)

 

Change in restricted cash and marketable investment securities

 

(4,385

)

(58,398

)

Purchase of strategic investments included in noncurrent marketable and other investment securities

 

 

(47,142

)

Proceeds from sale of strategic investments

 

20,413

 

 

Other

 

(383

)

(83

)

Net cash flows from investing activities

 

(801,766

)

(2,770,046

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

1,000,000

 

Deferred debt issuance costs

 

 

(28,618

)

Repayment of long-term debt and capital lease obligations

 

(21,979

)

(20,043

)

Class A common stock repurchases

 

(106,683

)

(18,594

)

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

 

4,983

 

2,568

 

Other

 

16

 

 

Net cash flows from financing activities

 

(123,663

)

935,313

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

608,513

 

56,996

 

Cash and cash equivalents, beginning of period

 

105,844

 

98,574

 

Cash and cash equivalents, end of period

 

$

714,357

 

$

155,570

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest

 

$

354,998

 

$

238,696

 

Capitalized interest

 

$

17,139

 

$

13,454

 

Cash received for interest

 

$

30,758

 

$

10,511

 

Cash paid for income taxes

 

$

511,550

 

$

250,576

 

Employee benefits paid in Class A common stock

 

$

29,127

 

$

12,198

 

Vendor financing

 

$

40,000

 

$

 

Satellites and other assets financed under capital lease obligations

 

$

786

 

$

131,178

 

 

The accompanying notes are an integral part of the 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”) operate the DISH Network® direct broadcast satellite (“DBS”) subscription television service in the United States which had 14.289 million subscribers as of September 30, 2010.  We have deployed substantial resources to develop the “DISH Network DBS System.”  The DISH Network DBS System consists of our licensed Federal Communications Commission (“FCC”) authorized DBS and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, in-home service and call center operations, and certain other assets utilized in our operations.

 

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

 

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, 2009 (“2009 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.

 

4



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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, 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, capital leases, asset impairments, useful lives of property, equipment and intangible assets, retailer incentives, programming expenses, subscriber lives and royalty obligations.  Weakened economic conditions have increased the inherent uncertainty in the estimates and assumptions indicated above.  Actual results may differ from previously estimated amounts, and such differences may be material to the Condensed Consolidated Financial Statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.

 

Fair Value of Financial Instruments

 

The carrying value for cash and cash equivalents, marketable investment securities, trade accounts receivable, net of allowance for doubtful accounts, and current liabilities is equal to or approximates fair value due to their short-term nature.  See Note 7 for the fair value of our long-term debt.

 

New Accounting Pronouncements

 

Revenue Recognition — Multiple-Deliverable Arrangements

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-13 (“ASU 2009-13”), Revenue Recognition - Multiple-Deliverable Revenue Arrangements.  ASU 2009-13 changes the requirements for establishing separate units of accounting in a multiple deliverable arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price.  We are currently evaluating the impact, if any, ASU 2009-13 will have on our consolidated financial statements, when adopted, as required, on January 1, 2011.

 

5



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 common shareholders” 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 and convertible securities were converted to common stock.

 

The potential dilution from our subordinated notes convertible into common stock was computed using the “if converted method.”  The potential dilution from stock awards was computed using the treasury stock method based on the average market value of our Class A common stock.  The following table presents earnings per share amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(In thousands, except per share amounts)

 

Basic net income (loss) attributable to DISH Network common shareholders

 

$

244,964

 

$

80,562

 

$

732,901

 

$

456,666

 

Interest on dilutive subordinated convertible note, net of related tax effect

 

 

 

 

351

 

Diluted net income (loss) attributable to DISH Network common shareholders

 

$

244,964

 

$

80,562

 

$

732,901

 

$

457,017

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

445,662

 

446,823

 

446,789

 

446,816

 

Dilutive impact of stock awards outstanding

 

670

 

608

 

786

 

1,015

 

Dilutive impact of subordinated note convertible into common shares

 

 

 

 

482

 

Diluted

 

446,332

 

447,431

 

447,575

 

448,313

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

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

 

$

0.55

 

$

0.18

 

$

1.64

 

$

1.02

 

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

 

$

0.55

 

$

0.18

 

$

1.64

 

$

1.02

 

 

 

 

 

 

 

 

 

 

 

Shares of Class A common stock issuable upon conversion of:

 

 

 

 

 

 

 

 

 

3% Convertible Subordinated Note due 2011 (repaid in October 2009)

 

 

482

 

 

482

 

 

As of September 30, 2010 and 2009, there were stock awards to purchase 11.1 million and 9.1 million shares, respectively, of Class A common stock outstanding, not included in the weighted-average common shares outstanding above, as their effect is antidilutive.

 

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

 

 

 

As of September 30,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Performance-based options

 

11,003

 

9,633

 

Restricted Performance Units and other

 

1,518

 

1,108

 

Total

 

12,521

 

10,741

 

 

6



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

4.      Marketable Investment Securities, Restricted Cash and Other Investment Securities

 

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

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

1,154,760

 

$

1,053,826

 

Current marketable investment securities - strategic

 

246,571

 

163,997

 

Current marketable investment securities - other

 

543,863

 

815,669

 

Total current marketable investment securities

 

1,945,194

 

2,033,492

 

Restricted marketable investment securities (1)

 

33,352

 

21,360

 

Noncurrent marketable investment securities - ARS and MBS (2)

 

118,363

 

120,650

 

Total marketable investment securities

 

2,096,909

 

2,175,502

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

112,529

 

120,133

 

 

 

 

 

 

 

Other investment securities:

 

 

 

 

 

Other investment securities - cost method

 

49,574

 

49,574

 

Total other investment securities (2)

 

49,574

 

49,574

 

 

 

 

 

 

 

Total marketable investment securities, restricted cash and other investment securities

 

$

2,259,012

 

$

2,345,209

 

 


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

 

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

 

Marketable Investment Securities

 

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

 

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 of investments in many municipalities, which are backed by financial institutions or other highly rated companies 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 investments in public companies that are highly speculative and have experienced and continue to experience volatility.  As of September 30, 2010, a significant portion of our strategic investment portfolio consisted of securities of several issuers, and the value of that portfolio depends on those issuers.

 

7



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

We account for certain debt securities acquired at a discount under the cost recovery method, partial accrual or full accrual methods based on management’s quarterly evaluation of these securities.  These debt securities were purchased at a discount due to their credit quality.  As a result, the yield that may be accreted (accretable yield) is limited to the excess of our estimate of undiscounted expected principal, interest and other cash flows (including the effects of prepayments) expected to be collected over our initial investment.  The face value of these securities as of September 30, 2010 and December 31, 2009 was $137 million.  The carrying value, which is equal to fair value, of these securities as of September 30, 2010 and December 31, 2009 was $82 million and $80 million, respectively.  The total discount on these securities was $88 million as of September 30, 2010, with $9 million classified as accretable yield and the remaining $79 million classified as non-accretable yield.  The total discount on these securities was $91 million as of December 31, 2009, with $12 million classified as accretable yield and the remaining $79 million classified as non-accretable yield.

 

Current Marketable Investment Securities - Other

 

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

 

Restricted Cash and Marketable Investment Securities

 

As of September 30, 2010 and December 31, 2009, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.  Restricted cash and marketable investment securities as of September 30, 2010 included $62 million related to our litigation with Tivo.

 

Noncurrent Marketable Investment Securities — ARS and MBS

 

We have investments in ARS and MBS which are classified as available-for-sale securities and reported at fair value.  Events in the credit markets have reduced or eliminated current liquidity for certain of our ARS and MBS investments.  As a result, we classify these investments as noncurrent assets, as we intend to hold these investments until they recover or mature.  See below for further discussion on the July 1, 2010 fair value election on certain ARS investments.

 

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

 

Fair Value Election.  Our ARS and MBS noncurrent marketable investment securities portfolio of $118 million includes $61 million of securities accounted for under the fair value method.  In March 2010, the FASB issued Accounting Standards Update 2010-11 (“ASU 2010-11”), Derivatives and Hedging:  Scope Exception Related to Embedded Credit Derivatives.  ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from certain bifurcation requirements.  Only one form of embedded credit derivative qualifies for the exemption - one that is related to the subordination of one financial instrument to another.  As a result, entities that have contracts containing an embedded credit derivative feature in a form other than subordination may need to separately account for the embedded credit derivative feature.  On July 1, 2010, we elected to apply the fair value option to certain of our ARS portfolio impacted by ASU 2010-11.  As a result, a $50 million loss, net of tax, related to these ARS in “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit)” as of June 30, 2010 was included as a cumulative-effect adjustment to beginning “Accumulated earnings (deficit).”  All changes in the fair value of these investments after June 30, 2010 are recognized in our results of operations and included in “Other, net” income and expense on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and detailed in the table titled “Gains and Losses on Sales and Changes in Carrying Value of Investments” below.

 

8



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Other Investment Securities

 

We have a few strategic investments in certain debt and equity securities that are included in noncurrent “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets 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 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 September 30, 2010 and December 31, 2009, we had accumulated net unrealized gains of $61 million and net unrealized losses of $3 million, both net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  A full valuation allowance has been established against any deferred taxes that are capital in nature.  The components of our available-for-sale investments are detailed in the table below.

 

 

 

As of September 30, 2010

 

As of December 31, 2009

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

1,154,760

 

$

 

$

 

$

 

$

1,053,826

 

$

1

 

$

(3

)

$

(2

)

ARS and MBS

 

57,260

 

1,763

 

(13,507

)

(11,744

)

120,650

 

1,114

 

(69,167

)

(68,053

)

Other (including restricted)

 

659,236

 

39,226

 

(1,768

)

37,458

 

917,069

 

39,490

 

(1,645

)

37,845

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

164,550

 

56,810

 

(21,062

)

35,748

 

83,957

 

27,415

 

 

27,415

 

Subtotal

 

$

2,035,806

 

$

97,799

 

$

(36,337

)

$

61,462

 

$

2,175,502

 

$

68,020

 

$

(70,815

)

$

(2,795

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARS fair value election

 

61,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total marketable investment securities

 

$

2,096,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2010, restricted and non-restricted marketable investment securities include debt securities of $1.731 billion with contractual maturities of one year or less and $201 million with contractual maturities greater than one year.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

9



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 September 30, 2010, the unrealized losses on our investments in equity securities represent investments in broad-based indexes and in several companies in the technology 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 September 30, 2010 and December 31, 2009, the unrealized losses on our investments in debt securities primarily represent investments in auction rate, mortgage and asset-backed securities.  We do not intend to sell our investments in these debt securities before they recover or mature, and it is more likely than not that we will hold these investments until that time.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these marketable investment securities are related to temporary market fluctuations.

 

 

 

 

 

 

 

As of September 30, 2010

 

 

 

Primary

 

Total

 

Less than Six Months

 

Six to Nine Months

 

Nine Months or More

 

Investment

 

Reason for

 

Fair

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Category

 

Unrealized Loss

 

Value

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

 

 

 

 

(In thousands)

 

Debt securities

 

Temporary market fluctuations

 

$

237,303

 

$

65,667

 

$

(93

)

$

98,679

 

$

(313

)

$

72,957

 

$

(14,869

)

Equity securities

 

Temporary market fluctuations

 

90,827

 

90,827

 

(21,062

)

 

 

 

 

Total

 

 

 

$

328,130

 

$

156,494

 

$

(21,155

)

$

98,679

 

$

(313

)

$

72,957

 

$

(14,869

)

 

 

 

 

 

 

 

As of December 31, 2009

 

 

 

 

 

 

 

(In thousands)

 

Debt securities

 

Temporary market fluctuations

 

$

348,995

 

$

180,359

 

$

(306

)

$

7,535

 

$

(45

)

$

161,101

 

$

(70,464

)

Total

 

 

 

$

348,995

 

$

180,359

 

$

(306

)

$

7,535

 

$

(45

)

$

161,101

 

$

(70,464

)

 

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;

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

·                  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring assumptions based on the best information available.

 

10



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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

 

 

 

As of

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

1,154,760

 

$

 

$

1,154,760

 

$

 

$

1,053,826

 

$

 

$

1,053,826

 

$

 

ARS and MBS

 

118,363

 

 

6,616

 

111,747

 

120,650

 

 

7,907

 

112,743

 

Other (including restricted)

 

659,236

 

29,363

 

573,970

 

55,903

 

917,069

 

22,031

 

894,770

 

268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

164,550

 

164,550

 

 

 

83,957

 

83,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total marketable investment securities

 

$

2,096,909

 

$

193,913

 

$

1,735,346

 

$

167,650

 

$

2,175,502

 

$

105,988

 

$

1,956,503

 

$

113,011

 

 

Changes in Level 3 instruments are as follows:

 

 

 

Level 3
Investment
Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2009

 

$

113,011

 

Net realized and unrealized gains (losses) included in earnings

 

4,451

 

Net realized and unrealized gains (losses) included in earnings - fair value election

 

(49,656

)

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

 

55,107

 

Purchases, issuances and settlements, net

 

(2,946

)

Transfers from level 2 to level 3

 

47,683

 

Balance as of September 30, 2010

 

$

167,650

 

 

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

 

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

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Other Income (Expense):

 

2010

 

2009

 

2010

 

2009

 

 

 

(In thousands)

 

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

 

$

19,227

 

$

16

 

$

19,237

 

$

(4,716

)

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

 

6,818

 

(14

)

6,818

 

598

 

Marketable and other investment securities - other-than-temporary impairments

 

(3,858

)

(833

)

(1,712

)

(36,400

)

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

 

 

 

1,545

 

 

Other

 

140

 

(1,084

)

(2,634

)

(1,554

)

Total

 

$

22,327

 

$

(1,915

)

$

23,254

 

$

(42,072

)

 

11



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

5.              Inventory

 

Inventory consists of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Finished goods - DBS

 

$

287,700

 

$

199,189

 

Raw materials

 

189,819

 

60,837

 

Work-in-process - used

 

39,057

 

34,204

 

Work-in-process - new

 

6,262

 

1,720

 

Total inventory

 

$

522,838

 

$

295,950

 

 

As of September 30, 2010, our inventory balance was $523 million, an increase of $227 million.  The increase is due to less gross subscriber additions than anticipated in 2010.  In addition, the inventory balance at December 31, 2009 was lower than normal due to more subscriber additions and less churn than forecasted during the last half of 2009.

 

6.              Property and Equipment

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense consists of the following:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(In thousands)

 

Equipment leased to customers

 

$

199,442

 

$

191,778

 

$

630,188

 

$

591,729

 

Satellites

 

30,544

 

22,184

 

78,426

 

64,247

 

Buildings, furniture, fixtures, equipment and other

 

12,873

 

14,433

 

38,353

 

41,012

 

Total depreciation and amortization

 

$

242,859

 

$

228,395

 

$

746,967

 

$

696,988

 

 

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.

 

Satellites

 

We currently utilize 13 satellites in geostationary orbit approximately 22,300 miles above the equator, six of which we own.  We currently lease capacity on five satellites from EchoStar with terms ranging from two to ten years.  We account for these as operating leases.  See Note 11 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 or the term of the satellite agreement.

 

Operation of our programming service requires that we have adequate satellite transmission capacity for the programming we offer.  Moreover, current competitive conditions require that we continue to expand our offering of new programming, particularly by expanding local HD coverage and offering more HD national channels.  While we generally have had in-orbit 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.

 

12



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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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.

 

Certain satellites in our fleet have experienced anomalies, some of which have had a significant adverse impact on their remaining life and commercial operation.  There can be no assurance that future anomalies will not further impact the remaining life and commercial operation of any of these satellites.  See “Long-Lived Satellite Assets” below for further discussion of evaluation of impairment.  There can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We do not anticipate carrying insurance for any of the in-orbit satellites that we own, and therefore will bear the risk of any in-orbit failures.  Recent developments with respect to our satellites are discussed below.

 

Owned Satellites

 

EchoStar VII.  EchoStar VII, which is being used as an in-orbit spare, was designed with four gyros, three of which are required to properly control the positioning of the satellite.  During October 2010, EchoStar VII experienced an anomaly which caused one of the gyros to stop functioning.  While this anomaly is not expected to reduce the estimated useful life of the satellite to less than 12 years and has not impacted operation of the satellite to date, there can be no assurance that future anomalies will not cause further losses which could impact operation of the satellite.

 

EchoStar XIV.  Our EchoStar XIV satellite was launched on March 20, 2010 and commenced commercial operations at the 119 degree orbital location during May 2010.  EchoStar XIV is a combination full continental United States (“CONUS”) and spot beam satellite that has allowed us, among other things, to expand our HD offerings.

 

EchoStar XV.  Our EchoStar XV satellite was launched on July 10, 2010 and commenced commercial operations at the 61.5 degree orbital location during August 2010.  EchoStar XV is a CONUS satellite that has allowed us, among other things, to expand our HD offerings.

 

Long-Lived Satellite Assets

 

We evaluate our 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.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

7.              Long-Term Debt

 

Fair Value of our Long-Term Debt

 

The following table summarizes the carrying and fair values of our debt facilities as of September 30, 2010 and December 31, 2009:

 

 

 

As of

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

 

 

(In thousands)

 

6 3/8% Senior Notes due 2011

 

$

1,000,000

 

$

1,040,000

 

$

1,000,000

 

$

1,028,750

 

7 % Senior Notes due 2013

 

500,000

 

534,375

 

500,000

 

515,000

 

6 5/8% Senior Notes due 2014

 

1,000,000

 

1,050,000

 

1,000,000

 

1,010,000

 

7 3/4% Senior Notes due 2015

 

750,000

 

800,775

 

750,000

 

789,375

 

7 1/8% Senior Notes due 2016

 

1,500,000

 

1,580,625

 

1,500,000

 

1,548,750

 

7 7/8% Senior Notes due 2019

 

1,400,000

 

1,501,640

 

1,400,000

 

1,473,500

 

Mortgages and other notes payable

 

78,311

 

78,311

 

42,107

 

42,107

 

Subtotal

 

$

6,228,311

 

$

6,585,726

 

$

6,192,107

 

$

6,407,482

 

Capital lease obligations (1)

 

287,060

 

 

 

304,457

 

 

 

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

 

$

6,515,371

 

 

 

$

6,496,564

 

 

 

 


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

 

Our 6 3/8% Senior Notes with an aggregate principal balance of $1.0 billion mature on October 1, 2011.

 

8.              Stockholders’ Equity (Deficit)

 

Common Stock Repurchase Program

 

Our Board of Directors previously authorized stock repurchases of up to $1.0 billion of our Class A common stock.  During the nine months ended September 30, 2010, we repurchased 6.0 million shares of our Class A common stock for $107 million.  As of September 30, 2010, we were authorized by our Board of Directors to repurchase up to $893 million of our Class A common stock.  On November 2, 2010, our Board of Directors extended the plan and authorized an increase in the maximum dollar value of shares that may be repurchased under the plan, such that we are currently authorized to repurchase up to $1.0 billion of our outstanding shares of our Class A common stock through and including December 31, 2011.

 

9.              Stock-Based Compensation

 

Stock Incentive Plans

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance and non-performance based stock incentives.  As of September 30, 2010, we had outstanding under these plans stock options to acquire 22.2 million shares of our Class A common stock and 1.7 million restricted stock units.  Stock options granted prior to and on September 30, 2010 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of ten years.  While historically we have issued stock awards subject to vesting, typically at the rate of 20% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives.  As of September 30, 2010, we had 76.2 million shares of our Class A common stock available for future grant under our stock incentive plans.

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

During December 2009, we paid a dividend in cash of $2.00 per share on our outstanding Class A and Class B common stock to shareholders of record on November 20, 2009.  In light of such dividend, during February 2010, the exercise price of 20.6 million stock options, affecting approximately 700 employees, was reduced by $2.00 per share (the “Stock Option Adjustment”).  Except as noted below, all information discussed below reflects the Stock Option Adjustment.

 

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

 

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

 

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

 

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

 

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

 

As of September 30, 2010, the following stock awards were outstanding:

 

 

 

As of September 30, 2010

 

 

 

DISH Network Awards

 

EchoStar Awards

 

Stock Awards Outstanding

 

Stock
Options

 

Restricted
Stock
Units

 

Stock
Options

 

Restricted
Stock
Units

 

Held by DISH Network employees

 

18,700,151

 

1,295,390

 

1,070,874

 

59,517

 

Held by EchoStar employees

 

3,527,086

 

365,841

 

N/A

 

N/A

 

Total

 

22,227,237

 

1,661,231

 

1,070,874

 

59,517

 

 

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

 

15


 


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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Stock Award Activity

 

Our stock option activity for the nine months ended September 30, 2010 was as follows:

 

 

 

For the Nine Months

 

 

 

Ended September 30, 2010

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Total options outstanding, beginning of period (1)

 

21,861,691

 

$

21.71

 

Granted

 

2,424,500

 

18.33

 

Exercised

 

(357,992

)

9.20

 

Forfeited and cancelled

 

(1,700,962

)

22.15

 

Total options outstanding, end of period

 

22,227,237

 

18.60

 

Performance-based options outstanding, end of period (2)

 

11,003,250

 

15.96

 

Exercisable at end of period

 

7,548,603

 

22.96

 

 


(1)         The beginning of period weighted-average exercise price of $21.71 does not reflect the Stock Option Adjustment, which occurred subsequent to December 31, 2009.

 

(2)         These stock options, which are included in the caption “Total options outstanding, end of period,” were issued pursuant to performance-based stock incentive plans.  Vesting of these stock options is contingent upon meeting certain company goals which are not yet probable of being achieved.  See discussion of the 2005 LTIP, 2008 LTIP and other employee performance awards below.

 

We realized tax benefits from stock awards exercised during the three and nine months ended September 30, 2010 and 2009 as follows:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(In thousands)

 

Tax benefit from stock awards exercised

 

$

80

 

$

245

 

$

1,351

 

$

260

 

 

Based on the closing market price of our Class A common stock on September 30, 2010, the aggregate intrinsic value of our stock options was as follows:

 

 

 

As of September 30, 2010

 

 

 

Options
Outstanding

 

Options
Exercisable

 

 

 

(In thousands)

 

Aggregate intrinsic value

 

$

73,360

 

$

6,673

 

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Our restricted stock unit activity for the nine months ended September 30, 2010 was as follows:

 

 

 

For the Nine Months

 

 

 

Ended September 30, 2010

 

 

 

Restricted
Stock
Units

 

Weighted-
Average
Grant Date
Fair Value

 

Total restricted stock units outstanding, beginning of period

 

1,246,284

 

$

25.93

 

Granted

 

600,000

 

18.15

 

Vested

 

 

 

Forfeited and cancelled

 

(185,053

)

23.36

 

Total restricted stock units outstanding, end of period

 

1,661,231

 

23.41

 

Restricted performance units outstanding, end of period (1)

 

1,518,481

 

22.66

 

 


(1)         These restricted performance units, which are included in the caption “Total restricted stock units outstanding, end of period,” were issued pursuant to performance-based stock incentive plans.  Vesting of these restricted performance units is contingent upon meeting certain company goals which are not yet probable of being achieved.  See discussion of the 2005 LTIP, 2008 LTIP and other employee performance awards below.

 

Long-Term Performance-Based Plans

 

2005 LTIP.  During 2005, we adopted a long-term, performance-based stock incentive plan (the “2005 LTIP”).  The 2005 LTIP provides stock options and restricted stock units, either alone or in combination, which vest over seven years at the rate of 10% per year during the first four years, and at the rate of 20% per year thereafter.  Exercise of the stock awards is subject to a performance condition that a company-specific subscriber goal is achieved by March 31, 2015.

 

Contingent compensation related to the 2005 LTIP will not be recorded in our financial statements unless and until management concludes achievement of the performance condition is probable.  Given the competitive nature of our business, small variations in subscriber churn, gross new subscriber addition rates and certain other factors can significantly impact subscriber growth.  Consequently, while it was determined that achievement of the goal was not probable as of September 30, 2010, that assessment could change at any time.

 

If all of the stock awards under the 2005 LTIP were vested and the goal had been met or if we had determined that achievement of the goal was probable during the nine months ended September 30, 2010, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below.  If the goal is met and there are unvested stock awards at that time, the vested amounts would be expensed immediately on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized ratably over the remaining vesting period.

 

 

 

2005 LTIP

 

 

 

Total

 

Vested
Portion

 

 

 

(In thousands)

 

DISH Network awards held by DISH Network employees

 

$

38,272

 

$

20,193

 

EchoStar awards held by DISH Network employees

 

7,493

 

3,944

 

Total

 

$

45,765

 

$

24,137

 

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

2008 LTIP.  During 2008, we adopted a long-term, performance-based stock incentive plan (the “2008 LTIP”).  The 2008 LTIP provides stock options and restricted stock units, either alone or in combination, which vest based on company-specific subscriber and financial goals.  Exercise of the stock awards is contingent on achieving these goals by December 31, 2015.

 

During 2009, we generated cumulative free cash flow in excess of $1.0 billion, which resulted in approximately 10% of the 2008 LTIP stock awards vesting.  We recorded non-cash, stock-based compensation expense as indicated in the table below.  Additional compensation related to the 2008 LTIP will be recorded based on management’s assessment of the probability of meeting the remaining performance goals.  If the remaining goals are probable of being achieved and stock awards vest, we will recognize the additional non-cash, stock-based compensation expense on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the term of this stock incentive plan.

 

Other Employee Performance Awards.  In addition to the above long-term, performance stock incentive plans, we have other stock awards that vest based on certain other company-specific subscriber and financial goals.  Exercise of these stock awards is contingent on achieving certain performance goals within specified time frames.  During the nine months ended September 30, 2010, we determined that certain performance goals were probable of achievement and, as a result, recorded non-cash, stock-based compensation expense as indicated in the table below.

 

Additional compensation related to these awards will be recorded based on management’s assessment of the probability of meeting the remaining performance goals.  If the remaining goals are probable of being achieved and stock awards vest, we will recognize the additional non-cash, stock-based compensation expense on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the term of this stock incentive plan.

 

Given the competitive nature of our business, small variations in subscriber churn, gross new subscriber addition rates and certain other factors can significantly impact subscriber growth.  Consequently, while it was determined that achievement of certain company-specific subscriber and financial goals was not probable as of September 30, 2010, that assessment could change at any time.

 

The non-cash stock-based compensation expense associated with these awards is as follows:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(In thousands)

 

2008 LTIP

 

$

781

 

$

578

 

$

2,392

 

$

1,935

 

Other employee performance awards

 

15

 

74

 

247

 

219

 

Total non-cash, stock-based compensation expense recognized for performance-based awards

 

$

796

 

$

652

 

$

2,639

 

$

2,154

 

 

Estimated Remaining Non-Cash, Stock-Based Compensation Expense

 

2008 LTIP

 

Other
Employee
Performance
Awards

 

 

 

(In thousands)

 

Remaining expense estimated to be recognized during 2010

 

$

564

 

$

83

 

Estimated contingent expense subsequent to 2010

 

27,655

 

41,588

 

Total estimated remaining expense over the term of the plan

 

$

28,219

 

$

41,671

 

 

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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Of the 22.2 million stock options and 1.7 million restricted stock units outstanding under our stock incentive plans as of September 30, 2010, the following awards were outstanding pursuant to our performance-based stock incentive plans:

 

 

 

As of September 30, 2010

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise Price

 

Performance-Based Stock Options

 

 

 

 

 

2005 LTIP

 

3,489,000

 

$

23.00

 

2008 LTIP

 

5,514,250

 

10.62

 

Other employee performance awards

 

2,000,000

 

18.41

 

Total

 

11,003,250

 

15.96

 

 

 

 

 

 

 

Restricted Performance Units and Other

 

 

 

 

 

2005 LTIP

 

470,161

 

 

 

2008 LTIP

 

45,750

 

 

 

Other employee performance awards

 

1,002,570

 

 

 

Total

 

1,518,481

 

 

 

 

Stock-Based Compensation

 

During the nine months ended September 30, 2010, we incurred $3 million of additional non-cash, stock-based compensation cost in connection with the Stock Option Adjustment discussed previously.  This amount is included in the table below.  Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the three and nine months ended September 30, 2010 and 2009 and was allocated to the same expense categories as the base compensation for such employees:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(In thousands)

 

Subscriber-related

 

$

227

 

$

241

 

$

910

 

$

747

 

General and administrative

 

2,889

 

1,041

 

11,416

 

7,810

 

Total non-cash, stock-based compensation

 

$

3,116

 

$

1,282

 

$

12,326

 

$

8,557

 

 

As of September 30, 2010, our total unrecognized compensation cost related to our non-performance based unvested stock awards was $22 million and includes compensation expense that we will recognize for EchoStar stock awards held by our employees as a result of the Spin-off.  This cost is based on an estimated future forfeiture rate of approximately 4.0% per year and will be recognized over a weighted-average period of approximately three years.  Share-based compensation expense is recognized based on stock awards ultimately expected to vest and is reduced for estimated forfeitures.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Changes in the estimated forfeiture rate can have a significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.

 

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Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Valuation

 

The fair value of each stock award for the three and nine months ended September 30, 2010 and 2009 was estimated at the date of the grant using a Black-Scholes option valuation model with the following assumptions:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Stock Options

 

2010

 

2009

 

2010

 

2009

 

Risk-free interest rate

 

1.50% - 1.71%

 

2.67% - 3.00%

 

1.50% - 2.89%

 

1.97% - 3.19%

 

Volatility factor

 

35.50% - 37.86%

 

33.10% - 34.00%

 

33.33% - 37.86%

 

29.72% - 34.00%

 

Expected term of options in years

 

5.4 - 6.4

 

6.2 - 6.7

 

5.4 - 7.5

 

6.0 - 7.3

 

Weighted-average fair value of options granted

 

$7.05 - $7.32

 

$7.37 - $7.74

 

$6.83 - $8.14

 

$3.86 - $7.74

 

 

In December 2009, we paid a $2.00 cash dividend per share on our outstanding Class A and Class B common stock.  We do not currently intend to pay additional dividends on our common stock and accordingly, the dividend yield percentage used in the Black-Scholes option valuation model is set at zero for all periods.  The Black-Scholes option valuation model was developed for use in estimating the fair value of traded stock options which have no vesting restrictions and are fully transferable.  Consequently, our estimate of fair value may differ from other valuation models.  Further, the Black-Scholes option valuation model requires the input of subjective assumptions.  Changes in the subjective input assumptions can materially affect the fair value estimate.  Therefore, we do not believe the existing models provide as reliable a single measure of the fair value of stock-based compensation awards as a market-based model would.

 

We will continue to evaluate the assumptions used to derive the estimated fair value of our stock options as new events or changes in circumstances become known.

 

10.       Commitments and Contingencies

 

Commitments

 

Guarantees

 

In connection with the Spin-off, we distributed certain satellite lease agreements to EchoStar and remained the guarantor under those capital leases for payments totaling approximately $300 million over the next five years.

 

In addition, during the third quarter 2009, EchoStar entered into a new satellite transponder service agreement for Nimiq 5 through 2024.  We sublease this capacity from EchoStar and also guarantee a certain portion of its obligation under this agreement through 2019.  As of September 30, 2010, the remaining obligation under this agreement was $564 million.

 

As of September 30, 2010, we have not recorded a liability on the balance sheet for any of these guarantees.

 

Contingencies

 

In connection with the Spin-off, we entered into a separation agreement with EchoStar, which provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation.  Under the terms of the separation agreement, EchoStar has assumed certain liabilities that relate to its business including certain designated liabilities for acts or omissions prior to the Spin-off.  Certain specific provisions govern intellectual property related claims under which, generally, EchoStar will only be liable for its acts or omissions following the Spin-off and we will indemnify EchoStar for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off as well as our acts or omissions following the Spin-off.

 

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Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Acacia

 

During 2004, Acacia Media Technologies (“Acacia”) filed a lawsuit against us and EchoStar in the United States District Court for the Northern District of California.  The suit also named DirecTV, Comcast, Charter, Cox and a number of smaller cable companies as defendants.  Acacia is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  The suit alleges infringement of United States Patent Nos. 5,132,992; 5,253,275; 5,550,863; 6,002,720; and 6,144,702, which relate to certain systems and methods for transmission of digital data.  On September 25, 2009, the District Court granted summary judgment to the defendants on invalidity grounds, and dismissed the action with prejudice.  On October 8, 2010, the Federal Circuit Court of Appeals affirmed the dismissal. The plaintiffs can appeal that decision to the United States Supreme Court.  We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe any of the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain user-friendly features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Broadcast Innovation, L.L.C.

 

During 2001, Broadcast Innovation, L.L.C. (“Broadcast Innovation”) filed a lawsuit against us, EchoStar, DirecTV, Thomson Consumer Electronics and others in United States District Court in Denver, Colorado.  Broadcast Innovation is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  The suit alleges infringement of United States Patent Nos. 6,076,094 (the ‘094 patent) and 4,992,066 (the ‘066 patent).  The ‘094 patent relates to certain methods and devices for transmitting and receiving data along with specific formatting information for the data.  The ‘066 patent relates to certain methods and devices for providing the scrambling circuitry for a pay television system on removable cards.  Subsequently, DirecTV and Thomson settled with Broadcast Innovation leaving us as the only defendant.

 

During 2004, the District Court issued an order finding the ‘066 patent invalid.  Also in 2004, the District Court found the ‘094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and Comcast.  In 2005, the United States Court of Appeals for the Federal Circuit overturned that finding of invalidity with respect to the ‘094 patent and remanded the Charter case back to the District Court.  During June 2006, Charter filed a reexamination request with the United States Patent and Trademark Office.  The District Court has stayed the Charter case pending reexamination, and our case has been stayed pending resolution of the Charter case.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe any of the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain user-friendly features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

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