e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER
31, 2008 |
OR
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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)
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Nevada
(State or other jurisdiction of incorporation or organization)
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88-0336997
(I.R.S. Employer Identification No.) |
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9601 South Meridian Boulevard
Englewood, Colorado
(Address of principal executive offices)
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80112
(Zip Code) |
Registrants telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which Registered |
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Class A common stock, $0.01 par value
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The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
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. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2008, the aggregate market value of Class A common stock held by non-affiliates of the Registrant was $5.9 billion based upon the closing price of the
Class A common stock as reported on the Nasdaq Global Select Market as of the close of business on that date.
As of February 20, 2009, the Registrants outstanding common stock consisted of 208,980,930 shares of Class A common stock and 238,435,208 shares of Class B common
stock, each $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the Registrants definitive Proxy Statement to be filed in connection with its 2009 Annual Meeting of Shareholders are incorporated by reference in Part
III.
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.
For further discussion see Item 1A. Risk Factors. The risks and uncertainties include, but are
not limited to, the following:
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Weakening economic conditions, including the recent downturn in financial markets and
reduced consumer spending, may adversely affect our ability to grow or maintain our
business. |
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If we do not improve our operational performance and customer satisfaction, our gross
subscriber additions may decrease and our subscriber churn may increase. |
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If declines in DISH Network gross subscriber additions, increases in subscriber churn
and higher subscriber acquisition and retention costs continue, our financial performance
will be further adversely affected. |
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We face intense and increasing competition from satellite television providers, cable
television providers, telecommunications companies, and companies that provide/facilitate
the delivery of video content via the internet. |
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We may be required to make substantial additional investments in order to maintain
competitive high definition, or HD, programming offerings. |
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Technology in our industry changes rapidly and could cause our services and products to
become obsolete. |
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We may need additional capital, which may not be available on acceptable terms or at
all, in order to continue investing in our business and to finance acquisitions and other
strategic transactions. |
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A portion of our investment portfolio is invested in securities that have experienced
limited or no liquidity in recent months and may not be immediately accessible to support
our financing needs. |
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AT&T Incs, or AT&T, termination of its distribution agreement with us may reduce
subscriber additions and increase churn if we are not able to develop alternative
distribution channels. |
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As technology changes, and in order to remain competitive, we may have to upgrade or
replace subscriber equipment and make substantial investments in our infrastructure. |
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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. |
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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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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. |
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We depend on third parties to solicit orders for DISH Network services that represent a
significant percentage of our total gross subscriber acquisitions. |
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We depend on others to provide the programming that we offer to our subscribers and, if
we lose access to this programming, our subscriber losses and subscriber churn may
increase. |
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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. |
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We depend on the Cable Act for access to programming from cable-affiliate programmers at
cost-effective rates. |
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We face increasing competition from other distributors of foreign language programming
that may limit our ability to maintain our foreign language programming subscriber base. |
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Our local programming strategy faces uncertainty because we may not be able to obtain
necessary retransmission consents from local network stations. |
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We are subject to significant regulatory oversight and changes in applicable regulatory
requirements could adversely affect our business. |
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We have made a substantial investment in certain 700 MHz wireless licenses and will be
required to make significant additional investments in order to commercialize these
licenses and recoup our investment. |
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We have substantial debt outstanding and may incur additional debt that could have a
dilutive effect on our outstanding equity capital or future earnings. |
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If we are unsuccessful in defending Tivos litigation against us, we could be prohibited
from offering digital video recorder, or DVR, technology that would in turn put us at a
significant disadvantage to our competitors. |
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We have limited owned and leased satellite capacity and satellite failures could adversely affect our business. |
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Our owned and leased satellites are subject to risks related to launch that could limit
our ability to utilize these satellites. |
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Our owned and leased satellites are subject to significant operational and atmospheric
risks that could limit our ability to utilize these satellites. |
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Our owned and leased satellites have minimum design lives of 12 years, but could fail or
suffer reduced capacity before then. |
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We currently have no commercial insurance coverage on the satellites we own and could
face significant impairment charges if one of our satellites fails. |
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We may have potential conflicts of interest with EchoStar due to our common ownership
and management. |
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We rely on key personnel and the loss of their services or the inability to attract and
retain them may negatively affect our businesses. |
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We are controlled by one principal stockholder who is also our Chairman, President and
Chief Executive Officer. |
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We are party to various lawsuits which, if adversely decided, could have a significant
adverse impact on our business, particularly lawsuits regarding intellectual property. |
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We may pursue acquisitions and other strategic transactions to complement or expand our
business which may not be successful and in which we may lose the entire value of our
investment. |
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Our business depends substantially on Federal Communications Commission, or FCC,
licenses that can expire or be revoked or modified and applications that may not be
granted. |
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We are subject to digital HD carry-one-carry-all requirements that cause capacity
constraints. |
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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 cannot assure you that there will not be deficiencies leading to material weaknesses
in our internal control over financial reporting. |
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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. In this connection, 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. DDBS refers to DISH DBS Corporation and its
subsidiaries, a wholly owned, indirect subsidiary of DISH Network.
iii
PART I
Item 1. BUSINESS
OVERVIEW
DISH Network Corporation is the nations third largest pay-TV provider, with approximately 13.678
million customers across the United States as of December 31, 2008. We were organized in 1995 as a
corporation under the laws of the State of Nevada and started offering DISH Network subscription
television services in March 1996.
Our common stock is publicly traded on the Nasdaq Global Select Market under the symbol DISH.
Our principal executive offices are located at 9601 South Meridian Boulevard, Englewood, Colorado
80112 and our telephone number is (303) 723-1000.
On January 1, 2008, we completed a tax-free 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) which was incorporated in Nevada on October 12, 2007. DISH
Network and EchoStar now 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.
Business Strategy
Our business strategy is to be the best provider of video services in the United States by
providing high-quality products, outstanding customer service, and great value.
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High-Quality Products. We offer a wide selection of local and national programming,
featuring more national and local HD channels than most pay-TV providers and the only
HD-only programming packages currently available in the industry. We have been a
technology leader in our industry, introducing award-winning DVRs, dual tuner receivers,
1080p video on demand, and external hard drives. We plan to leverage Slingbox
placeshifting technology and other technologies to maintain and improve our
competitiveness in the future. |
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Outstanding Customer Service. We strive to provide outstanding customer service by
improving the quality of the initial installation of subscriber equipment, improving the
reliability of our equipment, better educating our customers about our products and
services, and resolving customer problems promptly and effectively when they do arise. |
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Great Value. We have historically been viewed as the low-cost provider in the pay-TV
industry because we offer the lowest everyday prices available to consumers after
introductory promotions expire. We believe that a key factor to being a value leader in
the industry is our low cost structure which is an asset we continuously strive to
maintain. |
Products and Services
Programming. We provide programming which includes more than 280 basic video channels, 60 Sirius
Satellite Radio music channels, 30 premium movie channels, 35 regional and specialty sports
channels, 2,100 local channels, 200 Latino and international channels, and 50 channels of
pay-per-view content. Although we distribute over 2,100 local channels, a subscriber typically may
only receive the local channels available in the subscribers home market. As of December 31,
2008, we also provided local HD channels in over 90 markets representing 78% of U.S. TV households
as well as over 120 national HD channels.
1
Receiver Systems. Our subscribers receive programming via in-home equipment that includes a small
satellite dish, digital set-top receivers, and remote controls. Some of our advanced receiver
models feature DVRs, HD capability, and dual-tuners which allow independent viewing on two separate
televisions. Our newest receiver models are Internet-protocol compatible which allows consumers to
view movies and other content on their televisions via the Internet and a broadband connection. As
a result of the Spin-off, we rely on EchoStar to design and manufacture all of our new receivers
and certain related components. See Item 1A Risk Factors.
Content Delivery
Digital Broadcast Operations Centers. The principal digital broadcast operations centers we use
are EchoStars facilities located in Cheyenne, Wyoming and Gilbert, Arizona. We also use six
regional digital broadcast operations centers owned and operated by EchoStar that allow us to
maximize the use of the spot beam capabilities of certain owned and leased satellites. Programming
content is received at these centers by fiber or satellite and processed, compressed, encrypted and
then uplinked to satellites for delivery to consumers.
In connection with the Spin-off, we entered into an agreement pursuant to which EchoStar provides
broadcast services including teleport services such as transmission and downlinking, channel
origination services, and channel management services to us thereby enabling us to deliver
satellite television programming to subscribers. The broadcast agreement expires on December 31,
2009; however, we have the right, but not the obligation, to extend the agreement annually for
successive one-year periods for up to two additional years. We may terminate channel origination
services and channel management services for any reason and without any liability upon sixty days
written notice. However, if we terminate teleport services for a reason other than EchoStars
breach, we will need to pay EchoStar an amount equal to the balance of the expected cost of
providing such teleport services. The fees for the services provided under the broadcast agreement
are equal to EchoStars cost plus a fixed margin, which varies depending on the nature of the
services provided.
Satellites. Our DISH Network programming is currently delivered to customers using satellites that
operate in the Ku band portion of the microwave radio spectrum. The Ku-band is divided into two
spectrum segments. The portion of the Ku-band that allows the use of
higher power satellites 12.2 to 12.7 GHz over the United States is known as the Broadcast Satellite Service (BSS) band,
which is also referred to as the Direct Broadcast Satellite (DBS) band. The portion of the
Ku-band that requires lower power satellites 11.7 to 12.2 GHz over the United States is known
as the Fixed Satellite Service (FSS) band.
Most of our programming is currently delivered using DBS satellites. To accommodate the more
bandwidth-intensive HD programming and other needs, we continue to explore opportunities to expand
our satellite capacity through the acquisition of new spectrum, the launching of more
technologically advanced satellites, and the more efficient use of existing spectrum via, among
other things, better modulation and compression technologies.
We own or lease capacity on 14 satellites in geostationary orbit approximately 22,300 miles above
the equator. For further information concerning these satellites and satellite anomalies, please
see the table and discussion under Satellites below.
Conditional Access System. Our conditional access system secures our programming content using
encryption so that only paying customers can access our programming. We use microchips embedded in
credit card-sized access cards, called smart cards, or in security chips in the satellite
receiver, together referred to as security access devices, to limit access to programming
content.
Our signal encryption has been compromised in the past and may be compromised in the future even
though we continue to respond with significant investment in security
measures, such as security access device replacement programs and updates in security software, that are intended to make signal theft more
difficult. It has been our prior experience that security measures may be only effective for short
periods of time or not at all and that we remain susceptible to additional signal theft. We cannot
assure you that we will be successful in reducing or controlling theft of our programming content.
During the third quarter of 2008, we began implementing a plan to
replace our existing security access devices to re-secure our system, which is expected to take approximately nine to twelve months to complete.
We cannot assure you that we will be successful in reducing or controlling theft of our
programming content and we may incur additional costs in the future
if our security access device replacement
plan is not effective.
2
Distribution Channels
While we offer receiver systems and programming through direct sales channels, a majority of our
new subscriber acquisitions are generated through independent retailers such as small satellite
retailers, direct marketing groups, local and regional consumer electronics stores, nationwide
retailers, and telecommunications companies. In general, we pay these retailers a mix of up-front
incentives and monthly incentives for these sales. In addition, we partner with telecommunications
companies to bundle DISH Network programming with broadband and voice services on a single bill.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions over the past several years, accounting for approximately 17% of our gross
subscriber additions for the year ended December 31, 2008 and 19% of our gross subscriber additions
in the fourth quarter. This distribution relationship ended on January 31, 2009. AT&T has entered
into a new distribution relationship with DirecTV Group, Inc. (DirecTV). It may be difficult for
us to develop alternative distribution channels that will fully replace AT&T and if we are unable
to do so, our gross and net subscriber additions may be further impaired, our subscriber churn may
increase, and our results of operations may be adversely affected. In addition, approximately one
million of our current subscribers were acquired through our distribution relationship with AT&T
and subscribers acquired through this channel have historically churned at a higher rate than our
overall subscriber base. Although AT&T is not permitted to target these subscribers for transition
to another pay-TV service and we and AT&T are required to maintain bundled billing and cooperative
customer service for these subscribers, these subscribers may still churn at higher than historical
rates following termination of the AT&T distribution relationship.
Competition
As of December 31, 2008, our 13.678 million subscribers represent approximately 14% of pay-TV
subscribers in the United States. We face substantial competition from established pay-TV
providers and increasing competition from companies providing/facilitating the delivery of video
content via the internet.
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Other Direct Broadcast Satellite Operators. We compete directly with the DirecTV, the
largest satellite TV provider in the U.S. which had over 17.6 million subscribers at the
end of 2008, representing approximately 18% of pay-TV subscribers. |
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Cable Television Companies. We encounter substantial competition in the pay-TV industry
from numerous cable television companies that operate via franchise licenses across the
U.S. According to the National Cable & Telecommunications Associations 2008 Industry
Overview, 96% of the 129 million U.S. housing units are passed by cable. Approximately 97
million households subscribe to a pay-TV service and approximately 66% of pay-TV
subscribers receive their programming from a cable operator. Cable companies are typically
able to bundle their video services with broadband and voice services and many have
significant investments in companies that provide programming content. |
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Telecommunications Companies. Several large telecommunications companies have been
upgrading older copper wire lines with fiber optic lines in their larger markets. These
fiber optic lines provide high capacity bandwidth, enabling telecommunications companies to
offer increased HD video content that can be bundled with their broadband and voice
services. These fiber-based providers represented the fastest growing sector in the pay-TV
industry over the past year. |
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New and Emerging Technologies and Other Digital Media Providers. New and emerging
technologies also represent a potential competitive alternative for consumers considering
our services. We expect to face increasing competition from content providers who
distribute video directly to consumers over the Internet and companies that make products
that allow internet video content to be viewed on televisions and other devices. |
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Over-the-Air Broadcasters. In most areas of the United States, consumers can receive
over-the-air terrestrial video broadcasts typically ranging from four to fifteen channels. These
broadcasters provide local, network and syndicated programming free of charge. The upcoming
transition from analog to digital delivery will allow broadcasters to provide improved
signal quality, offer additional channels including content broadcast in HD, and explore new
business opportunities such as mobile video. |
Acquisition of New Subscribers
We incur significant up-front costs to acquire subscribers, including advertising, retailer
incentives, equipment, installation, and new customer promotions. While we attempt to recoup these
up-front costs over the lives of their subscription, there can be no assurance that we will. We
deploy business rules such as higher credit requirements and contractual commitments, and we strive
to provide outstanding customer service, to increase the likelihood of customers keeping their DISH
Network service over longer periods of time. Our subscriber acquisition costs may vary
significantly from period to period.
Advertising. We use print, radio and television media, on a local and national basis to motivate
potential subscribers to call DISH Network or visit our website.
Retailer Incentives. We pay retailers an upfront incentive for each new subscriber they bring to
DISH Network and, for certain retailers, we pay small monthly
incentives for up to 60 months provided,
among other things, the customer continuously subscribes to qualified programming.
Equipment. We incur significant upfront costs to provide our new subscribers with in-home
equipment, including advanced HD and DVR receivers, which most of our new subscribers lease from
us. While we seek to recoup such upfront equipment costs mostly through monthly fees, there can be
no assurance that we will be successful in achieving that objective. In addition, upon
deactivation of a subscriber we may refurbish and redeploy their equipment which lowers future
upfront costs. However, our ability to capitalize on these cost savings may be limited as
technological advances and consumer demand for new features may result in the returned equipment
becoming obsolete.
Installation. We incur significant upfront costs to install satellite dishes and receivers in the
homes of our new customers.
New Customer Promotions. We often offer free programming and/or promotional pricing during
introductory periods for new subscribers. While such promotional activities have an economic cost
and reduce our subscriber-related revenue, they are not included in our definitions of subscriber
acquisition costs or the SAC metric.
Customer Retention
We incur significant costs to retain our existing customers, mostly by upgrading their equipment to
HD and DVR receivers. As with our subscriber acquisition costs, our retention spending includes
the cost of equipment and installation. We also offer free programming and/or promotional pricing
for limited periods for existing customers in exchange for a commitment. A major component of our
retention efforts includes the installation of equipment for customers who move. Our subscriber
retention costs may vary significantly from period to period.
Customer Service
Customer Service Centers. We use both internally-operated and outsourced customer service centers
to handle calls from prospective and existing customers. We strive to answer customer calls
promptly and to resolve issues effectively on the first call. We intend to better use the
internet and other applications to provide our customers with more self-service capabilities over
time.
Installation and Other In-Home Service. High quality installations, upgrades, and in-home repairs
are critical to providing good customer service. Such in-home service is performed by both DISH
Network employees and a large network of our independent contractors.
Subscriber Management. We presently use, and depend on, CSG Systems International, Inc.s software
system for the majority of DISH Network subscriber billing and related functions.
4
New Business Opportunities
From time to time we evaluate opportunities for acquisitions and other strategic transactions that
may complement our current services and products, enhance our technical capabilities, improve or
sustain our competitive position, or offer growth opportunities. Future material investments or
acquisitions may require that we obtain additional capital or assume debt or other long-term
obligations.
We paid $712 million to acquire certain 700 MHz wireless licenses, which were granted to us by the
FCC in February 2009. We will be required to make significant additional investments or partner
with others to commercialize these licenses and satisfy FCC build-out requirements. Part or all of
our licenses may be terminated for failure to satisfy these requirements.
SATELLITES
Most of our programming is currently delivered using DBS satellites. We continue to explore
opportunities to expand our available satellite capacity through the use of other available
spectrum. Increasing our available spectrum is particularly important as more bandwidth intensive
HD programming is produced and in order to address new video and data applications consumers may
desire in the future. We utilize satellites in geostationary orbit approximately 22,300 miles
above the equator detailed in the table below.
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Original |
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Useful |
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Launch |
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Orbital |
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Life |
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Lease Term |
Satellites |
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Location |
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(Years) |
Owned: |
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EchoStar I |
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December 1995 |
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148 |
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12 |
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EchoStar V |
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September 1999 |
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129 |
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12 |
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EchoStar VII |
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February 2002 |
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119 |
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12 |
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EchoStar X |
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February 2006 |
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110 |
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12 |
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EchoStar XI |
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July 2008 |
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110 |
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12 |
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Leased from EchoStar: |
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EchoStar III |
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October 1997 |
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61.5 |
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12 |
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2 |
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EchoStar IV (1) |
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May 1998 |
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77 |
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12 |
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Month to month |
EchoStar VI |
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July 2000 |
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72.7 |
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12 |
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2 |
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EchoStar VIII (1) |
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August 2002 |
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77 |
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12 |
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2 |
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EchoStar IX |
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August 2003 |
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121 |
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12 |
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Month to month |
EchoStar XII |
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July 2003 |
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61.5 |
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10 |
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2 |
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AMC-15 (1) |
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December 2004 |
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105 |
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10 |
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Month to month |
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Leased from Other Third Party: |
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Anik F3 |
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April 2007 |
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118.7 |
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15 |
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15 |
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Ciel II (2) |
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December 2008 |
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129 |
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10 |
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10 |
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Under Construction: |
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Owned: |
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EchoStar XIV |
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Late 2009 |
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119 |
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12 |
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EchoStar XV |
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Late 2010 |
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119 |
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12 |
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Leased from EchoStar: |
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Nimiq 5 |
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Late 2009 |
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72.7 |
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10 |
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10 |
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QuetzSat-1 |
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2011 |
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77 |
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10 |
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10 |
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(1) |
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We currently do not lease the entire capacity available on these satellites. |
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(2) |
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Ciel II was placed in service in February 2009. |
5
Leased from EchoStar
The fees for the services provided under our short-term leases for capacity on satellites owned or
leased by EchoStar are based on spot market prices for similar satellite capacity and depend upon,
among other things, the orbital location of the satellite and the frequency on which the satellite
provides services. Generally, these satellite capacity agreements will terminate upon the earlier
of: (a) the end of life or replacement of the satellite; (b) the date the satellite fails; (c) the
date that the transponder on which service is being provided under
the agreement fails; and (d) January 1, 2010. Although, EchoStar has no obligation to provide us
transponder leasing after expiration, we generally anticipate
continuing to lease capacity on these satellites from EchoStar following the initial terms of these agreements,
and may enter into subsequent lease agreements if we determine that it is beneficial for us to do
so. However, if we are unable to extend these contracts on similar terms with EchoStar, or we are
unable to obtain similar contracts from third parties after the expiration date, there could be a
significant adverse effect on our business, results of operations and financial position.
Leased from Other Third Parties
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Anik F3. Anik F3, an FSS satellite, was launched and commenced commercial operation
during April 2007. This Telesat Canada (Telesat) satellite is equipped with 32 Ku-band
transponders, 24 C-band transponders and a small Ka-band payload. We have leased all of
the Ku-band capacity on Anik F3 for a period of 15 years. |
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Ciel II. Ciel II, a Canadian DBS satellite, was launched in December 2008 and commenced
commercial operation at the 129 degree orbital location in February 2009. This satellite,
which has both spot beam capabilities and the ability to provide service to the entire
continental United States (CONUS), will support our expansion of national and local HD
services and provide additional backup capacity. We have leased 100% of the capacity of
this satellite for a period of ten years. |
Satellites under Construction. As of December 31, 2008, we had entered into the following
contracts to construct new satellites which are contractually scheduled to be completed within the
next two years.
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EchoStar XIV. During 2007, we entered into a contract for the construction of EchoStar
XIV, a DBS satellite, which is expected to be completed during 2009. This satellite has
been designed with a combination of CONUS and spot beam capacity and could be used at
multiple orbital locations. EchoStar XIV will enable better bandwidth utilization, provide
back-up protection for our existing offerings, and could allow DISH Network to offer other
value-added services. |
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EchoStar XV. In April 2008, we entered into a contract for the construction of EchoStar
XV, a DBS satellite, which is expected to be completed during 2010. This satellite will
provide CONUS service and enable better bandwidth utilization, provide back-up protection
for our existing offerings, and could allow us to offer other value-added services. |
In addition, we have agreed to lease capacity on two satellites from EchoStar which are currently
under construction.
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Nimiq 5. In March 2008, we entered into a ten-year transponder service agreement with
EchoStar to lease 16 DBS transponders on Nimiq 5, a Canadian DBS satellite which is
expected to be completed during 2009. Upon expiration of the initial term, we have the
option to renew the transponder service agreement on a year-to-year basis through the
end-of-life of the Nimiq 5 satellite. Upon a launch failure, in-orbit failure or
end-of-life of the Nimiq 5 satellite, and in certain other circumstances, we have certain
rights to receive service from EchoStar on a replacement satellite. Nimiq 5 will provide CONUS service
and enable better bandwidth utilization, provide back-up protection for our existing offerings, and
could allow us to offer other value-added services. |
6
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QuetzSat-1. In November 2008, we entered into a ten-year transponder service agreement with
EchoStar to lease 24 DBS transponders on QuetzSat-1, a Mexican DBS satellite being constructed by SES
Latin America S.A. (SES). QuetzSat-1 is expected to be completed during 2011 and operate
at the 77 degree orbital location. Upon expiration of the initial term, we have the option
to renew the transponder service agreement on a year-to-year basis through the end-of-life
of the QuetzSat-1 satellite. Upon a launch failure, in-orbit failure or end-of-life of the
QuetzSat-1 satellite, and in certain other circumstances, we have certain rights to receive
service from EchoStar on a replacement satellite. QuetzSat-1 will enable better bandwidth
utilization, provide back-up protection for our existing offerings, and could allow DISH
Network to offer other value-added services. |
Satellite Anomalies
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.
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.
While we believe that overall our satellite fleet is generally in good condition, during 2008 and
prior periods, certain satellites in our fleet have experienced anomalies, some of which have had a
significant adverse impact on their commercial operation. There can be no assurance that future
anomalies will not cause further losses which could impact commercial operation, or the remaining
lives, of the satellites. See discussion of evaluation of impairment in Long-Lived Satellite
Assets below and Note 7 in the Notes to the Consolidated Financial Statements in Item 15 of this
Annual Report on Form 10-K. Recent developments with respect to our satellites are discussed
below.
Owned Satellites
EchoStar I. EchoStar I, a 7000 class satellite, designed and manufactured by Lockheed Martin
Corporation (Lockheed), is currently functioning properly in orbit. However, similar Lockheed
Series 7000 class satellites have experienced total in-orbit failures, including our own EchoStar
II, discussed below. While no telemetry or other data indicates EchoStar I would be expected to
experience a similar failure, Lockheed has been unable to conclude these and other Series 7000
satellites will not experience similar failures. EchoStar I, which is fully depreciated, can
operate up to 16 transponders at 130 watts per channel. During prior years, the satellite
experienced anomalies resulting in the possible loss of two solar array strings. The anomalies
have not impacted commercial operation of the satellite to date. Even if permanent loss of the two
solar array strings is confirmed, the satellite is not expected to be impacted since it is equipped
with a total of 104 solar array strings, only approximately 98 of which are required to assure full
power.
EchoStar II. During July 2008, our EchoStar II satellite experienced a failure that rendered the
satellite a total loss. EchoStar II had been operating primarily as a back-up satellite, but had
provided local network channel service to Alaska and six other small markets. All programming and
other services previously broadcast from EchoStar II were restored to Echostar I within several
hours after the failure. The $6 million book value of EchoStar II was written-off during the third
quarter 2008.
EchoStar V. EchoStar V was originally designed with a minimum 12-year design life. Momentum wheel
failures in prior years, together with relocation of the satellite between orbital locations,
resulted in increased fuel consumption, as previously disclosed. In addition, to date, EchoStar V
has experienced anomalies resulting in the loss of 13 solar array strings. These issues have not
impacted commercial operation of the satellite. However, during 2005, as a result of the momentum
wheel failures and the increased fuel consumption, we reduced the remaining estimated useful life
of the satellite. As of October 2008, EchoStar V was fully depreciated.
7
EchoStar VII. During 2006, EchoStar VII experienced an anomaly which resulted in the loss of a
receiver. Service was quickly restored through a spare receiver. These receivers process signals
sent from our uplink center for transmission back to earth by the satellite. The design life of
the satellite has not been affected and the anomaly is not expected to result in the loss of other
receivers on the satellite. However, there can be no assurance future anomalies will not cause
further receiver losses which could impact the useful life or commercial operation of the
satellite. In the event the spare receiver placed in operation following the 2006 anomaly also
fails, there would be no impact to the satellites ability to provide service to CONUS when
operating in CONUS mode. However, we would lose one-fifth of the spot beam capacity when operating
in spot beam mode.
EchoStar X. EchoStar X was designed with 49 spot beams which use up to 42 active 140 watt
traveling wave tube amplifiers (TWTAs) to provide
standard definition and HD local channels and other
programming to markets across the United States. During January 2008, the satellite experienced an
anomaly which resulted in the failure of one solar array circuit out of a total of 24 solar array
circuits, approximately 22 of which are required to assure full power for the original minimum
12-year design life of the satellite. The design life of the satellite has not been affected.
However, there can be no assurance future anomalies will not cause further losses, which could
impact commercial operation of the satellite or its useful life.
Leased Satellites
EchoStar III. EchoStar III was originally designed to operate a maximum of 32 DBS transponders in
CONUS at approximately 120 watts per channel, switchable to 16 transponders operating at over 230
watts per channel, and was equipped with a total of 44 TWTAs to provide redundancy. As a result of
past TWTA failures only 18 transponders are currently available for use. Due to redundancy
switching limitations and specific channel authorizations, we can only operate on 15 of our FCC
authorized frequencies at the 61.5 degree location. While we do not expect a large number of
additional TWTAs to fail in any year, and the failures have not reduced the original minimum
12-year design life of the satellite, it is likely that additional TWTA failures will occur from
time to time in the future, and such failures could further impact commercial operation of the
satellite.
EchoStar IV. EchoStar IV was originally designed to operate a maximum of 32 DBS transponders in
CONUS at approximately 120 watts per channel, switchable to 16 transponders operating at over 230
watts per channel. As a result of past TWTA failures, only six transponders are currently
available for use. There can be no assurance that further material degradation, or total loss of
use, of EchoStar IV will not occur in the immediate future.
EchoStar VI. EchoStar VI, which is being used as an in-orbit spare, was originally equipped with
108 solar array strings, approximately 102 of which are required to assure full power availability
for the operational life of the satellite. Prior to 2008, EchoStar VI experienced anomalies
resulting in the loss of 22 solar array strings, reducing the number of functional solar array
strings to 86. Although the operational life of the satellite has not been affected, commercial
operability has been reduced. The satellite was designed to operate 32 DBS transponders in CONUS
at approximately 125 watts per channel, switchable to 16 transponders operating at approximately
225 watts per channel. The power reduction resulting from the solar array failures currently
limits us to operation of a maximum of 25 transponders in standard power mode, or 12 transponders
in high power mode. The number of transponders to which power can be provided is expected to
decline in the future at the rate of approximately one transponder every three years.
EchoStar VIII. EchoStar VIII was designed to operate 32 DBS transponders in CONUS at approximately
120 watts per channel, switchable to 16 transponders operating at approximately 240 watts per
channel. EchoStar VIII also includes spot-beam technology. This satellite has experienced several
anomalies since launch, but none have reduced the operational life. However, there can be no
assurance that future anomalies will not cause further losses which could materially impact its
commercial operation, or result in a total loss of the satellite.
EchoStar IX. EchoStar IX was designed to operate 32 FSS transponders in CONUS at approximately 110
watts per channel, along with transponders that can provide services in the Ka-Band (a Ka-band
payload). The satellite also includes a C-band payload which is owned by a third party. Prior to
2008, EchoStar IX experienced anomalies resulting in the loss of three solar array strings and the
loss of one of its three momentum wheels, two of which are utilized during normal operations. A
spare wheel was switched in at the time. These anomalies have not impacted the commercial
operation of the satellite.
8
EchoStar XII. EchoStar XII was designed to operate 13 DBS transponders at 270 watts per channel in
CONUS mode, or 22 spot beams using a combination of 135 and 65 watt TWTAs. We currently operate
the satellite in spot beam/CONUS hybrid mode. EchoStar XII has a total of 24 solar array circuits,
approximately 22 of which are required to assure full power for the original minimum operational
life of the satellite. Prior to 2008, eight solar array circuits on EchoStar XII have experienced
anomalous behavior resulting in both temporary and permanent solar array circuit failures.
Although the design life of the satellite has not been affected, these circuit failures have
resulted in a reduction in power to the satellite which will preclude us from using the full
complement of transponders on EchoStar XII for the operational life of the satellite.
AMC-14. In connection with the Spin-off, we distributed our AMC-14 satellite lease agreement with
SES Americom (SES) to EchoStar with the intent to lease the entire capacity of the satellite from
EchoStar. During March 2008, AMC-14 experienced a launch anomaly and failed to reach its intended
orbit. SES subsequently declared the AMC-14 satellite a total loss due to a lack of viable options
to reposition the satellite to its proper geostationary orbit. We did not incur any financial
liability as a result of the AMC-14 satellite being declared a total loss.
Long-Lived Satellite Assets
We account for impairments of long-lived satellite assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). SFAS 144 requires a long-lived asset or asset group to be tested
for recoverability whenever events or changes in circumstance indicate that its carrying amount may
not be recoverable. Based on the guidance under SFAS 144, we evaluate our satellite fleet for
recoverability as one asset group. 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 (none of which caused a loss of service to subscribers for an
extended period) are not considered to be significant events that would require evaluation for
impairment recognition pursuant to the guidance under SFAS 144. 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.
GOVERNMENT REGULATIONS
We are subject to comprehensive regulation by the FCC for our domestic operations. We are also
regulated by other federal agencies, state and local authorities, the International
Telecommunication Union (ITU) and certain international
governments. Depending upon the circumstances, noncompliance with legislation
or regulations promulgated by these entities could result in suspension or revocation of our
licenses or authorizations, the termination or loss of contracts or the imposition of contractual
damages, civil fines or criminal penalties.
The following summary of regulatory developments and legislation in the United States is not
intended to describe all present and proposed government regulation and legislation affecting the
video programming distribution industry. Government regulations that are currently the subject of
judicial or administrative proceedings, legislative hearings or administrative proposals could
change our industry to varying degrees. We cannot predict either the outcome of these proceedings
or any potential impact they might have on the industry or on our operations.
9
FCC Regulation under the Communications Act
FCC Jurisdiction over our Operations. The Communications Act gives the FCC broad authority to
regulate the operations of satellite companies. Specifically, the Communications Act gives the FCC
regulatory jurisdiction over the following areas relating to communications satellite operations:
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the assignment of satellite radio frequencies and orbital locations; |
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licensing of satellites, earth stations, the granting of related authorizations, and
evaluation of the fitness of a company to be a licensee; |
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approval for the relocation of satellites to different orbital locations or the
replacement of an existing satellite with a new satellite; |
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ensuring compliance with the terms and conditions of such assignments and
authorizations, including required timetables for construction and operation of
satellites and other due diligence requirements; |
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avoiding interference with other radio frequency emitters; and |
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ensuring compliance with other applicable provisions of the Communications Act and
FCC rules and regulations governing the operations of satellite communications
providers and multi-channel video distributors. |
In order to obtain FCC satellite licenses and authorizations, satellite operators must satisfy
strict legal, technical and financial qualification requirements. Once issued, these licenses and
authorizations are subject to a number of conditions including, among other things, satisfaction of
ongoing due diligence obligations, construction milestones, and various reporting requirements.
Overview of Our Satellites and FCC Authorizations. Our satellites are located in orbital
positions, or slots, that are designated by their western longitude. An orbital position describes
both a physical location and an assignment of spectrum in the applicable frequency band. Each DBS
orbital position has 500 MHz of available Ku-band spectrum that is divided into 32 frequency
channels. Through digital compression technology, we can currently transmit between nine and 13
standard definition digital video channels per DBS frequency channel. Several of our satellites
also include spot-beam technology which enables us to increase the number of markets where we
provide local channels, but reduces the number of video channels that could otherwise be offered
across the entire United States.
The FCC has licensed us to operate a total of 82 DBS frequencies at the following orbital
locations:
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21 DBS frequencies at the 119 degree orbital location, capable of providing
service to CONUS; |
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29 DBS frequencies at the 110 degree orbital location, capable of providing
service to CONUS; and |
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32 DBS frequencies at the 148 degree orbital location, capable of providing
service to the Western United States. |
In addition, we currently lease or have entered into agreements to lease capacity on satellites
using the following spectrum at the following orbital locations:
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500 MHz of Ku-band FSS spectrum that is divided into 32 frequency channels
(each of which is capable of transmitting between five and eight standard
definition digital video channels) at the 118.7 degree orbital location, which is
a Canadian FSS slot that is capable of providing service to the United States,
Alaska and Hawaii; |
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32 DBS frequencies at the 129 degree orbital location, which a Canadian DBS
slot that is capable of providing service to most of the United States; |
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32 DBS frequencies at the 61.5 degree orbital location, capable of providing
service to most of the United States; |
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24 DBS frequencies at the 77 degree orbital location, which is a Mexican DBS
slot that is capable of providing service to most of the United States and Mexico;
and |
10
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16 DBS frequencies at the 72.7 degree orbital location, which is a Canadian DBS
slot that is capable of providing service to the United States. |
We also lease occasional-use FSS capacity from EchoStar on satellites located at the 121 and 105
degree orbital locations.
700 MHz Spectrum. We paid $712 million to acquire certain 700 MHz wireless licenses, which were
granted to us by the FCC in February 2009. We will be required to make significant additional
investments or partner with others to commercialize these licenses and satisfy FCC build-out
requirements. Part or all of our licenses may be terminated if we fail to satisfy these
requirements.
Duration of our DBS Satellite Licenses. Generally speaking, all of our satellite licenses are
subject to expiration unless renewed by the FCC. The term of each of our DBS licenses is ten
years. Our licenses are currently set to expire at various times. In addition, our special
temporary authorizations are granted for periods of only 180 days or less, subject again to
possible renewal by the FCC.
Opposition and other Risks to our Licenses. Several third parties have opposed, and we expect them
to continue to oppose, some of our FCC satellite authorizations and pending requests to the FCC for
extensions, modifications, waivers and approvals of our licenses. In addition, we may not have
fully complied with all of the FCC reporting, filing and other requirements in connection with our
satellite authorizations. Consequently, it is possible the FCC could revoke, terminate, condition
or decline to extend or renew certain of our authorizations or licenses.
FCC Actions Affecting our Licenses and Applications. A number of our other applications have been
denied or dismissed without prejudice by the FCC, or remain pending. We cannot be sure that the
FCC will grant any of our outstanding applications, or that the authorizations, if granted, will
not be subject to onerous conditions. Moreover, the cost of building, launching and insuring a
satellite can be as much as $300 million or more, and we cannot be sure that we will be able to
construct and launch all of the satellites for which we have requested authorizations. The FCC has also imposed a bond requirement for up to $3 million for each of our fixed satellite
services satellite licenses, all or part of which would be forfeited by a licensee that does not
meet its diligence milestones for a particular satellite.
4.5 Degree Spacing Tweener Satellites. The FCC has proposed to allow so-called tweener DBS
operations DBS satellites operating from orbital locations 4.5 degrees (half of the usual nine
degrees) away from other DBS satellites. The FCC has already granted authorizations to Spectrum
Five and EchoStar Corporation for tweener satellites at the 114.5 and 86.5 degree orbital
locations, respectively. Certain tweener operations, as proposed, could cause harmful interference
into our service and constrain our future operations. The FCC has not completed its rulemaking on
the operating and service rules for tweener satellites.
Interference from Other Services Sharing Satellite Spectrum. The FCC has adopted rules that allow
non-geostationary orbit fixed satellite services to operate on a co-primary basis in the same
frequency band as DBS and Ku-band-based fixed satellite services. The FCC has also authorized the
use of terrestrial communication services (MVDDS) in the DBS band. MVDDS licenses were auctioned
in 2004. Despite regulatory provisions to protect DBS operations from harmful interference, there
can be no assurance that operations by other satellites or terrestrial communication services in
the DBS band will not interfere with our DBS operations and adversely affect our business.
International Satellite Competition and Interference. DirecTV has obtained FCC authority to
provide service to the United States from a Canadian DBS orbital slot, and EchoStar Corporation has
obtained authority to provide service to the United States from both a Mexican and a Canadian DBS
orbital slot. Further, we have also received authority to do the same from a Canadian DBS orbital slot
at 129 degrees and a Canadian FSS orbital slot at 118.7 degrees. The possibility that the FCC will allow service to the U.S. from additional
foreign slots may permit additional competition against us from other satellite providers. It may
also provide a means by which to increase our available satellite capacity in the United States.
In addition, a number of administrations, such as Great Britain and the Netherlands, have requested
to add orbital locations serving the U.S. close to our licensed slots. Such operations could cause
harmful interference to our satellites and constrain our future operations at those slots if such
tweener operations are approved by the FCC.
11
Rules Relating to Broadcast Services. The FCC imposes different rules for subscription and
broadcast services. We believe that because we offer a subscription programming service, we are
not subject to many of the regulatory obligations imposed upon broadcast licensees. However, we
cannot be certain whether the FCC will find in the future that we must comply with regulatory
obligations as a broadcast licensee, and certain parties have requested that we be treated as a
broadcaster. If the FCC determines that we are a broadcast licensee, it could require us to comply
with all regulatory obligations imposed upon broadcast licensees, which are generally subject to
more burdensome regulation than subscription television service providers.
Public Interest Requirements. Under a requirement of the Cable Act, the FCC imposed public
interest requirements on DBS licensees. These rules require us to set aside four percent of our
channel capacity exclusively for noncommercial programming for which we must charge programmers
below-cost rates and for which we may not impose additional charges on subscribers. This could
displace programming for which we could earn commercial rates and could adversely affect our
financial results. We cannot be sure that if the FCC were to review our methodology for processing
public interest carriage requests, computing the channel capacity we must set aside or determining
the rates that we charge public interest programmers, it would find them in compliance with the
public interest requirements.
Plug and Play. The FCC has adopted the so-called plug and play standard for compatibility
between digital television sets and cable systems. That standard was developed through
negotiations involving the cable and consumer electronics industries, but not us. The FCC is
considering various proposals to establish two-way digital cable plug and play rules. That
proceeding also asks about means to incorporate all pay-TV providers into its plug and play
rules. The cable industry and consumer electronics companies have reached a tru2way commercial
agreement to resolve many of the outstanding issues in this docket. We cannot predict whether the
FCC will impose rules on our DBS operations that are based on cable system architecture or the
private cable/consumer electronics tru2way commercial arrangement. Complying with the separate
security and other plug and play requirements would require potentially costly modifications to
our set-top boxes and operations. We cannot predict the timing or outcome of this FCC proceeding.
Digital HD Must Carry Requirement. We are subject to digital HD carry-one-carry-all requirements
that will cause capacity constraints. In order to provide any full-power local broadcast signal in
any market, we are required to retransmit all qualifying broadcast signals in that market
(carry-one-carry-all). The digital transition requires all full-power broadcasters to cease
transmission using analog signals and switch over to digital signals by June 12, 2009. The switch
to digital provides broadcasters significantly greater capacity to provide high definition and
multicast programming. In March 2008, the FCC adopted new digital carriage rules that require DBS
providers to phase in carry-one-carry-all obligations with respect to the carriage of full-power
broadcasters HD signals by February 2013 in HD local markets. The carriage of additional HD
signals on our DBS system could cause us to experience significant capacity constraints and limit
the number of local markets that we can serve. Preparations for the digital transition also
required resource-intensive efforts by us to convert broadcast signals switching from analog to
digital at the hundreds of local facilities we utilize across the nation to receive local channels
and transmit them to our uplink facilities.
In addition, the FCC is now considering whether to require DBS providers to carry broadcast
stations in both standard definition and high definition starting in 2010, in conjunction with the
phased-in HD carry-one-carry-all requirements adopted by the FCC. If we were required to carry
multiple versions of each broadcast station, we would have to dedicate more of our finite satellite
capacity to each broadcast station, which may force us to reduce the number of local markets served
and limit our ability to meet competitive needs. We cannot predict the outcome or timing of that
proceeding.
Retransmission Consent. The Satellite Home Viewer Improvement Act (SHVIA) generally gives
satellite companies a statutory copyright license to retransmit local broadcast channels by
satellite back into the market from which they originated, subject to obtaining the retransmission
consent of the local network station. If we fail to reach retransmission consent agreements with
broadcasters, we cannot carry their signals. This could have an adverse effect on our strategy to
compete with cable and other satellite companies which provide local signals. While we have been
able to reach retransmission consent agreements with most local network stations in markets where
we currently offer local channels by satellite, roll-out of local channels in additional cities and
in high definition will require that we obtain additional retransmission agreements. We cannot be
sure that we will secure
12
these agreements or that we will secure new agreements upon the expiration of our current
retransmission consent agreements, some of which are short-term.
Dependence on Cable Act for Program Access. We purchase a large percentage of our programming from
cable-affiliated programmers. The Cable Acts provisions prohibiting exclusive contracting
practices with cable affiliated programmers were extended for another five-year period in September
2007. Cable companies have appealed the FCCs decision. We cannot predict the outcome or timing
of that litigation. Any change in the Cable Act and the FCCs rules that permit the cable industry
or cable-affiliated programmers to discriminate against competing businesses, such as ours, in the
sale of programming could adversely affect our ability to acquire cable-affiliated programming at
all or to acquire programming on a cost-effective basis. Further, the FCC generally has not shown
a willingness to enforce the program access rules aggressively. As a result, we may be limited in
our ability to obtain access on nondiscriminatory terms to programming from programmers that are
affiliated with the cable system operators.
In addition, affiliates of certain cable providers have denied us access to sports programming they
feed to their cable systems terrestrially, rather than by satellite. To the extent that cable
operators deliver additional programming terrestrially in the future, they may assert that this
additional programming is also exempt from the program access laws. These restrictions on our
access to programming could materially and adversely affect our ability to compete in regions
serviced by these cable providers.
MDU Exclusivity. The FCC has found that cable companies should not be permitted to have exclusive
relationships with multiple dwelling units (e.g., apartment buildings). That decision is under
appeal, and we cannot predict the timing or outcome of that litigation. Nonetheless, the FCC has
now asked whether DBS and Private Cable Operators (PCOs) should be permitted to have similar
relationships with multiple dwelling units. If the cable exclusivity ban were to be extended to
DBS providers, our ability to serve these types of buildings and communities would be adversely
affected.
The International Telecommunication Union
Our DBS system also must conform to the ITU broadcasting satellite service plan for Region 2 (which
includes the United States). If any of our operations are not consistent with this plan, the ITU
will only provide authorization on a non-interference basis pending successful modification of the
plan or the agreement of all affected administrations to the non-conforming operations.
Accordingly, unless and until the ITU modifies its broadcasting satellite service plan to include
the technical parameters of DBS applicants operations, our satellites, along with those of other
DBS operators, must not cause harmful electrical interference with other assignments that are in
conformance with the plan. Further, DBS satellites are not presently entitled to any protection
from other satellites that are in conformance with the plan.
Export Control Regulation
The delivery of satellites and related technical information for the purpose of launch by foreign
launch services providers is subject to strict export control and prior approval requirements.
PATENTS AND TRADEMARKS
Many entities, including some of our competitors, have or may in the future obtain patents and
other intellectual property rights that cover or affect products or services related to those that
we offer. In general, if a court determines that one or more of our products infringes on
intellectual property held by others, we may be required to cease developing or marketing those
products, to obtain licenses from the holders of the intellectual property at a material cost, or
to redesign those products in such a way as to avoid infringing the patent claims. If those
intellectual property rights are held by a competitor, we may be unable to obtain the intellectual
property at any price, which could adversely affect our competitive position.
We may not be aware of all intellectual property rights that our products may potentially infringe.
In addition, patent applications in the United States are confidential until the Patent and
Trademark Office issues a patent and, accordingly, our products may infringe claims contained in
pending patent applications of which we are not aware.
13
Further, the process of determining definitively whether a claim of infringement is valid often
involves expensive and protracted litigation, even if we are ultimately successful on the merits.
We cannot estimate the extent to which we may be required in the future to obtain intellectual
property licenses or the availability and cost of any such licenses. Those costs, and their impact
on our results of operations, could be material. Damages in patent infringement cases may also
be trebled in certain circumstances. To the extent that we are required to pay
unanticipated royalties to third parties, these increased costs of doing business could negatively
affect our liquidity and operating results. We are currently defending multiple patent
infringement actions. We cannot be certain the courts will conclude these companies do not own the
rights they claim, that our products do not infringe on these rights, that we would be able to
obtain licenses from these persons on commercially reasonable terms or, if we were unable to obtain
such licenses, that we would be able to redesign our products to avoid infringement. See Item 3
Legal Proceedings.
ENVIRONMENTAL REGULATIONS
We are subject to the requirements of federal, state, local and foreign environmental and
occupational safety and health laws and regulations. These include laws regulating air emissions,
water discharge and waste management. We attempt to maintain compliance with all such
requirements. We do not expect capital or other expenditures for environmental compliance to be
material in 2009 or 2010. Environmental requirements are complex, change frequently and have
become more stringent over time. Accordingly, we cannot provide assurance that these requirements
will not change or become more stringent in the future in a manner that could have a material
adverse effect on our business.
SEGMENT REPORTING DATA AND GEOGRAPHIC AREA DATA
For operating segment and principal geographic area data for 2008, 2007 and 2006 see Note 16 in the
Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
EMPLOYEES
We had approximately 26,000 employees at December 31, 2008, most of whom are located in the
United States. We generally consider relations with our employees to be good.
Although a total of approximately 18 employees in two of our field offices have voted to unionize,
we are not currently a party to any collective bargaining agreements. However, we are currently
negotiating collective bargaining agreements at these offices.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act and accordingly file our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements and other information with the Securities and Exchange Commission (SEC). The public
may read and copy any materials filed with the SEC at the SECs Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information
on the operation of the Public Reference Room. As an electronic filer, our public filings are also
maintained on the SECs Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The address of that
website is http://www.sec.gov.
14
WEBSITE ACCESS
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act also may be accessed free of charge through our website as soon as reasonably practicable after
we have electronically filed such material with, or furnished it to, the SEC. The address of that
website is http://www.dishnetwork.com.
We have adopted a written code of ethics that applies to all of our directors, officers and
employees, including our principal executive officer and senior financial officers, in accordance
with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange
Commission promulgated thereunder. Our code of ethics is available on our corporate website at
http://www.dishnetwork.com. In the event that we make changes in, or provide waivers of,
the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose
these events on our website.
EXECUTIVE OFFICERS OF THE REGISTRANT
(furnished in accordance with Item 401 (b) of Regulation S-K, pursuant to General Instruction G(3)
of Form 10-K)
The following table sets forth the name, age and offices with DISH Network of each of our executive
officers, the period during which each executive officer has served as such, and each executive
officers business experience during the past five years:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
Charles W. Ergen
|
|
|
56 |
|
|
Chairman, President, Chief Executive Officer and Director |
W. Erik Carlson
|
|
|
39 |
|
|
Executive Vice President, Operations |
Thomas A. Cullen
|
|
|
49 |
|
|
Executive Vice President, Corporate Development |
James DeFranco
|
|
|
56 |
|
|
Executive Vice President, Sales & Distribution,
Travel/Events and Marketing, and Director |
R. Stanton Dodge
|
|
|
41 |
|
|
Executive Vice President, General Counsel and Secretary |
Bernard L. Han
|
|
|
44 |
|
|
Executive Vice President and Chief Financial Officer |
Michael Kelly
|
|
|
47 |
|
|
Executive Vice President, Commercial and Business Development |
Carl E. Vogel
|
|
|
51 |
|
|
Vice Chairman and Director |
Stephen W. Wood
|
|
|
50 |
|
|
Executive Vice President, Chief Human Resources Officer |
Charles W. Ergen. Mr. Ergen has been Chairman of the Board of Directors and Chief Executive
Officer of DISH Network since its formation and, during the past five years, has held various
executive officer and director positions with DISH Networks subsidiaries. Mr. Ergen also serves
as Chairman, President and Chief Executive Officer of EchoStar. Mr. Ergen was appointed President
of DISH Network in February 2008. Mr. Ergen, along with his spouse, Cantey Ergen, and James
DeFranco, was a co-founder of DISH Network in 1980.
W. Erik Carlson. Mr. Carlson was named Executive Vice President, Operations in February 2008 and
is responsible for overseeing our home and commercial installations, customer service centers,
internal customer billing and equipment retrieval and refurbishment operations. Mr. Carlson
previously was Senior Vice President of Retail Services, a position he held since mid-2006. He
joined DISH Network in 1995 and has held progressively larger operating roles over the years.
Thomas A. Cullen. Mr. Cullen has served as our Executive Vice President, Corporate Development
since December 2006. Before joining DISH Network, Mr. Cullen served as President of TensorComm, a
venture-backed wireless technology company. From August 2003 to April 2005, Mr. Cullen was with
Charter Communications Inc. (Charter), serving as Senior Vice President, Advanced Services and
Business Development from August 2003 until he was promoted to Executive Vice President in August
2004. From January 2001 to October 2002, Mr. Cullen was General Partner of Lone Tree Capital, a
private equity partnership focused on investment opportunities in the technology and communications
sector.
15
James DeFranco. Mr. DeFranco is one of our Executive Vice Presidents and has been one of our vice
presidents and a member of the Board since our formation. During the past five years he has held
various executive officer and director positions with our subsidiaries. Mr. DeFranco co-founded
DISH Network with Charles W. Ergen and Mr. Ergens spouse, Cantey Ergen, in 1980.
R. Stanton Dodge. Mr. Dodge is currently the Executive Vice President, General Counsel and
Secretary of DISH Network and is responsible for all legal and government affairs for DISH Network and its
subsidiaries. Mr. Dodge also serves as EchoStars Executive Vice President, General Counsel and
Secretary and is responsible for all legal and government affairs of EchoStar and its subsidiaries pursuant to a
management services agreement between DISH Network and EchoStar that was entered into in connection
with the Spin-off of EchoStar from DISH Network. Since joining DISH Network in November 1996, he
has held various positions of increasing responsibility in DISH Networks legal department.
Bernard L. Han. Mr. Han was named Executive Vice President and Chief Financial Officer of DISH
Network in September 2006 and is currently responsible for all accounting, finance and information
technology functions of DISH Network. Mr. Han also serves as EchoStars Executive Vice President
and Chief Financial Officer pursuant to a management services agreement between DISH Network and
EchoStar that was entered into in connection with the Spin-off of EchoStar from DISH Network. From
October 2002 to May 2005, Mr. Han served as Executive Vice President and Chief Financial Officer of
Northwest Airlines, Inc. Prior to October 2002, he held positions as Executive Vice President and
Chief Financial Officer and Senior Vice President and Chief Marketing Officer at America West
Airlines, Inc.
Michael Kelly. Mr. Kelly is currently the Executive Vice President, Commercial and Business
Development. Mr. Kelly served as the Executive Vice President of DISH Network Service L.L.C. and
Customer Service from February 2004 until December 2005 and as Senior Vice President of DISH
Network Service L.L.C. from March 2001 until February 2004. Mr. Kelly joined DISH Network in March
2000 as Senior Vice President of International Programming following our acquisition of Kelly
Broadcasting Systems, Inc.
Carl E. Vogel. Mr. Vogel has served on the Board since May 2005 and is currently our Vice
Chairman. Mr. Vogel also serves as EchoStars Vice Chairman of the board of directors and as an
advisor pursuant to a management services agreement between DISH Network and EchoStar that was
entered into in connection with the Spin-off of EchoStar from DISH Network. Mr. Vogel became a
full-time employee in June 2005 and served as our President and Vice Chairman from September 2006
until February 2008. From 2001 until 2005, Mr. Vogel served as the President and CEO of Charter
Communications Inc., a publicly-traded company providing cable television and broadband services to
approximately six million customers. Prior to joining Charter, Mr. Vogel worked as an executive
officer in various capacities for companies affiliated with Liberty Media Corporation. Mr. Vogel
was one of our executive officers from 1994 until 1997, including serving as our President from
1995 until 1997. Mr. Vogel is also currently serving on the Board of Directors and Audit Committee
of Shaw Communications, Inc.
Stephen W. Wood. Mr. Wood has served as our Executive Vice President, Human Resources since May
2006 and is responsible for all human resource functions of DISH Network and its subsidiaries.
Prior to joining DISH Network, Mr. Wood served as an Executive Vice President for Gate Gourmet
International from 2004 to 2006 and practiced employment and labor law in Richmond, Virginia with
McGuire Woods LLP, as well as held executive Human Resources positions at Cigna Healthcare from
2001 to 2004 and Advantica Restaurant Group from 1993 to 2001.
There are no arrangements or understandings between any executive officer and any other person
pursuant to which any executive officer was selected as such. Pursuant to the Bylaws of DISH
Network, executive officers serve at the discretion of the Board of Directors.
16
Item 1A. RISK FACTORS
The risks and uncertainties described below are not the only ones facing us. Additional risks and
uncertainties that we are unaware of or that we currently believe to be immaterial also may become
important factors that affect us.
If any of the following events occur, our business, financial condition or results of operations
could be materially and adversely affected.
Weakening economic conditions, including the recent downturn in financial markets and reduced
consumer spending, may adversely affect our ability to grow or maintain our business.
Our ability to grow or maintain our business may be adversely affected by weakening economic
conditions, including the effect of wavering consumer confidence, rising unemployment, tight credit
markets, declines in financial markets, falling home prices and other factors. In particular, the
recent economic downturn could result in the following:
|
|
|
Fewer Subscriber Additions and Increased Churn. We could continue to face fewer gross
subscriber additions and increased churn due to, among other things: (i) the downturn in
the housing market in the United Stares combined with lower discretionary spending; (ii)
increased price competition for our products and services; and (iii) the potential loss of
retailers, who generate a significant portion of our new subscribers, because many of them
are small businesses that are more susceptible to the negative effects of a weak economy.
In particular, subscriber churn may increase with respect to subscribers who purchase our
lower tier programming packages and who may be more sensitive to deteriorating economic
conditions. |
|
|
|
|
Lower ARPU. Our ARPU could be negatively impacted by more aggressive introductory
offers. Furthermore, due to lower levels of disposable income, our customers may downgrade
to lower cost programming packages and elect not to purchase premium services or pay per
view movies. |
|
|
|
|
Higher Subscriber Acquisition and Retention Costs. Our profits may be adversely
affected by increased subscriber acquisition and retention costs necessary to attract and
retain subscribers in a more difficult economic environment. |
|
|
|
|
Increased Impairment Charges. We may be more likely to incur impairment charges or
losses related to our debt and equity investments due to the significant deterioration of
the overall debt and equity markets. A prolonged downturn could further reduce the value
of certain assets including, among other things, satellites and FCC licenses, and thus
increase the possibility of impairment charges related to these investments as well. |
If we do not improve our operational performance and customer satisfaction, our gross subscriber
additions may decrease and our subscriber churn may increase.
If we are unable to improve our operational performance and customer satisfaction, we may
experience a decrease in gross subscriber additions and an increase in churn, which could have a
material adverse effect on our business, financial condition and results of operations. In order
to improve our operations, we have made and expect that we will continue to make material
investments in staffing, training, information technology systems, and other initiatives, primarily
in our call center and in-home service businesses. We cannot, however, be certain that our
increased spending will ultimately be successful in yielding operational improvements. In the
meantime, we may continue to incur higher costs as a result of both our operational inefficiencies
and increased spending.
17
If declines in DISH Network gross subscriber additions, increases in subscriber churn and higher
subscriber acquisition and retention costs continue, our financial performance will be further
adversely affected.
During the fourth quarter of 2008, we experienced a net loss of 102,000 DISH Network subscribers.
We believe this net loss resulted from weaker economic conditions, aggressive subscriber
acquisition and retention promotions by our competition, heavy marketing by our competition, the
growth of fiber-based and Internet-based video providers, signal theft and other forms of fraud,
and operational inefficiencies at DISH Network. We have not always met our own standards for
performing high quality installations, effectively resolving customer issues when they arise,
answering customer calls in an acceptable timeframe, effectively
communicating with our customer
base, reducing calls driven by the complexity of our business, improving the reliability of certain
systems and customer equipment, and aligning the interests of certain
third party retailers and
installers to provide high quality service.
Most of these factors have affected both gross new subscriber additions as well as existing
subscriber churn. Our future gross subscriber additions and subscriber churn may continue to be
negatively impacted by these factors, which could in turn adversely affect our revenue growth and
results of operations.
We may incur increased costs to acquire new and retain existing subscribers. Our subscriber
acquisition costs could increase as a result of increased spending for advertising and the
installation of more HD and DVR receivers, which are generally more expensive than other receivers.
Meanwhile, retention costs may be driven higher by a faster rate of upgrading existing
subscribers equipment to HD and DVR receivers. Additionally, certain of our promotions allow
consumers with relatively lower credit scores to become subscribers and these subscribers typically
churn at a higher rate.
Our subscriber acquisition costs and our subscriber retention costs can vary significantly from
period to period and can cause material variability to our net income (loss) and free cash flow.
Any material increase in subscriber acquisition or retention costs from current levels could have a
material adverse effect on our business, financial position and results of operations.
We face intense and increasing competition from satellite television providers, cable television
providers, telecommunications companies, and companies that provide/facilitate the delivery of
video content via the internet.
Our business is focused on providing pay-TV services and we have traditionally competed against
satellite and cable television providers. Many of these competitors offer video services bundled
with broadband and video services, HD offerings and video on demand services that consumers may
find attractive.
In addition, DirecTVs satellite receivers and services are offered through a significantly greater
number of consumer electronics stores than ours. As a result of this and other factors, our
services are less known to consumers than those of DirecTV. Due to this relative lack of consumer
awareness and other factors, we are at a competitive marketing disadvantage compared to DirecTV.
DirecTV also offers exclusive programming that may be attractive to prospective subscribers, and
may have access to discounts on programming not available to us.
Competition has intensified in recent quarters with the rapid growth of fiber-based pay-TV services
offered by telecommunications companies such as Verizon and AT&T. These telecommunications
companies are upgrading their older copper wire telephone lines with high-bandwidth fiber optic
lines in larger markets. These fiber optic lines provide significantly greater capacity, enabling
the telecommunications companies to offer substantial HD programming content.
In addition, the upcoming transition from analog to digital delivery will allow broadcasters to
provide improved signal quality, offer additional channels including content broadcast in HD, and
explore new business opportunities such as mobile video.
We also expect to face increasing competition from companies who distribute/facilitate video
services to consumers over the Internet. This growth of viable video alternatives over the
Internet could negatively impact consumer demand for our products and services.
18
This increasingly competitive environment may require us to increase subscriber acquisition and
retention spending or accept lower subscriber acquisitions and higher subscriber churn.
We may be required to make substantial additional investments in order to maintain competitive HD
programming offerings.
We believe that the availability and extent of HD programming has become and will continue to be a
significant factor in consumers choice among pay-TV providers. Other pay-TV providers may have
more successfully marketed and promoted their HD programming packages and may also be better
equipped to increase their HD offerings to respond to increasing consumer demand for this content.
We may be required to make substantial additional investments in infrastructure to respond to
competitive pressure to deliver additional HD programming, and there can be no assurance that we
will be able to compete effectively with HD program offerings from other pay-TV providers. In
particular, in recent quarters, our capital expenditures have increased because we have made
significant efforts to expand our HD capability and provide more of our subscribers with HD set top
boxes.
Technology in our industry changes rapidly and could cause our services and products to become
obsolete.
Our operating results are dependent to a significant extent upon our ability to continue to
introduce new products and services on a timely basis and to reduce costs of our existing products
and services. We may not be able to successfully identify new product or service opportunities or
develop and market these opportunities in a timely or cost-effective manner. The success of new
product development depends on many factors, including proper identification of customer need,
cost, timely completion and introduction, differentiation from offerings of competitors and market
acceptance.
Technology in the pay-TV industry changes rapidly as new technologies are developed, which could
cause our services and products to become obsolete. We and our suppliers may not be able to keep
pace with technological developments. If the new technologies on which we intend to focus our
research and development investments fail to achieve acceptance in the marketplace, our competitive
position could be impaired causing a reduction in our revenues and earnings. We may also be at a
competitive disadvantage in developing and introducing complex new products and technologies
because of the substantial costs we may incur in making these products or technologies available
across our installed base of over 13 million subscribers. For example, our competitors could be
the first to obtain proprietary technologies that are perceived by the market as being superior.
Further, after we have incurred substantial research and development costs, one or more of the
technologies under our development, or under development by one or more of our strategic partners,
could become obsolete prior to its introduction. In addition, delays in the delivery of components
or other unforeseen problems in our DBS system may occur that could materially and adversely affect
our ability to generate revenue, offer new services and remain competitive.
Technological innovation is important to our success and depends, to a significant degree, on the
work of technically skilled employees. We rely on EchoStar Corporation to design and develop
set-top boxes with advanced features and functionality. If EchoStar is unable to attract and
retain appropriately technically skilled employees, our competitive position could be materially
and adversely affected.
We may need additional capital, which may not be available on acceptable terms or at all, in order
to continue investing in our business and to finance acquisitions and other strategic transactions.
We may need to raise additional capital in the future to among other things, continue investing in
our business, construct and launch new satellites, and to pursue acquisitions and other strategic
transactions.
Recent developments in the financial markets such as the scarcity of capital have made it more
difficult for non-investment grade borrowers of high yield indebtedness to access capital markets
at acceptable terms or at all. The recent reduction in our stock price combined with the
instability in the equity markets has made it difficult for us to raise equity financing without
incurring substantial dilution to our existing shareholders. In addition, weak market conditions
may limit our ability to generate sufficient internal cash to fund
these investments, capital expenditures, acquisitions and other strategic transactions. We cannot
predict with any certainty whether or not we will be impacted by the current adverse credit market.
As a result, these conditions make it difficult for us to accurately forecast and plan future
business activities because we may not have access to funding sources necessary for us to pursue
organic and strategic business development opportunities.
19
A portion of our investment portfolio is invested in securities that have experienced limited or no
liquidity in recent months and may not be immediately accessible to support our financing needs.
A portion of our investment portfolio is invested in asset backed securities, auction rate
securities, mortgage backed securities, special investment vehicles, and strategic investments and
as a result a portion of our portfolio has restricted liquidity. Liquidity in the markets for
these investments has been impaired in the past year and these market conditions have adversely
affected our liquidity. In addition, certain of these securities have defaulted or have been
materially downgraded causing us to record impairment charges. If the credit ratings of these
securities further deteriorate or the lack of liquidity in the marketplace becomes prolonged, we
may be required to record further impairment charges. Moreover, the current significant volatility
of domestic and global financial markets has greatly affected the volatility and value of our
marketable investment securities. To the extent we require access to funds, we may need to sell
these securities under unfavorable market conditions, record further impairment charges and fall
short of our financing needs.
AT&Ts termination of its distribution agreement with us may reduce subscriber additions and
increase churn if we are not able to develop alternative distribution channels.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions over the past several years, accounting for approximately 17% of our gross
subscriber additions for the year ended December 31, 2008 and 19% of our gross subscriber additions
in the fourth quarter. This distribution relationship ended on January 31, 2009. AT&T has entered
into a new distribution relationship with DirecTV. It may be difficult for us to develop
alternative distribution channels that will fully replace AT&T and if we are unable to do so, our
gross and net subscriber additions may be further impaired, our subscriber churn may increase, and
our results of operations may be adversely affected. In addition, approximately one million of our
current subscribers were acquired through our distribution relationship with AT&T and subscribers
acquired through this channel have historically churned at a higher rate than our overall
subscriber base. Although AT&T is not permitted to target these subscribers for transition to
another pay-TV service and we and AT&T are required to maintain bundled billing and cooperative
customer service for these subscribers, these subscribers may still churn at higher than historical
rates following termination of the AT&T distribution relationship.
As technology changes, and in order to remain competitive, we may have to upgrade or replace
subscriber equipment and make substantial investments in our infrastructure.
Our competitive position depends in part on our ability to offer new subscribers and upgrade
existing subscribers with more advanced equipment, such as receivers with DVR and HD technology.
Furthermore, the increase in demand for HD programming requires investments in additional satellite
capacity. We may not be able to pass on to our subscribers the entire cost of these upgrades and
infrastructure investments.
We rely on 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.
EchoStar is our sole supplier of digital set-top boxes and digital broadcast operations. In
addition, EchoStar is a key supplier of other satellite services to us. Because purchases from
DISH Network are made pursuant to contracts that generally expire on January 1, 2010, EchoStar will
have no obligation to supply digital set-top boxes and satellite services to us after that date.
Equipment, transponder leasing and digital broadcast operation costs may increase beyond our
current expectations. We may be unable to renew agreements for these services with EchoStar on
acceptable terms or at all. EchoStars inability to develop and produce, or our inability to
obtain, equipment with the latest technology, or our inability to obtain transponder capacity and
digital broadcast operations and other services from third parties, could affect our subscriber
acquisition and churn and cause related revenue to decline.
20
Furthermore, any transition to a new supplier of set-top boxes could result in increased costs,
resources and development and customer qualification time. Any reduction in our supply of set-top
boxes could significantly delay our ability to ship set-top boxes to our subscribers and
potentially damage our relationships with our subscribers.
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.
We have contracted with 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. Our
dependence on these vendors makes our operations vulnerable to such third parties failure to
perform adequately. In addition, we have historically relied on a single source for certain items.
If these vendors are unable to meet our needs because they are no longer in business or because
they discontinue a certain product or service we need, our business, financial position and results
of operations may be adversely affected. Our inability to develop alternative sources quickly and
on a cost-effective basis could materially impair our ability to timely deliver our products to our
subscribers or operate our business. Furthermore, our vendors may request changes in pricing,
payment terms or other contractual obligations between the parties which could cause us to make
substantial additional investments.
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.
Increases in theft of our signal, or our competitors signals, could in addition to reducing new
subscriber activations, also cause subscriber churn to increase. We use security access devices in
our receiver systems to control access to authorized programming content. Our signal encryption
has been compromised in the past and may be compromised in the future even though we continue to
respond with significant investment in security measures, such as security access device replacement programs
and updates in security software, that are intended to make signal theft more difficult. It has
been our prior experience that security measures may be only effective for short periods of time or
not at all and that we remain susceptible to additional signal theft. We cannot assure you that we
will be successful in reducing or controlling theft of our programming content. During the third
quarter of 2008, we began implementing a plan to replace our existing security access devices to re-secure our
system, which is expected to take approximately nine to twelve months to complete. We cannot
assure you that we will be successful in reducing or controlling theft of our programming content
and we may incur additional costs in the future if our security access device replacement plan is not
effective.
We are also vulnerable to other forms of fraud. While we are addressing certain fraud through a
number of actions, including terminating more than 60 retailers for violating DISH Network business
rules, there can be no assurance that we will not continue to experience fraud which could impact
our subscriber growth and churn. The current economic downturn may create greater incentive for
signal theft and other forms of fraud, which could lead to higher subscriber churn and reduced
revenue.
We depend on third parties to solicit orders for DISH Network services that represent a significant
percentage of our total gross subscriber acquisitions.
A number of our retailers are not exclusive to us and may favor our competitors products and
services over ours based on the relative financial arrangements associated with selling our
products and those of our competitors. Furthermore, some of these retailers are significantly
smaller than we are and may be more susceptible to current uncertain economic conditions that will
make it more difficult for them to operate profitably. Because our retailers receive most of their
incentive value at activation and not over an extended period of time, our interests in obtaining
and retaining subscribers through good customer service may not always be aligned with our
retailers. It may be difficult to better align our interests with our resellers because of their
capital and liquidity constraints. Loss of one or more of these relationships could have an
adverse effect on our subscriber base and certain of our other key operating metrics because we may
not be able to develop comparable alternative distribution channels.
21
We depend on others to provide the programming that we offer to our subscribers and, if we lose
access to this programming, our subscriber losses and subscriber churn may increase.
We depend on third parties to provide us with programming services. Our programming agreements
have remaining terms ranging from less than one to up to ten years and contain various renewal and
cancellation provisions. We may not be able to renew these agreements on favorable terms or at
all, and these agreements may be canceled prior to expiration of their original term. If we are
unable to renew any of these agreements or the other parties cancel the agreements, we cannot
assure you that we would be able to obtain substitute programming, or that such substitute
programming would be comparable in quality or cost to our existing programming. In addition, the
loss of programming could increase our subscriber churn. We also expect programming costs to
continue to increase. We may be unable to pass programming costs on to our customers, which could
have a material adverse effect on our business, financial condition and results of operations.
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.
The cost of programming represents a large percentage of our overall costs. Certain of our
competitors own directly or are affiliated with companies that own programming content that may
enable them to obtain lower programming costs. Unlike our larger cable and satellite competitors,
we have not made significant investments in programming providers. Furthermore, our competitors
offer exclusive programming that may be attractive to prospective subscribers.
We depend on the Cable Act for access to programming from cable-affiliate programmers at
cost-effective rates.
We purchase a large percentage of our programming from cable-affiliated programmers. The Cable
Acts provisions prohibiting exclusive contracting practices with cable affiliated programmers were
extended for another five-year period in September 2007. Cable companies have appealed the FCCs
decision. We cannot predict the outcome or timing of that litigation. Any change in the Cable Act
and the FCCs rules that permit the cable industry or cable-affiliated programmers to discriminate
against competing businesses, such as ours, in the sale of programming could adversely affect our
ability to acquire cable-affiliated programming at all or to acquire programming on a
cost-effective basis. Further, the FCC generally has not shown a willingness to enforce the
program access rules aggressively. As a result, we may be limited in our ability to obtain access
(or nondiscriminatory access) to programming from programmers that are affiliated with the cable
system operators.
In addition, affiliates of certain cable providers have denied us access to sports programming they
feed to their cable systems terrestrially, rather than by satellite. To the extent that cable
operators deliver additional programming terrestrially in the future, they may assert that this
additional programming is also exempt from the program access laws. These restrictions on our
access to programming could materially and adversely affect our ability to compete in regions
serviced by these cable providers.
We face increasing competition from other distributors of foreign language programming that may
limit our ability to maintain our foreign language programming subscriber base.
We face increasing competition from other distributors of foreign language programming, including
programming distributed over the Internet. There can be no assurance that we will maintain
subscribers in our foreign-language programming services. In addition, the increasing availability
of foreign language programming from our competitors, which in certain cases has resulted from our
inability to renew programming agreements on an exclusive basis or at all, could contribute to an
increase in our subscriber churn. Our agreements with distributors of foreign language programming
have varying expiration dates, and some agreements are on a month-to-month basis. There can be no
assurance that we will be able to grow or maintain our foreign language programming subscriber
base.
22
Our local programming strategy faces uncertainty because we may not be able to obtain necessary
retransmission consents from local network stations.
SHVIA generally gives satellite companies a statutory copyright license to retransmit local
broadcast channels by satellite back into the market from which they originated, subject to
obtaining the retransmission consent of the local network station. If we fail to reach
retransmission consent agreements with broadcasters we cannot carry their signals. This could have
an adverse effect on our strategy to compete with cable and other satellite companies which provide
local signals. While we have been able to reach retransmission consent agreements with most local
network stations in markets where we currently offer local channels by satellite, roll-out of local
channels in additional cities will require that we obtain additional retransmission agreements. We
cannot be sure that we will secure these agreements or that we will secure new agreements on
acceptable terms upon the expiration of our current retransmission consent agreements.
We are subject to significant regulatory oversight and changes in applicable regulatory
requirements could adversely affect our business.
DBS operators are subject to significant government regulation, primarily by the FCC and, to a
certain extent, by Congress, other federal agencies and international, state and local authorities.
Depending upon the circumstances, noncompliance with legislation or regulations promulgated by
these entities could result in the suspension or revocation of our licenses or registrations, the
termination or loss of contracts or the imposition of contractual damages, civil fines or criminal
penalties any of which could have a material adverse effect on our business, financial condition
and results of operations. You should review the regulatory disclosures under the caption Item 1.
Business Government Regulation FCC Regulation under the Communication Act of this Annual
Report on Form 10-K.
We
have made a substantial investment in certain 700 MHz wireless licenses and will be required to make
significant additional investments in order to commercialize these licenses and recoup our
investment.
We paid $712 million to acquire certain 700 MHz wireless licenses, which were granted to us by the
FCC in February 2009. We will be required to make significant additional investments or partner
with others to commercialize these licenses and satisfy FCC build-out requirements.
We expect to invest significant additional amounts to develop services and infrastructure to
effectively utilize the spectrum and provide services to our customers. We will also need to
comply with the technical and operational rules and regulations adopted by the FCC for this
spectrum, including specific build-out requirements. Part or all of our licenses can be terminated
for failure to satisfy these requirements. Specifically, we will be required to meet interim
build-out benchmarks by June 2013. Failure to meet an interim benchmark requirement will cause a
two year reduction in our license term (from 10 years to 8 years) and may result in enforcement
action, including forfeitures, and the loss of right to operate in any unserved areas.
There can be no assurance that we will be able to develop and implement a business model that will
realize a return on these investments and profitably deploy the spectrum represented by the 700 MHz
licenses.
Furthermore, the fair values of wireless licenses may vary significantly in the future. In
particular, valuation swings could occur if:
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consolidation in the wireless industry allows or requires wireless carriers to sell
significant portions of their wireless spectrum holdings, which could in turn reduce the
value of our spectrum holdings; or |
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a sudden large sale of spectrum by one or more wireless providers occurs. |
In addition, the fair value of wireless licenses could decline as a result of the FCCs pursuit of
policies, including auctions, designed to increase the number of wireless licenses available in
each of our markets. If the fair value of our 700 MHz licenses were to decline significantly, the
value of our 700 MHz licenses could be subject to non-cash impairment charges. We assess potential
impairments to our indefinite-lived intangible assets, including our 700 MHz licenses annually to
determine whether there is evidence that events or changes in circumstances indicate that an
impairment condition may exist. Estimates of the fair value of our 700 MHz licenses are based
primarily on
23
available market prices, including successful bid prices in FCC auctions and selling prices
observed in wireless license transactions.
We have substantial debt outstanding and may incur additional debt that could have a dilutive
effect on our outstanding equity capital or future earnings.
As of December 31, 2008, our total debt, including the debt of our subsidiaries, was $5.008
billion. Our debt levels could have significant consequences, including:
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requiring us to devote a substantial portion of our cash to make interest and principal
payments on our debt, thereby reducing the amount of cash available for other purposes. As
a result, we would have limited financial and operating flexibility in responding to
changing economic and competitive conditions; |
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limiting our ability to raise additional debt because it may be more difficult for
highly leveraged issuers such as us to obtain debt financing on
attractive terms; and |
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placing us at a disadvantage compared to our competitors that have less debt. |
In addition, we may incur substantial additional debt in the future. The terms of the indentures
relating to our senior notes permit us to incur additional debt. If new debt is added to our
current debt levels, the risks we now face could intensify.
If we are unsuccessful in defending Tivos litigation against us, we could be prohibited from
offering DVR technology that would in turn put us at a significant disadvantage to our competitors.
During 2008, Tivo filed a motion for contempt alleging that our next-generation DVRs continue to
infringe a patent held by Tivo. If we are unsuccessful in defending against Tivos motion for
contempt or any subsequent claim that our alternative technology infringes Tivos patent, we could
be prohibited from distributing DVRs or could be required to modify or eliminate certain
user-friendly DVR features that we currently offer to consumers. In that event we would be at a
significant disadvantage to our competitors who could offer this functionality and, while we would
attempt to provide that functionality through other manufacturers, the adverse affect on our
business could be material. We could also have to pay substantial additional damages.
We have limited owned and leased satellite capacity and satellite failures could adversely affect our business.
Operation of our subscription television 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.
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 have a material adverse effect on our business, financial condition and
results of operations.
Our owned and leased satellites are subject to risks related to launch that could limit our ability
to utilize these satellites.
Satellite launches are subject to significant risks, including delay, launch failure and incorrect orbital
placement. Certain launch vehicles that may be used by us have
either unproven track records or have experienced launch failures in the past. The risks of launch
delay and failure are usually greater when the launch vehicle does not have a track record of
previous successful flights. Launch failures result in significant delays in the deployment of
satellites because of the need both to construct replacement satellites, which can take more than
three years, and to obtain other launch opportunities. Such significant delays could materially and
adversely affect our ability to generate revenues. If we were unable to obtain launch insurance,
or obtain launch insurance at rates we
24
deem commercially reasonable, and a significant launch failure were to occur, it could have a
material adverse effect on our ability to generate revenues and fund future satellite procurement
and launch opportunities.
In addition, the occurrence of future launch failures may materially and adversely affect our
ability to insure the launch of our satellites at commercially reasonable premiums, if at all.
Please see further discussion under the caption We currently have no commercial insurance coverage
on the satellites we own below.
Our owned and leased satellites are subject to significant operational and atmospheric risks that
could limit our ability to utilize these satellites.
Satellites are subject to significant operational risks while in orbit. These risks include
malfunctions, commonly referred to as anomalies, that have occurred in our satellites and the
satellites of other operators as a result of various factors, such as satellite manufacturers
errors, problems with the power systems or control systems of the satellites and general failures
resulting from operating satellites in the harsh environment of space.
Although we work closely with the satellite manufacturers to determine and eliminate the cause of
anomalies in new satellites and provide for redundancies of many critical components in the
satellites, we may experience anomalies in the future, whether of the types described above or
arising from the failure of other systems or components.
Any single anomaly or series of anomalies could materially and adversely affect our operations and
revenues and our relationship with current customers, as well as our ability to attract new
customers for our multi-channel video services. In particular, future anomalies may result in the
loss of individual transponders on a satellite, a group of transponders on that satellite or the
entire satellite, depending on the nature of the anomaly. Anomalies may also reduce the expected
useful life of a satellite, thereby reducing the channels that could be offered using that
satellite, or create additional expenses due to the need to provide replacement or back-up
satellites. You should review the disclosures relating to satellite anomalies set forth under Note
7 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form
10-K.
Meteoroid events pose a potential threat to all in-orbit satellites. The probability that
meteoroids will damage those satellites increases significantly when the Earth passes through the
particulate stream left behind by comets. Occasionally, increased solar activity also poses a
potential threat to all in-orbit satellites.
Some decommissioned spacecraft are in uncontrolled orbits which pass through the geostationary belt
at various points, and present hazards to operational spacecraft, including our satellites. We may
be required to perform maneuvers to avoid collisions and these maneuvers may prove unsuccessful or
could reduce the useful life of the satellite through the expenditure of fuel to perform these
maneuvers. The loss, damage or destruction of any of our satellites as a result of an
electrostatic storm, collision with space debris, malfunction or other event could have a material
adverse effect on our business, financial condition and results of operations.
Our owned and leased satellites have minimum design lives of 12 years, but could fail or suffer
reduced capacity before then.
Our ability to earn revenue depends on the usefulness of our satellites, each of which has a
limited useful life. A number of factors affect the useful lives of the satellites, including,
among other things, the quality of their construction, the durability of their component parts, the
ability to continue to maintain proper orbit and control over the satellites functions, the
efficiency of the launch vehicle used, and the remaining on-board fuel following orbit insertion.
Generally, the minimum design life of each of our satellites is 12 years. We can provide no
assurance, however, as to the actual useful lives of the satellites.
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, any of which could have a material adverse effect on our
business, financial condition and results of operations. A relocation would require FCC approval
and, among other things, a showing to the FCC that the replacement satellite would not cause
additional interference compared to the failed or lost satellite. We cannot be certain that we
could obtain such FCC approval. If we choose to use a satellite in this manner, this use could
adversely affect our ability to meet the
25
operation deadlines associated with our authorizations. Failure to meet those deadlines could
result in the loss of such authorizations, which would have an adverse effect on our ability to
generate revenues.
We currently have no commercial insurance coverage on the satellites we own and could face
significant impairment charges if one of our satellites fails.
Generally, we do not carry launch or in-orbit insurance on the satellites we use. We currently do
not carry in-orbit insurance on any of our satellites and do not use commercial insurance to
mitigate the potential financial impact of in-orbit failures because we believe that the cost of
insurance premiums is uneconomical relative to the risk of satellite failure. If one or more of
our in-orbit satellites fail, we could be required to record significant impairment charges.
We may have potential conflicts of interest with EchoStar due to our common ownership and
management.
Questions relating to conflicts of interest may arise between EchoStar and us in a number of areas
relating to our past and ongoing relationships. Areas in which conflicts of interest between
EchoStar and us could arise include, but are not limited to, the following:
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Cross officerships, directorships and stock ownership. We have significant overlap in
directors and executive officers with EchoStar, which may lead to conflicting interests.
For instance, certain of our executive officers, including Charles W. Ergen, our Chairman,
President and Chief Executive Officer, serve as executive officers of EchoStar. Three of
our executive officers provide management services to EchoStar pursuant to a management
services agreement between EchoStar and us. These individuals may have actual or apparent
conflicts of interest with respect to matters involving or affecting each company.
Furthermore, our board of directors includes persons who are members of the board of
directors of EchoStar, including Mr. Ergen, who serves as the Chairman of EchoStar and us.
The executive officers and the members of our board of directors who overlap with EchoStar
have fiduciary duties to EchoStars shareholders. For example, there is the potential for
a conflict of interest when we or EchoStar look at acquisitions and other corporate
opportunities that may be suitable for both companies. In addition, our directors and
officers own EchoStar stock and options to purchase EchoStar stock, which they acquired or
were granted prior to the Spin-off of EchoStar from us, including Mr. Ergen, who owns
approximately 53.0% of the total equity and controls approximately 87.0% of the voting
power of EchoStar. These ownership interests could create actual, apparent or potential
conflicts of interest when these individuals are faced with decisions that could have
different implications for us and EchoStar. |
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Intercompany agreements related to the Spin-off. We have entered into certain
agreements with EchoStar pursuant to which we will provide EchoStar with certain
management, administrative, accounting, tax, legal and other services, for which EchoStar
will pay us our cost plus a fixed margin. In addition, we have entered into a number of intercompany agreements covering
matters such as tax sharing and EchoStars responsibility for certain liabilities
previously undertaken by us for certain of EchoStars businesses. We have also entered
into certain commercial agreements with EchoStar pursuant to which EchoStar is, among other
things, obligated to sell to us at specified prices, set-top boxes and related equipment.
The terms of these agreements were established while EchoStar was a wholly-owned subsidiary
of us and were not the result of arms length negotiations. The allocation of assets,
liabilities, rights, indemnifications and other obligations between EchoStar and us under
the separation and other intercompany agreements we entered into with EchoStar in
connection with the Spin-off of EchoStar from us do not necessarily reflect what two
unaffiliated parties might have agreed to. Had these agreements been negotiated with
unaffiliated third parties, their terms may have been more favorable, or less favorable, to
us. In addition, conflicts could arise between us and EchoStar in the interpretation or
any extension or renegotiation of these existing agreements. |
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Future intercompany transactions. In the future, EchoStar or its affiliates may enter
into transactions with us or our subsidiaries or other affiliates. Although the terms of
any such transactions will be established based upon negotiations between EchoStar and us
and, when appropriate, subject to the approval of the disinterested directors on our board
or a committee of disinterested directors, there can be no assurance that |
26
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the terms of any such transactions will be as favorable to us or our subsidiaries or
affiliates as may otherwise be obtained in arms length negotiations. |
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Business Opportunities. We have retained interests in various U.S. and international
companies that have subsidiaries or controlled affiliates that own or operate domestic or
foreign services that may compete with services offered by EchoStar. We may also compete
with EchoStar when we participate in auctions for spectrum or orbital slots for our
satellites. In addition, EchoStar may in the future use its satellites, uplink and
transmission assets to compete directly against us in the subscription television business. |
We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be
less favorable to us than if we were dealing with an unaffiliated party.
We do not have any agreements with EchoStar that restrict us from selling our products to
competitors of EchoStar. We also do not have any agreements with EchoStar that would prevent either
company from competing with the other.
We rely on key personnel and the loss of their services or the inability to attract and retain them
may negatively affect our businesses.
We believe that our future success will depend to a significant extent upon the performance of
Charles W. Ergen, our Chairman, President and Chief Executive Officer and certain other executives.
The loss of Mr. Ergen or of certain other key executives could have a material adverse effect on
our business, financial condition and results of operations. Although all of our executives have
executed agreements limiting their ability to work for or consult with competitors if they leave
us, we do not have employment agreements with any of them. Pursuant to a management services
agreement with EchoStar entered into at the time of the Spin-off, we have agreed to make certain of
our key officers available to provide services to EchoStar. In addition Mr. Ergen also serves as
Chairman, President and Chief Executive Officer of EchoStar. To the extent Mr. Ergen and such
other officers are performing services for EchoStar, this may divert their time and attention away
from our business and may therefore adversely affect our business.
We are controlled by one principal stockholder who is also our Chairman, President and Chief
Executive Officer.
Charles W. Ergen, our Chairman, President and Chief Executive Officer, currently beneficially owns
approximately 42.0% of our total equity securities and possesses approximately 58.0% of the total
voting power. Mr. Ergens beneficial ownership of shares of Class A Common Stock excludes
88,496,990 shares of Class A Common Stock issuable upon conversion of shares of Class B Common
Stock currently held by certain trusts established by Mr. Ergen for the benefit of his family.
These trusts beneficially own approximately 33.0% of our total equity securities and possess
approximately 34.0% of the total voting power. Through his voting power, Mr. Ergen has the ability
to elect a majority of our directors and to control all other matters requiring the approval of our
stockholders. As a result, DISH Network is a controlled company as defined in the Nasdaq listing
rules and is, therefore, not subject to Nasdaq requirements that would otherwise require us to have
(i) a majority of independent directors; (ii) a nominating committee composed solely of
independent directors; (iii) compensation of our executive officers determined by a majority of the
independent directors or a compensation committee composed solely of independent directors; and
(iv) director nominees selected, or recommended for the Boards selection, either by a majority of
the independent directors or a nominating committee composed solely of independent directors.
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 are subject to various legal proceedings and claims which arise in the ordinary course of
business, including among other things, disputes with programmers regarding fees. Many entities,
including some of our competitors, have or may in the future obtain patents and other intellectual
property rights that cover or affect products or services related to those that we offer. In
general, if a court determines that one or more of our products infringes on intellectual property
held by others, we may be required to cease developing or marketing those products, to obtain
licenses from the holders of the intellectual property at a material cost, or to redesign those
products in such a way as to avoid infringing the patent claims. If those intellectual property
rights are held by a competitor, we may be
27
unable to obtain the intellectual property at any price, which could adversely affect our
competitive position. Please see further discussion under Item 1. Business Patents and
Trademarks of this Annual Report on Form 10-K.
We may pursue acquisitions and other strategic transactions to complement or expand our business
which may not be successful and in which we may lose the entire value of our investment.
Our future success may depend on opportunities to buy other businesses or technologies that could
complement, enhance or expand our current business or products or that might otherwise offer us
growth opportunities. We may not be able to complete such transactions and such transactions, if
executed, pose significant risks and could have a negative effect on our operations. Any
transactions that we are able to identify and complete may involve a number of risks, including:
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the diversion of our managements attention from our existing business to integrate
the operations and personnel of the acquired or combined business or joint venture; |
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possible adverse effects on our operating results during the integration process; |
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a high degree of risk involved in these transactions, which could become substantial
over time, and higher exposure to significant financial losses if the underlying
ventures are not successful; and |
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our possible inability to achieve the intended objectives of the transaction. |
In addition, we may not be able to successfully or profitably integrate, operate, maintain and
manage our newly acquired operations or employees. We may not be able to maintain uniform
standards, controls, procedures and policies, and this may lead to operational inefficiencies.
New acquisitions, joint ventures and other transactions may require the commitment of significant
capital that would otherwise be directed to investments in our existing businesses or be
distributed to shareholders. Commitment of this capital may cause us to defer or suspend any share
repurchases that we otherwise may have made.
Our business depends substantially on FCC licenses that can expire or be revoked or modified and
applications that may not be granted.
If the FCC were to cancel, revoke, suspend or fail to renew any of our licenses or authorizations,
it could have a material adverse effect on our financial condition, profitability and cash flows.
Specifically, loss of a frequency authorization would reduce the amount of spectrum available to
us, potentially reducing the amount of programming and other services available to our subscribers.
The materiality of such a loss of authorizations would vary based upon, among other things, the
location of the frequency used or the availability of replacement spectrum. In addition, Congress
often considers and enacts legislation that could affect us, and FCC proceedings to implement the
Communications Act and enforce its regulations are ongoing. We cannot predict the outcomes of
these legislative or regulatory proceedings or their effect on our business.
We
are subject to digital HD
carry-one-carry-all requirements that cause capacity constraints.
In order to provide any full-power analog local broadcast signal in any market today, we are
required to retransmit all qualifying analog broadcast signals in that market
(carry-one-carry-all). The digital transition requires all full-power broadcasters to cease
transmission using analog signals and switch over to digital signals by June 12, 2009. The switch
to digital will provide broadcasters significantly greater capacity to provide high definition and
multi-cast programming. During March 2008, the FCC adopted new digital carriage rules that require
DBS providers to phase in carry-one-carry-all obligations with respect to the carriage of
full-power broadcasters HD signals by February 2013. The carriage of additional HD signals on our
DBS system could cause us to experience significant capacity constraints and limit the number of
local markets that we can serve. The digital transition has also necessitated resource-intensive
efforts by us to transition broadcast signals switching from analog to digital at the hundreds of
local facilities we utilize across the nation to receive local channels and transmit them to our
uplink facilities.
In addition, the FCC is now considering whether to require DBS providers to carry broadcast
stations in both standard definition and high definition starting in 2010, in conjunction with the
phased-in HD carry-one, carry-all requirements adopted by the FCC. If we were required to carry
multiple versions of each broadcast station, we
28
would have to dedicate more of our finite satellite capacity to each broadcast station, which may
force us to reduce the number of local markets served and limit our ability to meet competitive
needs. We cannot predict the outcome or timing of that proceeding.
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.
Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent
a change in control of our company that a shareholder may consider favorable. These provisions
include the following:
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a capital structure with multiple classes of common stock: a Class A that entitles the
holders to one vote per share, a Class B that entitles the holders to ten votes per share,
a Class C that entitles the holders to one vote per share, except upon a change in control
of our company in which case the holders of Class C are entitled to ten votes per share; |
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a provision that authorizes the issuance of blank check preferred stock, which could
be issued by our board of directors to increase the number of outstanding shares and
thwart a takeover attempt; |
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a provision limiting who may call special meetings of shareholders; and |
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a provision establishing advance notice requirements for nominations of candidates for
election to our board of directors or for proposing matters that can be acted upon by
shareholders at shareholder meetings. |
In addition, pursuant to our certificate of incorporation we have a significant amount of
authorized and unissued stock which would allow our board of directors to issue shares to persons
friendly to current management, thereby protecting the continuity of its management, or which
could be used to dilute the stock ownership of persons seeking to obtain control of us.
We cannot assure you that there will not be deficiencies leading to material weaknesses in our
internal control over financial reporting.
We periodically evaluate and test our internal control over financial reporting in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act. Although our management has
concluded that our internal control over financial reporting was effective as of December 31,
2008, if in the future we are unable to report that our internal control over financial reporting
is effective (or if our auditors do not agree with our assessment of the effectiveness of, or are
unable to express an opinion on, our internal control over financial reporting), investors,
customers and business partners could lose confidence in the accuracy of our financial reports,
which could in turn have a material adverse effect on our business, investor confidence in our
financial results may weaken, and our stock price may suffer.
We may face other risks described from time to time in periodic and current reports we file with
the SEC.
Item 1B. UNRESOLVED STAFF COMMENTS
29
Item 2. PROPERTIES
The following table sets forth certain information concerning our principal properties.
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Leased From |
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Approximate |
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Other |
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Segment(s) |
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Square |
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Third |
Description/Use/Location |
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Using Property |
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Footage |
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Owned |
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EchoStar |
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Party |
Corporate headquarters, Englewood, Colorado |
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All |
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476,000 |
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X |
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Customer call center, Littleton, Colorado |
|
DISH Network |
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202,000 |
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X |
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Service center, Englewood, Colorado |
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DISH Network |
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93,343 |
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X |
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Service center, Spartanburg, South Carolina |
|
DISH Network |
|
316,000 |
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X |
Customer call center, warehouse and service center, El Paso, Texas |
|
DISH Network |
|
171,000 |
|
X |
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Customer call center, McKeesport, Pennsylvania |
|
DISH Network |
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106,000 |
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X |
Customer call center, Christiansburg, Virginia |
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DISH Network |
|
103,000 |
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X |
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Customer call center and general offices, Tulsa, Oklahoma |
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DISH Network |
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79,000 |
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X |
Customer call center and general offices, Pine Brook, New Jersey |
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DISH Network |
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67,000 |
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X |
Customer call center, Alvin, Texas |
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DISH Network |
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60,000 |
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X |
Customer call center, Phoenix, Arizona |
|
DISH Network |
|
57,000 |
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X |
Customer call center, College Point, New York |
|
DISH Network |
|
60,000 |
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|
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|
X |
Customer call center, Thornton, Colorado |
|
DISH Network |
|
55,000 |
|
X |
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Customer call center, Harlingen, Texas |
|
DISH Network |
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54,000 |
|
X |
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Customer call center, Bluefield, West Virginia |
|
DISH Network |
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50,000 |
|
X |
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Customer call center, Hilliard, Ohio |
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DISH Network |
|
31,000 |
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X |
Warehouse, distribution and service center, Atlanta, Georgia |
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DISH Network |
|
250,000 |
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X |
Warehouse and distribution center, Denver, Colorado |
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DISH Network |
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303,000 |
|
|
|
|
|
X |
Warehouse and distribution center, Sacramento, California |
|
DISH Network |
|
82,000 |
|
X |
|
|
|
|
Warehouse, Denver, Colorado |
|
DISH Network |
|
44,000 |
|
X |
|
|
|
|
In addition to the principal properties listed above, we operate several DISH Network service
centers strategically located in regions throughout the United States. Furthermore, we own or
lease capacity on 14 satellites which are a major component of our DISH Network DBS System. See
further discussion under Item 1. Business Satellites in this Annual Report on Form 10-K.
Item 3. LEGAL PROCEEDINGS
In connection with the Spin-off, we entered into a separation agreement with EchoStar, which
provides for, among other things, the division of liability resulting from litigation. Under the
terms of the separation agreement, EchoStar has assumed liability for any acts or omissions that
relate to its business whether such acts or omissions occurred before or after the Spin-off.
Certain exceptions are provided, including for intellectual property related claims generally,
whereby EchoStar will only be liable for its acts or omissions that occurred following the
Spin-off. Therefore, we have indemnified EchoStar for any potential liability or damages
resulting from intellectual property claims relating to the period prior to the effective date of
the Spin-off.
Acacia
During 2004, Acacia Media Technologies (Acacia) filed a lawsuit against us 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 intellectual
property holding company which seeks to license an acquired patent portfolio. The suit alleges
infringement of United States Patent Nos. 5,132,992 (the 992 patent), 5,253,275 (the 275 patent),
5,550,863 (the 863 patent), 6,002,720 (the 720 patent) and 6,144,702 (the 702 patent).
30
The patents relate to certain systems and methods for transmission of digital data. During 2004
and 2005, the Court issued Markman rulings which found that the 992 and 702 patents were not as
broad as Acacia had contended, and that certain terms in the 702 patent were indefinite. The
Court issued additional claim construction rulings on December 14, 2006, March 2, 2007, October 19,
2007, and February 13, 2008. On March 12, 2008, the Court issued an order outlining a schedule for
filing dispositive invalidity motions based on its claim constructions. Acacia has agreed to
stipulate to invalidity based on the Courts claim constructions in order to proceed immediately to
the Federal Circuit on appeal. The Court, however, has permitted us to file additional invalidity
motions.
Acacias various patent infringement cases have been consolidated for pre-trial purposes in the
United States District Court for the Northern District of California. We intend to vigorously
defend this case. In the event that a Court ultimately determines that we infringe any of the
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.
In 2001, Broadcast Innovation, L.L.C. (Broadcast Innovation) filed a lawsuit against us, DirecTV,
Thomson Consumer Electronics and others in Federal District Court in Denver, Colorado. 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. We examined these patents and believe that they are not infringed by any of our
products or services. Subsequently, DirecTV and Thomson settled with Broadcast Innovation leaving
us as the only defendant.
During 2004, the judge issued an order finding the 066 patent invalid. Also in 2004, the Court
ruled 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 the 094
patent finding of invalidity and remanded the case back to the District Court. During June 2006,
Charter filed a reexamination request with the United States Patent and Trademark Office. The
Court has stayed the case pending reexamination. Our case remains 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 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.
Channel Bundling Class Action
On September 21, 2007, a purported class of cable and satellite subscribers filed an antitrust
action against us in the United States District Court for the Central District of California. The
suit also names as defendants DirecTV, Comcast, Cablevision, Cox, Charter, Time Warner, Inc., Time
Warner Cable, NBC Universal, Viacom, Fox Entertainment Group, and Walt Disney Company. The suit
alleges, among other things, that the defendants engaged in a conspiracy to provide customers with
access only to bundled channel offerings as opposed to giving customers the ability to purchase
channels on an a la carte basis. We filed a motion to dismiss, which the Court denied in July
2008. We intend to vigorously defend this case. We cannot predict with any degree of certainty
the outcome of the suit or determine the extent of any potential liability or damages.
31
Datasec
During April 2008, Datasec Corporation (Datasec) sued us and DirecTV Corporation in the United
States District Court for the Central District of California, alleging infringement of U.S.
Patent No. 6,075,969 (the 969 patent). The 969 patent was issued in 2000 to inventor Bruce
Lusignan, and is entitled Method for Receiving Signals from a Constellation of Satellites in
Close Geosynchronous Orbit. In September 2008, Datasec voluntarily dismissed its case without
prejudice.
Distant Network Litigation
During October 2006, a District Court in Florida entered a permanent nationwide injunction
prohibiting us from offering distant network channels to consumers effective December 1, 2006.
Distant networks are ABC, NBC, CBS and Fox network channels which originate outside the community
where the consumer who wants to view them, lives. We have turned off all of our distant network
channels and are no longer in the distant network business. Termination of these channels resulted
in, among other things, a small reduction in average monthly revenue per subscriber and free cash
flow, and a temporary increase in subscriber churn. The plaintiffs in that litigation alleged that
we were in violation of the Courts injunction and appealed the District Court decision finding
that we are not in violation. On July 7, 2008, the Eleventh Circuit rejected the plaintiffs
appeal and affirmed the decision of the District Court.
Enron Commercial Paper Investment
During October 2001, we received approximately $40 million from the sale of Enron commercial paper
to a third party broker. That commercial paper was ultimately purchased by Enron. During November
2003, an action was commenced in the United States Bankruptcy Court for the Southern District of
New York against approximately 100 defendants, including us, who invested in Enrons commercial
paper. The complaint alleges that Enrons October 2001 purchase of its commercial paper was a
fraudulent conveyance and voidable preference under bankruptcy laws. We dispute these allegations.
We typically invest in commercial paper and notes which are rated in one of the four highest
rating categories by at least two nationally recognized statistical rating organizations. At the
time of our investment in Enron commercial paper, it was considered to be high quality and low
risk. We cannot predict with any degree of certainty the outcome of the suit or determine the
extent of any potential liability or damages.
Finisar Corporation
Finisar Corporation (Finisar) obtained a $100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent infringement. Finisar alleged that
DirecTVs electronic program guide and other elements of its system infringe United States Patent
No. 5,404,505 (the 505 patent).
In July 2006, we, together with NagraStar LLC, filed a Complaint for Declaratory Judgment in the
United States District Court for the District of Delaware against Finisar that asks the Court to
declare that they and we do not infringe, and have not infringed, any valid claim of the 505
patent. Trial is not currently scheduled. The District Court has stayed our action until the
Federal Circuit has resolved DirecTVs appeal. During April 2008, the Federal Circuit reversed the
judgment against DirecTV and ordered a new trial. Our case is stayed until the DirecTV action is
resolved.
We intend to vigorously prosecute this case. In the event that a Court ultimately determines that
we infringe this patent, we may be subject to substantial damages, which may include treble damages
and/or an injunction that could require us to modify our system architecture. We cannot predict
with any degree of certainty the outcome of the suit or determine the extent of any potential
liability or damages.
32
Global Communications
On April 19, 2007, Global Communications, Inc. (Global) filed a patent infringement action
against us in the United States District Court for the Eastern District of Texas. The suit alleges
infringement of United States Patent No. 6,947,702 (the 702 patent). This patent, which involves
satellite reception, was issued in September 2005. On October 24, 2007, the United States Patent
and Trademark Office granted our request for reexamination of the 702 patent and issued an Office
Action finding that all of the claims of the 702 patent were invalid. At the request of the
parties, the District Court stayed the litigation until the reexamination proceeding is concluded
and/or other Global patent applications issue. We intend to vigorously defend this case. In the
event that a Court ultimately determines that we infringe the 702 patent, 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.
Guardian Media
On December 22, 2008, Guardian Media Technologies LTD (Guardian) filed suit against EchoStar
Corporation, EchoStar Technologies L.L.C., and several other defendants in the United States
District Court for the Central District of California alleging infringement of United States Patent
Nos. 4,930,158 (the 158 patent) and 4,930,160 (the 160 patent). The 158 patent is entitled
Selective Video Playing System and the 160 patent is entitled Automatic Censorship of Video
Programs. Both patents are expired and relate to certain parental lock features.
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. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
Katz Communications
On June 21, 2007, Ronald A. Katz Technology Licensing, L.P. (Katz) filed a patent infringement
action against us in the United States District Court for the Northern District of California. The
suit alleges infringement of 19 patents owned by Katz. The patents relate to interactive voice
response, or IVR, technology. 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.
Multimedia Patent Trust
On February 13, 2009, Multimedia Patent Trust (MPT) filed suit against us, EchoStar and several
other defendants in the United States District Court for the Southern District of California
alleging infringement of United States Patent Nos. 4,958,226 entitled Conditional Motion
Compensated Interpolation Of Digital Motion Video, 5,227,878 entitled Adaptive Coding and
Decoding of Frames and Fields of Video, 5,136,377 entitled Adaptive Non-linear Quantizer,
5,500,678 entitled Optimized Scanning of Transform Coefficients in Video Coding, and 5,563,593
entitled Video Coding with Optimized Low Complexity Variable Length Codes. The patents relate to
encoding and compression technology.
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. We cannot predict with any degree of certainty the outcome of the suit
or determine the extent of any potential liability or damages.
33
Personalized Media Communications
In February 2008, Personalized Media Communications, Inc. filed suit against us, EchoStar and
Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging
infringement of United States Patent Nos. 4,694,490 (the 490 patent), 5,109,414 (the 414
patent), 4,965,825 (the 825 patent), 5,233,654 (the 654 patent), 5,335,277 (the 277 patent),
and 5,887,243 (the 243 patent), all of which were issued to John Harvey and James Cuddihy as
named inventors. The 490 patent, the 414 patent, the 825 patent, the 654 patent and the 277
patent are defined as the Harvey Patents. The Harvey Patents are entitled Signal Processing
Apparatus and Methods. The lawsuit alleges, among other things, that our DBS system receives
program content at broadcast reception and satellite uplinking facilities and transmits such
program content, via satellite, to remote satellite receivers. The lawsuit further alleges that
we infringe the Harvey Patents by transmitting and using a DBS signal specifically encoded to
enable the subject receivers to function in a manner that infringes the Harvey Patents, and by
selling services via DBS transmission processes which infringe the Harvey Patents.
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.
Retailer Class Actions
During 2000, lawsuits were filed by retailers in Colorado state and federal courts attempting to
certify nationwide classes on behalf of certain of our retailers. The plaintiffs are requesting
the Courts declare certain provisions of, and changes to, alleged agreements between us and the
retailers invalid and unenforceable, and to award damages for lost incentives and payments, charge
backs, and other compensation. We have asserted a variety of counterclaims. The federal court
action has been stayed during the pendency of the state court action. We filed a motion for
summary judgment on all counts and against all plaintiffs. The plaintiffs filed a motion for
additional time to conduct discovery to enable them to respond to our motion. The state court
granted limited discovery which ended during 2004. The plaintiffs claimed we did not provide
adequate disclosure during the discovery process. The state court agreed, and denied our motion
for summary judgment as a result. In April 2008, the state court granted plaintiffs class
certification motion and in January 2009, the state court entered an order excluding certain
evidence that we can present at trial based on the prior discovery issues. The state court also
denied plaintiffs request to dismiss our counterclaims. The final impact of the courts
evidentiary ruling cannot be fully assessed at this time. We intend to vigorously defend this
case. We cannot predict with any degree of certainty the outcome of the lawsuit or determine the
extent of any potential liability or damages.
Superguide
During 2000, Superguide Corp. (Superguide) filed suit against us, DirecTV, Thomson and others in
the United States District Court for the Western District of North Carolina, Asheville Division,
alleging infringement of United States Patent Nos. 5,038,211 (the 211 patent), 5,293,357 (the 357
patent) and 4,751,578 (the 578 patent) which relate to certain electronic program guide functions,
including the use of electronic program guides to control VCRs. Superguide sought injunctive and
declaratory relief and damages in an unspecified amount. In October 2008, we reached a settlement
with Superguide which did not have a material impact on our results of operations.
Technology Development Licensing
On January 22, 2009, Technology Development and Licensing LLC (TechDev) filed suit against us and
EchoStar in the United States District Court for the Northern District of Illinois alleging
infringement of United States Patent No. 35, 952 (the 952 patent). The 952 patent is entitled
Television Receiver Having Memory Control for Tune-By-Label Feature, and relates to certain
favorite channel features.
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. We cannot predict with any degree of certainty the outcome of the suit or
determine the extent of any potential liability or damages.
34
Tivo Inc.
On January 31, 2008, the U.S. Court of Appeals for the Federal Circuit affirmed in part and
reversed in part the April 2006 jury verdict concluding that certain of our digital video
recorders, or DVRs, infringed a patent held by Tivo. In accordance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies (SFAS 5), we previously recorded a
total reserve of $132 million on our Consolidated Balance Sheets to reflect the April 2006 jury
verdict, supplemental damages and pre-judgment interest awarded by the Texas court. This amount
also includes the estimated cost of any software infringement prior to implementation of our
alternative technology, discussed below, plus interest subsequent to the jury verdict. In its
January 2008 decision, the Federal Circuit affirmed the jurys verdict of infringement on Tivos
software claims, upheld the award of damages from the District Court, and ordered that the stay
of the District Courts injunction against us, which was issued pending appeal, be dissolved when
the appeal becomes final. The Federal Circuit, however, found that we did not literally infringe
Tivos hardware claims, and remanded such claims back to the District Court for further
proceedings. On October 6, 2008, the Supreme Court denied our petition for certiorari. As a
result, approximately $105 million of the total $132 million reserve was released from an escrow
account to Tivo.
In addition, we have developed and deployed next-generation DVR software to our customers DVRs.
This improved software is fully operational and has been automatically downloaded to current
customers (our alternative technology). We have written legal opinions from outside counsel that
conclude that our alternative technology does not infringe, literally or under the doctrine of
equivalents, either the hardware or software claims of Tivos patent. Tivo has filed a motion for
contempt alleging that we are in violation of the Courts injunction. We have vigorously opposed
the motion arguing that the Courts injunction does not apply to DVRs that have received our
alternative technology, that our alternative technology does not infringe Tivos patent, and that
we are in compliance with the injunction. An evidentiary hearing on Tivos motion for contempt was
held on February 17-19, 2009 and the Court will rule after receiving the parties post-trial
briefs. In January 2009, the Patent and Trademark Office (PTO) granted our Petition for
Re-Examination of the software claims of Tivos 389 patent, which are the subject of Tivos
current motion for contempt. The PTO found that there is a substantial new question of
patentability as to the software claims in light of prior patents that appear to render Tivos 389
patent invalid as obvious.
If we are unsuccessful in defending against Tivos motion for contempt or any subsequent claim that
our alternative technology infringes Tivos patent, we could be prohibited from distributing DVRs
or could be required to modify or eliminate certain user-friendly DVR features that we currently
offer to consumers. In that event we would be at a significant disadvantage to our competitors who
could offer this functionality and, while we would attempt to provide that functionality through
other manufacturers, the adverse affect on our business could be material. We could also have to
pay substantial additional damages.
Voom
On May 28, 2008, Voom HD Holdings (Voom) filed a complaint against us in New York Supreme Court.
The suit alleges breach of contract arising from our termination of the affiliation agreement we
had with Voom for the carriage of certain Voom HD channels on DISH Network. In January 2008, Voom
sought a preliminary injunction to prevent us from terminating the agreement. The Court denied
Vooms motion, finding, among other things, that Voom was not likely to prevail on the merits of
its case. Voom is claiming over $1.0 billion in damages. We intend to vigorously defend this
case. We cannot predict with any degree of certainty the outcome of the suit or determine the
extent of any potential liability or damages.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims
which arise in the ordinary course of business, including among other things, disputes with
programmers regarding fees. In our opinion, the amount of ultimate liability with respect to any
of these actions is unlikely to materially affect our financial position, results of operations or
liquidity.
35
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth quarter of 2008.
PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters
Market Information. Our Class A common stock is quoted on the Nasdaq Global Select Market under
the symbol DISH. The high and low closing sale prices of our Class A common stock during 2008
and 2007 on the Nasdaq Global Select Market (as reported by Nasdaq) are set forth below. The
sales prices of our Class A common stock reported below are not adjusted to reflect the Spin-off.
|
|
|
|
|
|
|
|
|
2008 |
|
High |
|
Low |
First Quarter |
|
$ |
33.48 |
|
|
$ |
26.64 |
|
Second Quarter |
|
|
35.66 |
|
|
|
29.09 |
|
Third Quarter |
|
|
31.57 |
|
|
|
19.97 |
|
Fourth Quarter |
|
|
20.69 |
|
|
|
8.37 |
|
|
|
|
|
|
|
|
|
|
2007 |
|
High |
|
Low |
First Quarter |
|
$ |
44.43 |
|
|
$ |
38.21 |
|
Second Quarter |
|
|
49.56 |
|
|
|
42.89 |
|
Third Quarter |
|
|
46.81 |
|
|
|
38.00 |
|
Fourth Quarter |
|
|
51.08 |
|
|
|
36.77 |
|
As of February 20, 2009, there were approximately 11,147 holders of record of our Class A common
stock, not including stockholders who beneficially own Class A common stock held in nominee or
street name. As of February 20, 2009, 149,938,218 of the 238,435,208 outstanding shares of our
Class B common stock were held by Charles W. Ergen, our Chairman, President and Chief Executive
Officer and the remaining 88,496,990 were held in trusts for members of Mr. Ergens family.
There is currently no trading market for our Class B common stock.
Spin-off. On January 1, 2008, DISH Network spun off EchoStar as a separate publicly-traded company
in the form of a stock dividend distributed to DISH Network shareholders. DISH Network
stockholders received for each share of common stock held on the record date for the Spin-off, 0.20
of a share of the same class of common stock of EchoStar.
We currently do not intend to declare additional dividends on our common stock. Payment of any
future dividends will depend upon our earnings and capital requirements, restrictions in our debt
facilities, and other factors the Board of Directors considers appropriate. We currently intend to
retain our earnings, if any, to support future growth and expansion although we expect to
repurchase shares of our common stock from time to time. See further discussion under Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Capital Resources in this Annual Report on Form 10-K.
36
Securities Authorized for Issuance Under Equity Compensation Plans. See Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in this
Annual Report on Form 10-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information regarding purchases of our Class A common stock made by us
for the period from January 1, 2008 through December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Approximate |
|
|
|
Total |
|
|
|
|
|
|
Shares Purchased |
|
|
Dollar Value of Shares |
|
|
|
Number of |
|
|
Average |
|
|
as Part of Publicly |
|
|
that May Yet be |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
Purchased Under the |
|
Period |
|
Purchased |
|
|
per Share |
|
|
or Programs |
|
|
Plans or Programs (1) |
|
|
|
(In thousands, except share data) |
|
January 1,
2008 August 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
September 1, 2008 September
30, 2008 |
|
|
3,054,115 |
|
|
$ |
26.82 |
|
|
|
3,054,115 |
|
|
$ |
918,094 |
|
October 1, 2008 November 30,
2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
December 1, 2008 December 31,
2008 |
|
|
82,776 |
|
|
$ |
9.99 |
|
|
|
82,776 |
|
|
$ |
999,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,136,891 |
|
|
$ |
26.37 |
|
|
|
3,136,891 |
|
|
$ |
999,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our board of directors previously authorized stock repurchases of up to $1.0 billion of
our Class A common stock. In November 2008, 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 authorized to repurchase up to $1.0 billion of our outstanding
shares through and including December 31, 2009, subject to a limitation to purchase no more than 20% of our outstanding common stock. As of December 31, 2008, we may repurchase
up to $999 million under this plan. Purchases under our repurchase program may be made
through open market purchases, privately negotiated transactions, or Rule 10b5-1 trading
plans, subject to market conditions and other factors. We may elect not to purchase the
maximum amount of shares allowable under this program and we may also enter into additional
share repurchase programs authorized by our Board of Directors. |
37
Item 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each of the five years ended December 31,
2008 have been derived from, and are qualified by reference to our Consolidated Financial
Statements. Certain prior year amounts have been reclassified to conform to the current year
presentation. See further discussion under Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Explanation of Key Metrics and Other Items in
this Annual Report on Form 10-K. This data should be read in conjunction with our Consolidated
Financial Statements and related Notes thereto for the three years ended December 31, 2008, and
Managements Discussion and Analysis of Financial Condition and Results of Operations included
elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
Statements of Operations Data |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
Total revenue |
|
$ |
11,617,187 |
|
|
$ |
11,090,375 |
|
|
$ |
9,818,486 |
|
|
$ |
8,447,175 |
|
|
$ |
7,158,471 |
|
Total costs and expenses |
|
|
9,561,007 |
|
|
|
9,516,971 |
|
|
|
8,601,115 |
|
|
|
7,279,927 |
|
|
|
6,455,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
2,056,180 |
|
|
$ |
1,573,404 |
|
|
$ |
1,217,371 |
|
|
$ |
1,167,248 |
|
|
$ |
703,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
$ |
608,272 |
|
|
$ |
1,514,540 |
(1) |
|
$ |
214,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) available to common stockholders |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
$ |
608,272 |
|
|
$ |
1,514,540 |
|
|
$ |
214,769 |
|
Diluted net income (loss) available to common stockholders |
|
$ |
909,585 |
|
|
$ |
765,571 |
|
|
$ |
618,106 |
|
|
$ |
1,560,688 |
(1) |
|
$ |
214,769 |
|
Basic weighted-average common shares outstanding |
|
|
448,786 |
|
|
|
447,302 |
|
|
|
444,743 |
|
|
|
452,118 |
|
|
|
464,053 |
|
Diluted weighted-average common shares outstanding |
|
|
460,226 |
|
|
|
456,834 |
|
|
|
452,685 |
|
|
|
484,131 |
|
|
|
467,598 |
|
Basic net income (loss) per share |
|
$ |
2.01 |
|
|
$ |
1.69 |
|
|
$ |
1.37 |
|
|
$ |
3.35 |
|
|
$ |
0.46 |
|
Diluted net income (loss) per share |
|
$ |
1.98 |
|
|
$ |
1.68 |
|
|
$ |
1.37 |
|
|
$ |
3.22 |
|
|
$ |
0.46 |
|
Cash dividend per common share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
Balance Sheet Data |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Cash, cash equivalents and marketable investment securities |
|
$ |
559,132 |
|
|
$ |
2,788,196 |
|
|
$ |
3,032,570 |
|
|
$ |
1,181,361 |
|
|
$ |
1,155,633 |
|
Total assets |
|
|
6,460,047 |
|
|
|
10,086,529 |
|
|
|
9,768,696 |
|
|
|
7,410,210 |
|
|
|
6,029,277 |
|
Long-term debt and capital lease obligations
(including current portion) |
|
|
5,007,756 |
|
|
|
6,125,704 |
|
|
|
6,967,321 |
|
|
|
5,935,301 |
|
|
|
5,791,561 |
|
Total stockholders equity (deficit) |
|
|
(1,949,106 |
) |
|
|
639,989 |
|
|
|
(219,383 |
) |
|
|
(866,624 |
) |
|
|
(2,078,212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
Other Data |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
DISH Network subscribers, as of period end (in millions) |
|
|
13.678 |
|
|
|
13.780 |
|
|
|
13.105 |
|
|
|
12.040 |
|
|
|
10.905 |
|
DISH Network subscriber additions, gross (in millions) |
|
|
2.966 |
|
|
|
3.434 |
|
|
|
3.516 |
|
|
|
3.397 |
|
|
|
3.441 |
|
DISH Network subscriber additions, net (in millions) |
|
|
(0.102 |
) |
|
|
0.675 |
|
|
|
1.065 |
|
|
|
1.135 |
|
|
|
1.480 |
|
Average monthly subscriber churn rate |
|
|
1.86 |
% |
|
|
1.70 |
% |
|
|
1.64 |
% |
|
|
1.65 |
% |
|
|
1.62 |
% |
Average monthly revenue per subscriber (ARPU) |
|
$ |
69.27 |
|
|
$ |
65.83 |
|
|
$ |
62.78 |
|
|
$ |
58.34 |
|
|
$ |
55.26 |
|
Average subscriber acquisition costs per subscriber (SAC) |
|
$ |
720 |
|
|
$ |
656 |
|
|
$ |
686 |
|
|
$ |
693 |
|
|
$ |
611 |
|
Net cash flows from (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
2,188,344 |
|
|
$ |
2,616,720 |
|
|
$ |
2,279,242 |
|
|
$ |
1,774,074 |
|
|
$ |
1,001,442 |
|
Investing activities |
|
$ |
(1,597,471 |
) |
|
$ |
(2,470,832 |
) |
|
$ |
(2,148,968 |
) |
|
$ |
(1,478,762 |
) |
|
$ |
1,078,281 |
|
Financing activities |
|
$ |
(1,411,841 |
) |
|
$ |
(976,016 |
) |
|
$ |
1,022,147 |
|
|
$ |
(402,623 |
) |
|
$ |
(2,666,022 |
) |
|
|
|
(1) |
|
Net income in 2005 includes $915 million related to the reversal of our recorded
valuation allowance for those net deferred tax assets that we believe are more likely than not to
be realized in the future. |
38
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of
operations together with the audited consolidated financial statements and notes to the financial
statements included elsewhere in this annual report. This managements discussion and analysis is
intended to help provide an understanding of our financial condition, changes in financial
condition and results of our operations and contains forward-looking statements that involve risks
and uncertainties. The forward-looking statements are not historical facts, but rather are based
on current expectations, estimates, assumptions and projections about our industry, business and
future financial results. Our actual results could differ materially from the results contemplated
by these forward-looking statements due to a number of factors, including those discussed in this
report, including under the caption Item 1A. Risk Factors in this Annual Report on Form 10-K.
EXECUTIVE SUMMARY
Overview
After achieving significant growth in subscribers over the past twelve years, DISH Network saw its
subscriber base decrease by 102,000 in 2008 with most of the decline taking place in the fourth
quarter. Factors common to the pay-TV industry generally as well as factors that were specific to
DISH Network each contributed to this decline.
The current overall economic environment has negatively impacted many industries including
ours. The downturn in the housing market has had a further effect on the pay-TV industry. In
addition, the overall growth rate in the pay-TV industry has slowed in recent years as the
penetration of pay-TV households approaches 90%. Within this maturing industry, competition has
intensified with the rapid growth of fiber-based pay-TV services offered by telecommunications
companies. Furthermore, new internet protocol television (IPTV) products/services have begun to
impact the pay-TV industry and such products/services will become more viable competition over time
as their quality improves. In spite of these factors that have impacted the entire pay-TV
industry, certain of our competitors have been able to achieve relatively strong results in the
current environment.
While economic factors have impacted the entire pay-TV industry, our relative performance has been
mostly driven by issues specific to DISH. In recent years, DISH Networks position as the low cost
provider in the pay-TV industry has been eroded by increasingly aggressive promotional pricing used
by our competitors to attract new customers and similarly aggressive promotions and tactics used to
retain existing customers. Some competitors have been especially aggressive and effective in
marketing the value and quality of their service. Furthermore, our subscriber growth has been
adversely affected by signal theft and other forms of fraud and by operational inefficiencies at
DISH Network. We have not always met our own standards for performing high quality installations,
effectively resolving customer issues when they arise, answering customer calls in an acceptable
timeframe, effectively communicating with our customer base, reducing calls driven by the complexity
of our business, improving the reliability of certain systems and customer equipment, and aligning
the interests of certain third party retailers and installers to provide high quality service.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions over the past several years, accounting for approximately 17% of our gross
subscriber additions for the year ended December 31, 2008 and 19% of our gross subscriber additions
in the fourth quarter. This distribution relationship ended on January 31, 2009. AT&T has entered
into a new distribution relationship with DirecTV. It may be difficult for us to develop
alternative distribution channels that will fully replace AT&T and if we are unable to do so, our
gross and net subscriber additions may be further impaired, our subscriber churn may increase, and
our results of operations may be adversely affected. In addition, approximately one million of our
current subscribers were acquired through our distribution relationship with AT&T and subscribers
acquired through this channel have historically churned at a higher rate than our overall
subscriber base. Although AT&T is not permitted to target these subscribers for transition to
another pay-TV service and we and AT&T are required to maintain bundled billing and cooperative
customer service for these subscribers, these subscribers may still churn at higher than historical
rates following termination of the AT&T distribution relationship.
39
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
As discussed below, to address the decline in our subscriber base, we have been focusing on factors
generally within our control. Aggressive offerings by our competitors have required us to respond
with stronger promotional offerings of our own. In February 2009, we introduced a new promotion
where qualifying subscribers can receive certain programming packages for as low as $9.99 per month
for up to six months. We strive to attract good quality subscribers to this promotion via credit
requirements and contractual commitments. In support of our recent promotional offerings, we
increased our advertising expenditures throughout 2008.
We have been investing more in advanced technology equipment as part of our subscriber acquisition
and retention efforts. Recent initiatives to transmit certain programming only in MPEG-4 and to
activate certain new subscribers only with MPEG-4 receivers have accelerated our deployment of
MPEG-4 receivers. To meet current demand, we have increased the rate at which we upgrade existing
subscribers to HD and DVR receivers. While these efforts may increase our subscriber acquisition
and retention costs, we believe that they will help reduce subscriber churn and costs over the long
run.
We have also been changing equipment for certain subscribers to free up satellite bandwidth in
support of HD and other initiatives. We expect to implement these initiatives at least through the
first half of 2009. We believe that the benefit from the increase in available satellite bandwidth
outweighs the short-term cost of these equipment changes.
To combat signal theft and improve the security of our broadcast system, we launched an initiative
that will continue at least through the first half of 2009 to replace our security access devices.
To combat other forms of fraud, we have taken a wide range of actions including terminating more
than 60 retailers found to be in violation of DISH Networks business rules. While these
initiatives may inconvenience our subscribers and disrupt our distribution channels in the short
term, we believe that the long-term benefits will outweigh the costs.
To address our operational inefficiency, we have made and intend to continue to make material
investments in staffing, training, information systems, and other initiatives, primarily in our
call center and in-home service businesses. These investments are intended to help combat
inefficiencies introduced by the increasing complexity of our business, improve customer
satisfaction, reduce churn, increase productivity, and allow us to scale better over the long run.
We cannot, however, be certain that our increased spending will ultimately be successful in
yielding such returns. In the meantime, we may continue to incur higher costs as a result of both
our operational inefficiencies and increased spending.
Over the longer run, we will use Slingbox placeshifting technology and other technologies to
maintain and enhance our competitiveness. We may also partner with or acquire companies whose
lines of business are complementary to ours should attractive opportunities arise.
The adoption of the above measures have contributed to higher expenses and lower margins. While we
believe that the increased costs will be outweighed by longer-term
benefits, there can be no assurance when or if we will realize these
benefits at all.
Programming costs represent a large percentage of our subscriber-related expenses. As a result,
our margins may face further downward pressure from price escalations in current contracts and the
renewal of long term programming contracts on less favorable pricing terms.
Our balance of cash and current marketable investment securities was materially lower on December
31, 2008 than it has been in recent years, mostly due to the redemption of a significant amount of
debt towards the end of 2008. Furthermore, the current lack of stability in the capital markets
makes it uncertain that we could raise more cash on acceptable terms or at all. As a result, we
may not have as much flexibility to invest in our business, pursue strategic investments, prepay
debt, or buy back our own stock as we have had in the past.
40
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
The Spin-off. Effective January 1, 2008, we completed the separation of the assets and businesses
we owned and operated historically into two companies (the Spin-off):
|
|
|
DISH Network, through which we retain our pay-TV business, and |
|
|
|
|
EchoStar Corporation (EchoStar) which operates the digital set-top box business, and
holds certain satellites, uplink and satellite transmission assets, real estate and other
assets and related liabilities formerly held by DISH Network. |
DISH Network and EchoStar now operate as separate public companies, and neither entity has any
ownership interest in the other. However, a majority of the voting power of the shares of both
companies is controlled by our Chairman, President and Chief Executive Officer, Charles W. Ergen.
In connection with the Spin-off, DISH Network entered into certain agreements with EchoStar to
define responsibility for obligations relating to, among other things, set-top box sales,
transition services, taxes, employees and intellectual property, which impact several of our key
operating metrics. We have entered into certain agreements with EchoStar subsequent to the
Spin-off and we may enter into additional agreements with EchoStar in the future.
Prior to the Spin-off, our set-top boxes and other subscriber
equipment as well as satellite, uplink and transmission services were provided internally at cost.
Following the Spin-off, we purchase set-top boxes from EchoStar at its cost plus a fixed margin,
which varies depending on a number of factors including the types of set-top boxes that we
purchase. In addition, we now purchase and/or lease satellite, uplink and transmission services
from EchoStar at its cost plus a fixed margin. The prices that we pay for these services depend
upon the nature of the services that we obtain from EchoStar and the market competition for these
services. Furthermore, as part of the Spin-off, certain real estate was contributed to EchoStar
and leased back to us and we now incur additional costs in the form of rent paid on these leases.
These additional costs are not reflected in our historical consolidated financial statements for
periods prior to January 1, 2008.
41
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Subscriber-related revenue. Subscriber-related revenue consists principally of revenue from
basic, movie, local, pay-per-view, Latino and international subscription television services,
equipment rental fees and other hardware related fees, including fees for DVRs and additional
outlet fees from subscribers with multiple receivers, advertising services, fees earned from our
DishHOME Protection Plan, equipment upgrade fees, HD programming and other subscriber revenue.
Certain of the amounts included in Subscriber-related revenue are not recurring on a monthly
basis.
Equipment sales and other revenue. Equipment sales and other revenue principally includes the
unsubsidized sales of DBS accessories to retailers and other third-party distributors of our
equipment and to DISH Network subscribers. During 2007 and 2006, this category also included sales
of non-DISH Network digital receivers and related components to international customers and
satellite and transmission revenue, which related to the set-top box business and other assets that
were distributed to EchoStar in connection with the Spin-off.
Equipment sales, transitional services and other revenue EchoStar. Equipment sales,
transitional services and other revenue EchoStar includes revenue related to equipment sales,
and transitional services and other agreements with EchoStar associated with the Spin-off.
Subscriber-related expenses. Subscriber-related expenses principally include programming
expenses, costs incurred in connection with our in-home service and call center operations, billing
costs, refurbishment and repair costs related to receiver systems, subscriber retention and other
variable subscriber expenses.
Satellite and transmission expenses EchoStar. Satellite and transmission expenses EchoStar
includes the cost of digital broadcast operations provided to us by EchoStar, which were previously
performed internally, including satellite uplinking/downlinking, signal processing, conditional
access management, telemetry, tracking and control and other professional services. In addition,
this category includes the cost of leasing satellite and transponder capacity on satellites that
were distributed to EchoStar in connection with the Spin-off.
Satellite and transmission expenses other. Satellite and transmission expenses other
includes transponder leases and other related services. Prior to the Spin-off, Satellite and
transmission expenses other included costs associated with the operation of our digital
broadcast centers, including satellite uplinking/downlinking, signal processing, conditional access
management, telemetry, tracking and control, satellite and transponder leases, and other related
services, which were previously performed internally.
Equipment, transitional services and other cost of sales. Equipment, transitional services and
other cost of sales principally includes the cost of unsubsidized sales of DBS accessories to
retailers and other distributors of our equipment domestically and to DISH Network subscribers. In
addition, this category includes costs related to equipment sales, transitional services and other
agreements with EchoStar associated with the Spin-off.
During 2007 and 2006, Equipment, transitional services and other cost of sales also included
costs associated with non-DISH Network digital receivers and related components sold to
international customers and satellite and transmission expenses, which related to the set-top box
business and other assets that were distributed to EchoStar in connection with the Spin-off.
Subscriber acquisition costs. In addition to leasing receivers, we generally subsidize
installation and all or a portion of the cost of our receiver systems in order to attract new DISH
Network subscribers. Our Subscriber acquisition costs include the cost of our receiver systems
sold to retailers and other distributors of our equipment, the cost of receiver systems sold
directly by us to subscribers, net costs related to our promotional incentives, and costs related
to installation and acquisition advertising. We exclude the value of equipment capitalized under
our lease program for new subscribers from Subscriber acquisition costs.
SAC. Management believes subscriber acquisition cost measures are commonly used by those
evaluating companies in the pay-TV industry. We are not aware of any uniform standards for
calculating the average subscriber acquisition costs per new subscriber activation, or SAC, and
we believe presentations of SAC may not be calculated consistently by different companies in the
same or similar businesses. Our SAC is calculated as
Subscriber acquisition costs, plus the value of equipment capitalized under our lease program for
new subscribers, divided by gross subscriber additions. We include all the costs of acquiring
subscribers (e.g., subsidized and
42
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
capitalized equipment) as our management believes it is a more
comprehensive measure of how much we are spending to acquire subscribers. We also include all new
DISH Network subscribers in our calculation, including DISH Network subscribers added with little
or no subscriber acquisition costs.
General and administrative expenses. General and administrative expenses consists primarily of
employee-related costs associated with administrative services such as legal, information systems,
accounting and finance, including non-cash, stock-based compensation expense. It also includes
outside professional fees (e.g., legal, information systems and accounting services) and other
items associated with facilities and administration. Following the Spin-off, the general and
administrative expenses associated with the business and assets distributed to EchoStar in
connection with the Spin-off are no longer reflected in our General and administrative expenses.
Interest expense. Interest expense primarily includes interest expense, prepayment premiums and
amortization of debt issuance costs associated with our senior debt and convertible subordinated
debt securities (net of capitalized interest) and interest expense associated with our capital
lease obligations.
Other income (expense), net. The main components of Other income and expense are unrealized
gains and losses from changes in fair value of non-marketable strategic investments accounted for
at fair value, equity in earnings and losses of our affiliates, gains and losses realized on the
sale of investments, and impairment of marketable and non-marketable investment securities.
Earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA is defined as
Net income (loss) plus Interest expense net of Interest income, Taxes and Depreciation and
amortization. This non-GAAP measure is reconciled to net income (loss) in our discussion of
Results of Operations below.
DISH Network subscribers. We include customers obtained through direct sales, and through
third-party retail networks and other distribution relationships, in our DISH Network subscriber
count. We also provide DISH Network service to hotels, motels and other commercial accounts. For
certain of these commercial accounts, we divide our total revenue for these commercial accounts by
an amount approximately equal to the retail price of our Americas Top 100 programming package (but
taking into account, periodically, price changes and other factors), and include the resulting
number, which is substantially smaller than the actual number of commercial units served, in our
DISH Network subscriber count. Previously, our end of period DISH Network subscriber count was
rounded down to the nearest five thousand. However, beginning December 31, 2008, we round to the
nearest one thousand.
Average monthly revenue per subscriber (ARPU). We are not aware of any uniform standards for
calculating ARPU and believe presentations of ARPU may not be calculated consistently by other
companies in the same or similar businesses. We calculate average monthly revenue per subscriber,
or ARPU, by dividing average monthly Subscriber-related revenue for the period (total
Subscriber-related revenue during the period divided by the number of months in the period) by
our average DISH Network subscribers for the period. Average DISH Network subscribers are
calculated for the period by adding the average DISH Network subscribers for each month and
dividing by the number of months in the period. Average DISH Network subscribers for each month
are calculated by adding the beginning and ending DISH Network subscribers for the month and
dividing by two.
Subscriber churn rate. We are not aware of any uniform standards for calculating subscriber churn
rate and believe presentations of subscriber churn rates may not be calculated consistently by
different companies in the same or similar businesses. We calculate subscriber churn rate for any
period by dividing the number of DISH Network subscribers who terminated service during the period
by the average monthly DISH Network subscribers during the period, and further dividing by the
number of months in the period. When calculating subscriber churn, as is the case when calculating
ARPU, the number of subscribers in a given month is based on the average of the beginning-of-month
and the end-of-month subscriber counts. Prior to the fourth quarter of 2008, the number of
subscribers at the beginning of each month was used as the number of
subscribers for that month in our subscriber churn
calculation. The revised calculation produces a 1.86% churn rate for the year ended December 31,
2008 versus 1.85% using the prior calculation. Prior period subscriber churn figures have not been
adjusted for this revised subscriber churn calculation as the impacts were similarly immaterial.
Free cash flow. We define free cash flow as Net cash flows from operating activities less
Purchases of property and equipment, as shown on our Consolidated Statements of Cash Flows.
43
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
RESULTS OF OPERATIONS
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
Variance |
|
Statements of Operations Data |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related revenue |
|
$ |
11,455,575 |
|
|
$ |
10,690,976 |
|
|
$ |
764,599 |
|
|
|
7.2 |
|
Equipment sales and other revenue |
|
|
124,261 |
|
|
|
399,399 |
|
|
|
(275,138 |
) |
|
|
(68.9 |
) |
Equipment sales, transitional services and other revenue EchoStar |
|
|
37,351 |
|
|
|
|
|
|
|
37,351 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
11,617,187 |
|
|
|
11,090,375 |
|
|
|
526,812 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related expenses |
|
|
5,977,355 |
|
|
|
5,496,579 |
|
|
|
480,776 |
|
|
|
8.7 |
|
% of Subscriber-related revenue |
|
|
52.2 |
% |
|
|
51.4 |
% |
|
|
|
|
|
|
|
|
Satellite and transmission expenses EchoStar |
|
|
305,322 |
|
|
|
|
|
|
|
305,322 |
|
|
NM |
% of Subscriber-related revenue |
|
|
2.7 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
Satellite and transmission expenses other |
|
|
32,407 |
|
|
|
180,687 |
|
|
|
(148,280 |
) |
|
|
(82.1 |
) |
% of Subscriber-related revenue |
|
|
0.3 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
Equipment, transitional services and other cost of sales |
|
|
169,917 |
|
|
|
281,722 |
|
|
|
(111,805 |
) |
|
|
(39.7 |
) |
Subscriber acquisition costs |
|
|
1,531,741 |
|
|
|
1,570,415 |
|
|
|
(38,674 |
) |
|
|
(2.5 |
) |
General and administrative expenses |
|
|
544,035 |
|
|
|
624,251 |
|
|
|
(80,216 |
) |
|
|
(12.8 |
) |
% of Total revenue |
|
|
4.7 |
% |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
Litigation expense |
|
|
|
|
|
|
33,907 |
|
|
|
(33,907 |
) |
|
|
(100.0 |
) |
Depreciation and amortization |
|
|
1,000,230 |
|
|
|
1,329,410 |
|
|
|
(329,180 |
) |
|
|
(24.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
9,561,007 |
|
|
|
9,516,971 |
|
|
|
44,036 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,056,180 |
|
|
|
1,573,404 |
|
|
|
482,776 |
|
|
|
30.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
51,217 |
|
|
|
137,872 |
|
|
|
(86,655 |
) |
|
|
(62.9 |
) |
Interest expense, net of amounts capitalized |
|
|
(369,878 |
) |
|
|
(405,319 |
) |
|
|
35,441 |
|
|
|
8.7 |
|
Other, net |
|
|
(168,713 |
) |
|
|
(55,804 |
) |
|
|
(112,909 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(487,374 |
) |
|
|
(323,251 |
) |
|
|
(164,123 |
) |
|
|
(50.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,568,806 |
|
|
|
1,250,153 |
|
|
|
318,653 |
|
|
|
25.5 |
|
Income tax (provision) benefit, net |
|
|
(665,859 |
) |
|
|
(494,099 |
) |
|
|
(171,760 |
) |
|
|
(34.8 |
) |
Effective tax rate |
|
|
42.4 |
% |
|
|
39.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
$ |
146,893 |
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscribers, as of period end (in millions) |
|
|
13.678 |
|
|
|
13.780 |
|
|
|
(0.102 |
) |
|
|
(0.7 |
) |
DISH Network subscriber additions, gross (in millions) |
|
|
2.966 |
|
|
|
3.434 |
|
|
|
(0.468 |
) |
|
|
(13.6 |
) |
DISH Network subscriber additions, net (in millions) |
|
|
(0.102 |
) |
|
|
0.675 |
|
|
|
(0.777 |
) |
|
|
(115.1 |
) |
Average monthly subscriber churn rate |
|
|
1.86 |
% |
|
|
1.70 |
% |
|
|
0.16 |
% |
|
|
9.4 |
|
Average monthly revenue per subscriber (ARPU) |
|
$ |
69.27 |
|
|
$ |
65.83 |
|
|
$ |
3.44 |
|
|
|
5.2 |
|
Average subscriber acquisition costs per subscriber (SAC) |
|
$ |
720 |
|
|
$ |
656 |
|
|
$ |
64 |
|
|
|
9.8 |
|
EBITDA |
|
$ |
2,887,697 |
|
|
$ |
2,847,010 |
|
|
$ |
40,687 |
|
|
|
1.4 |
|
44
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
DISH Network subscribers. As of December 31, 2008, we had approximately 13.678 million DISH
Network subscribers compared to approximately 13.780 million subscribers at December 31, 2007, a
decrease of 102,000 or 0.7%. DISH Network added approximately 2.966 million gross new subscribers
for the year ended December 31, 2008, compared to approximately 3.434 million gross new subscribers
during 2007, a decrease of approximately 468,000 gross new subscribers.
DISH Network lost approximately 102,000 net subscribers for the year ended December 31, 2008,
compared to adding approximately 675,000 net new subscribers during the same period in 2007. This
decrease primarily resulted from lower gross new subscribers discussed above, an increase in our
subscriber churn rate, and churn on a larger average subscriber base for the year. Our average
monthly subscriber churn for the year ended December 31, 2008 was 1.86%, compared to 1.70% for the
same period in 2007. Given the increasingly competitive nature of our industry and the current
weaker economic conditions, especially the downturn in the financial and consumer markets, we may
not be able to reduce churn without significantly increasing our spending on customer retention
incentives, which would have a negative effect on our results of operations and free cash flow.
We believe our gross and net subscriber additions as well as our subscriber churn have been
negatively impacted by weaker economic conditions, aggressive promotional and retention offerings by
our competition, our relative discipline in our own promotional and retention activities including
the amount of discounted programming or equipment we have offered, the heavy marketing of HD
service by our competition, the growth of fiber-based and Internet-based pay TV providers, signal
theft and other forms of fraud, and operational inefficiencies at DISH Network. We have not always
met our own standards for performing high quality installations, effectively resolving customer
issues when they arise, answering customer calls in an acceptable timeframe, effectively
communicating with our customer base, reducing calls driven by the complexity of our business,
improving the reliability of certain systems and customer equipment, and aligning the interests of
certain third party retailers and installers to provide high quality service.
Most of these factors have affected both gross new subscriber additions as well as existing
subscriber churn. Our future gross subscriber additions and subscriber churn may continue to be
negatively impacted by these factors, which could in turn adversely affect our revenue growth.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions over the past several years, accounting for approximately 17% of our gross
subscriber additions for the year ended December 31, 2008 and 19% of our gross subscriber additions
in the fourth quarter. This distribution relationship ended on January 31, 2009. AT&T has entered
into a new distribution relationship with DirecTV. It may be difficult for us to develop
alternative distribution channels that will fully replace AT&T and if we are unable to do so, our
gross and net subscriber additions may be further impaired, our subscriber churn may increase, and
our results of operations may be adversely affected. In addition, approximately one million of our
current subscribers were acquired through our distribution relationship with AT&T and subscribers
acquired through this channel have historically churned at a higher rate than our overall
subscriber base. Although AT&T is not permitted to target these subscribers for transition to
another pay-TV service and we and AT&T are required to maintain bundled billing and cooperative
customer service for these subscribers, these subscribers may still churn at higher than historical
rates following termination of the AT&T distribution relationship.
Subscriber-related revenue. DISH Network Subscriber-related revenue totaled $11.456 billion for
the year ended December 31, 2008, an increase of $765 million or 7.2% compared to 2007. This
increase was primarily related to the increase in ARPU discussed below and a higher average
subscriber base in 2008 compared to 2007.
ARPU. Monthly average revenue per subscriber was $69.27 during the year ended December 31, 2008
versus $65.83 during the same period in 2007. The $3.44 or 5.2% increase in ARPU was primarily
attributable to (i) price increases in February 2008 and 2007 on some of our most popular
programming packages, (ii) an increase in hardware related fees, including rental fees and fees for
DVRs, (iii) increased penetration of HD programming driven in part by the availability of HD local
channels, (iv) an increase in fees earned from our DishHOME Protection Plan, and (v) increased
advertising revenue. This increase was partially offset by a decrease in revenue from our original
agreement with AT&T.
45
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
As previously discussed, in February 2009, we introduced new promotions which subsidize certain
programming for new and existing subscribers in an effort to increase and retain quality customers.
To the extent these promotions are successful, ARPU could decline in the short-term as the number
of DISH Network subscribers receiving free or discounted programming increases.
Equipment sales and other revenue. Equipment sales and other revenue totaled $124 million during
the year ended December 31, 2008, a decrease of $275 million or 68.9% compared to the same period
during 2007. The decrease in Equipment sales and other revenue primarily resulted from the
distribution of our set-top box business and certain other revenue-generating assets to EchoStar in
connection with the Spin-off, partially offset by increases in other revenue. During the year
ended December 31, 2007, our set-top box business that was distributed to EchoStar accounted for
$282 million of our Equipment sales and other revenue.
Equipment sales, transitional services and other revenue EchoStar. Equipment sales,
transitional services and other revenue EchoStar totaled $37 million during the year ended
December 31, 2008 as a result of the Spin-off.
Subscriber-related expenses. Subscriber-related expenses totaled $5.977 billion during the year
ended December 31, 2008, an increase of $481 million or 8.7% compared to the same period in 2007.
The increase in Subscriber-related expenses was primarily attributable to higher costs for: (i)
programming content, (ii) customer retention, (iii) call center operations, (iv) in-home service,
(v) the refurbishment and repair of receiver systems used in our equipment lease programs,
partially offset by a decrease in costs associated with our original agreement with AT&T. The
increase in customer retention expense was primarily driven by more upgrading of existing customers
to HD and DVR receivers and the changing of equipment for certain subscribers to free up satellite
bandwidth in support of HD and other initiatives. We expect to implement the satellite bandwidth
initiatives at least through the first half of 2009. We believe that the benefit from the increase
in available satellite bandwidth outweighs the short-term cost of these equipment changes. The
increases related to call center operations and in-home service were driven in part by our
investments in staffing, training, information systems, and other initiatives. These investments
are intended to help combat inefficiencies introduced by the increasing complexity of our business
and technology, improve customer satisfaction, reduce churn, increase productivity, and allow us to
better scale our business over the long run. We cannot, however, be certain that our increased
spending will ultimately
yield these benefits. In the meantime, we may continue to incur higher costs as a result of both
our operational inefficiencies and increased spending. Subscriber-related expenses represented
52.2% and 51.4% of Subscriber-related revenue during the years ended December 31, 2008 and 2007,
respectively. The increase in this expense to revenue ratio primarily resulted from the increase
in Subscriber-related expenses, partially offset by an increase in ARPU. Subscriber-related
expenses represented 54.6% of Subscriber-related revenue during the three months ended December
31, 2008.
In the normal course of business, we enter into contracts to purchase programming content in which
our payment obligations are fully contingent on the number of subscribers to whom we provide the
respective content. The terms of our contracts typically range from one to ten years with annual
rate increases. Our programming expenses will continue to increase to the extent we are successful
growing our subscriber base. In addition, our Subscriber-related expenses may face further upward
pressure from price escalations in current contracts and the renewal of long term programming
contracts on less favorable pricing terms.
Satellite and transmission expenses EchoStar. Satellite and transmission expenses EchoStar
totaled $305 million during the year ended December 31, 2008. As previously discussed, Satellite
and transmission expenses EchoStar resulted from costs associated with the services provided to
us by EchoStar, including the satellite and transponder capacity leases on satellites that were
distributed to EchoStar in connection with the Spin-off, and digital broadcast operations
previously provided internally at cost.
Satellite and transmission expenses other. Satellite and transmission expenses other
totaled $32 million during the year ended December 31, 2008, a $148 million decrease compared to
the same period in 2007. As previously discussed, prior to the Spin-off, Satellite and
transmission expenses other included costs associated with the operation of our digital
broadcast centers, including satellite uplinking/downlinking, signal processing, conditional access
management, telemetry, tracking and control, satellite and transponder leases, and other related
services.
46
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Following the Spin-off, these digital broadcast operation services have been provided to us by
EchoStar and are included in Satellite and transmission expenses EchoStar.
Equipment, transitional services and other cost of sales. Equipment, transitional services and
other cost of sales totaled $170 million during the year ended December 31, 2008, a decrease of
$112 million or 39.7% compared to the same period in 2007. The decrease primarily resulted from
the elimination of the cost of sales related to the distribution of our set-top box business to
EchoStar in connection with the Spin-off, partially offset by costs related to our transitional
services and other agreements with EchoStar, charges for obsolete inventory, and an increase in
other cost of sales. During the year ended December 31, 2007, the costs associated with our
set-top box business that was distributed to EchoStar accounted for $163 million of our Equipment,
transitional services and other cost of sales.
Subscriber acquisition costs. Subscriber acquisition costs totaled $1.532 billion for the year
ended December 31, 2008, a decrease of $39 million or 2.5% compared to the same period in 2007.
This decrease was primarily attributable to the decline in gross new subscribers, partially offset
by an increase in SAC discussed below.
SAC. SAC was $720 during the year ended December 31, 2008 compared to $656 during the same period
in 2007, an increase of $64, or 9.8%. This increase was primarily attributable to an increase in
equipment costs, as well as higher acquisition advertising expense and an increase in promotional
incentives paid to our independent retailer network. Our equipment costs were higher during 2008
as a result of an increase in the number of new DISH Network subscribers selecting more advanced
equipment, such as HD receivers, DVRs and receivers with multiple tuners and as a result of the
Spin-off of our set-top box business to EchoStar. Set-top boxes were historically designed
in-house and procured at our cost. We now acquire this equipment from EchoStar at its cost plus an
agreed-upon margin. These increases were partially offset by the increase in the redeployment
benefits of our equipment lease program for new subscribers. During the three months ended
December 31, 2008, SAC was $737.
During the years ended December 31, 2008 and 2007, the amount of equipment capitalized under our
lease program for new subscribers totaled $604 million and $682 million, respectively. This
decrease in capital expenditures under our lease program for new subscribers resulted primarily
from lower subscriber growth and an increase in redeployment of equipment returned by disconnecting
lease program subscribers, partially offset by higher equipment costs resulting from higher priced
advanced products and the mark-up on set-top boxes as a result of the Spin-off, discussed above.
Capital expenditures resulting from our equipment lease program for new subscribers have been, and
are expected to continue to be, partially mitigated by, among other things, the redeployment of
equipment returned by disconnecting lease program subscribers. However, to remain competitive we
upgrade or replace subscriber equipment periodically as technology changes, and the costs
associated with these upgrades may be substantial. To the extent technological changes render a
portion of our existing equipment obsolete, we would be unable to redeploy all returned equipment
and consequently would realize less benefit from the SAC reduction associated with redeployment of
that returned lease equipment.
Our SAC calculation does not reflect any benefit from payments we received in connection with
equipment not returned to us from disconnecting lease subscribers and returned equipment that is
made available for sale rather than being redeployed through our lease program. During the years
ended December 31, 2008 and 2007, these amounts totaled $128 million and $87 million, respectively.
47
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Several years ago, we began deploying receivers that utilize 8PSK modulation technology and
receivers that utilize MPEG-4 compression technology. These technologies, when fully deployed,
will allow more programming channels to be carried over our existing satellites. A majority of our
customers today, however, do not have receivers that use MPEG-4 compression and a smaller but still
significant percentage do not have receivers that use 8PSK modulation. We may choose to invest
significant capital to accelerate the conversion of customers to MPEG-4 and/or 8PSK in order to
realize the bandwidth benefits sooner. In addition, given that all of our HD content is broadcast
in MPEG-4, any growth in HD penetration will naturally accelerate our transition to these newer
technologies and may increase our subscriber acquisition and retention costs. All new receivers
that we purchase from EchoStar now have MPEG-4 technology. Although we continue to refurbish and
redeploy MPEG-2 receivers, as a result of our HD initiatives and current promotions, most new customers
in certain markets will be required to activate higher priced MPEG-4 technology. This limits our
ability to redeploy MPEG-2 receivers and, to the extent that our new promotion in certain markets are
successful, will accelerate the transition to MPEG-4 technology, resulting in an adverse effect on
our SAC.
Our Subscriber acquisition costs and SAC may materially increase in the future to the extent
that we transition to newer technologies, introduce more aggressive promotions, or provide greater
equipment subsidies. See further discussion under Liquidity and Capital Resources Subscriber
Retention and Acquisition Costs.
General and administrative expenses. General and administrative expenses totaled $544 million
during the year ended December 31, 2008, a decrease of $80 million or 12.8% compared to the same
period in 2007. This decrease was primarily attributable to the reduction in headcount and
administrative costs resulting from the Spin-off and a reduction in outside professional fees,
partially offset by an increase in costs related to transitional services and commercial agreements
with EchoStar as a result of the Spin-off. In addition, the 2007 amount included $22 million of
in-process research and development costs associated with the acquisition of Sling Media in the
fourth quarter 2007. General and administrative expenses represented 4.7% and 5.6% of Total
revenue during the years ended December 31, 2008 and 2007, respectively. The decrease in the
ratio of the expenses to Total revenue was primarily attributable to the changes in expenses
discussed above.
Litigation expense. The 2007 Litigation expense of $34 million related to the Tivo case and
represents the estimated cost of any software infringement prior to the implementation of the
alternative technology, plus interest subsequent to the jury verdict.
Depreciation and amortization. Depreciation and amortization expense totaled $1.000 billion
during the year ended December 31, 2008, a decrease of $329 million or 24.8% compared to the same
period in 2007. This decrease was primarily a result of our contribution of several satellites,
uplink and satellite transmission assets, real estate and other assets to EchoStar in connection
with the Spin-off. In addition, the 2007 expense included the write-off of costs associated with
discontinued software development projects.
Interest income. Interest income totaled $51 million during the year ended December 31, 2008, a
decrease of $87 million compared to the same period in 2007. This decrease principally resulted
from lower average carrying balances, as well as rate of return, of our cash and marketable
investment securities during 2008 compared to the same period in 2007.
Interest expense, net of amounts capitalized. Interest expense totaled $370 million during the
year ended December 31, 2008, a decrease of $35 million or 8.7% compared to the same period in
2007. This decrease primarily resulted from the reduction in interest expense associated with 2007
and 2008 debt redemptions and the contribution of satellite capital leases to EchoStar in
connection with the Spin-off, partially offset by an increase in interest expense related to the
issuance of debt during 2008.
48
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Other, net. Other, net expense totaled $169 million during the year ended December 31, 2008, an
increase of $113 million compared to the same period in 2007. This change primarily resulted from
an increase of $191 million related to impairments of marketable investment securities, partially
offset by a gain of $53 million on the sale of a non-marketable investment and a $33 million
decline in unrealized losses and impairments on our other investment securities.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $2.888 billion during
the year ended December 31, 2008, an increase of $41 million or 1.4% compared to the same period in
2007. EBITDA for the year ended December 31, 2008 was negatively impacted by changes in revenue
and expenses discussed above, including the $113 million increase in Other expense. The
following table reconciles EBITDA to the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
2,887,697 |
|
|
$ |
2,847,010 |
|
Less: |
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
318,661 |
|
|
|
267,447 |
|
Income tax provision (benefit), net |
|
|
665,859 |
|
|
|
494,099 |
|
Depreciation and amortization |
|
|
1,000,230 |
|
|
|
1,329,410 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
|
|
|
|
|
|
EBITDA is not a measure determined in accordance with accounting principles generally accepted in
the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. EBITDA is used as a measurement of
operating efficiency and overall financial performance and we believe it to be a helpful measure
for those evaluating companies in the pay-TV industry. Conceptually, EBITDA measures the amount of
income generated each period that could be used to service debt, pay taxes and fund capital
expenditures. EBITDA should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP.
Income tax (provision) benefit, net. Our income tax provision was $666 million during the year
ended December 31, 2008, an increase of $172 million compared to the same period in 2007. The
increase was primarily due to the increase in Income (loss) before income taxes and in our
effective tax rate during the period. The increase in our effective tax rate was primarily due to
the establishment of an $80 million valuation allowance against deferred tax assets, which are
capital in nature, related to the impairment of marketable and non-marketable investment securities
in 2008.
Net income (loss). Net income was $903 million during the year ended December 31, 2008, an
increase of $147 million compared to $756 million in 2007. The increase was primarily attributable
to the changes in revenue and expenses discussed above.
49
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
Variance |
|
Statements of Operations Data |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
% |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related revenue |
|
$ |
10,690,976 |
|
|
$ |
9,422,274 |
|
|
$ |
1,268,702 |
|
|
|
13.5 |
|
Equipment sales and other revenue |
|
|
399,399 |
|
|
|
396,212 |
|
|
|
3,187 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
11,090,375 |
|
|
|
9,818,486 |
|
|
|
1,271,889 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related expenses |
|
|
5,496,579 |
|
|
|
4,807,872 |
|
|
|
688,707 |
|
|
|
14.3 |
|
% of Subscriber-related revenue |
|
|
51.4 |
% |
|
|
51.0 |
% |
|
|
|
|
|
|
|
|
Satellite and transmission expenses other |
|
|
180,687 |
|
|
|
147,450 |
|
|
|
33,237 |
|
|
|
22.5 |
|
% of Subscriber-related revenue |
|
|
1.7 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
Equipment, transitional services and other cost of sales |
|
|
281,722 |
|
|
|
289,680 |
|
|
|
(7,958 |
) |
|
|
(2.7 |
) |
Subscriber acquisition costs |
|
|
1,570,415 |
|
|
|
1,596,303 |
|
|
|
(25,888 |
) |
|
|
(1.6 |
) |
General and administrative expenses |
|
|
624,251 |
|
|
|
551,547 |
|
|
|
72,704 |
|
|
|
13.2 |
|
% of Total revenue |
|
|
5.6 |
% |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
Litigation expense |
|
|
33,907 |
|
|
|
93,969 |
|
|
|
(60,062 |
) |
|
|
(63.9 |
) |
Depreciation and amortization |
|
|
1,329,410 |
|
|
|
1,114,294 |
|
|
|
215,116 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
9,516,971 |
|
|
|
8,601,115 |
|
|
|
915,856 |
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
1,573,404 |
|
|
|
1,217,371 |
|
|
|
356,033 |
|
|
|
29.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
137,872 |
|
|
|
126,401 |
|
|
|
11,471 |
|
|
|
9.1 |
|
Interest expense, net of amounts capitalized |
|
|
(405,319 |
) |
|
|
(458,150 |
) |
|
|
52,831 |
|
|
|
11.5 |
|
Other, net |
|
|
(55,804 |
) |
|
|
37,393 |
|
|
|
(93,197 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(323,251 |
) |
|
|
(294,356 |
) |
|
|
(28,895 |
) |
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,250,153 |
|
|
|
923,015 |
|
|
|
327,138 |
|
|
|
35.4 |
|
Income tax (provision) benefit, net |
|
|
(494,099 |
) |
|
|
(314,743 |
) |
|
|
(179,356 |
) |
|
|
(57.0 |
) |
Effective tax rate |
|
|
39.5 |
% |
|
|
34.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
756,054 |
|
|
$ |
608,272 |
|
|
$ |
147,782 |
|
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscribers, as of period end (in millions) |
|
|
13.780 |
|
|
|
13.105 |
|
|
|
0.675 |
|
|
|
5.2 |
|
DISH Network subscriber additions, gross (in millions) |
|
|
3.434 |
|
|
|
3.516 |
|
|
|
(0.082 |
) |
|
|
(2.3 |
) |
DISH Network subscriber additions, net (in millions) |
|
|
0.675 |
|
|
|
1.065 |
|
|
|
(0.390 |
) |
|
|
(36.6 |
) |
Average monthly subscriber churn rate |
|
|
1.70 |
% |
|
|
1.64 |
% |
|
|
0.06 |
% |
|
|
3.7 |
|
Average monthly revenue per subscriber (ARPU) |
|
$ |
65.83 |
|
|
$ |
62.78 |
|
|
$ |
3.05 |
|
|
|
4.9 |
|
Average subscriber acquisition costs per subscriber (SAC) |
|
$ |
656 |
|
|
$ |
686 |
|
|
$ |
(30 |
) |
|
|
(4.4 |
) |
EBITDA |
|
$ |
2,847,010 |
|
|
$ |
2,369,058 |
|
|
$ |
477,952 |
|
|
|
20.2 |
|
50
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
DISH Network subscribers. As of December 31, 2007, we had approximately 13.780 million DISH
Network subscribers compared to approximately 13.105 million subscribers at December 31, 2006, an
increase of 5.2%. DISH Network added approximately 3.434 million gross new subscribers for the
year ended December 31, 2007, compared to approximately 3.516 million gross new subscribers during
2006, a decrease of approximately 82,000 gross new subscribers.
DISH Network added approximately 675,000 net new subscribers for the year ended December 31, 2007,
compared to approximately 1.065 million net new subscribers during 2006, a decrease of 36.6%. This
decrease primarily resulted from an increase in our subscriber churn rate, churn on a larger
subscriber base, and the decrease in gross new subscribers discussed above.
Subscriber-related revenue. DISH Network Subscriber-related revenue totaled $10.691 billion for
the year ended December 31, 2007, an increase of $1.269 billion or 13.5% compared to 2006. This
increase was directly attributable to continued DISH Network subscriber growth and the increase in
ARPU discussed below.
ARPU. Monthly average revenue per subscriber was $65.83 during the year ended December 31, 2007
versus $62.78 during the same period in 2006. The $3.05 or 4.9% increase in ARPU is primarily
attributable to price increases in February 2007 and 2006 on some of our most popular programming
packages, increased penetration of HD programming, higher equipment rental fees resulting from
increased penetration of our equipment leasing programs, other hardware related fees, fees for
DVRs, and revenue from increased availability of standard definition and HD local channels by
satellite.
Equipment sales and other revenue. Equipment sales and other revenue totaled $399 million during
the year ended December 31, 2007, an increase of $3 million or 0.8% compared to 2006. During 2007,
we experienced a slight increase in sales of non-DISH Network digital receivers and related
components to international customers, offset by a decrease in domestic sales of DBS accessories.
Subscriber-related expenses. Subscriber-related expenses totaled $5.497 billion during the year
ended December 31, 2007, an increase of $689 million or 14.3% compared to 2006. The increase in
Subscriber-related expenses was primarily attributable to the increase in the number of DISH
Network subscribers and the items discussed below that contributed to the increase in the expense
to revenue ratio. Subscriber-related expenses as a percentage of Subscriber-related revenue
increased to 51.4% from 51.0% in the year ended December 31, 2007 compared to 2006. The increase
in this expense to revenue ratio primarily resulted from increases in: (i) programming costs, (ii)
in-home service, refurbishment and repair costs for our receiver systems associated with increased
penetration of our equipment lease programs, and (iii) bad debt expense resulting from an increase
in the number of subscribers who we deactivated for non-payment of their bill. These increases were
partially offset by a decline in costs associated with our call center operations and in costs
associated with our previous co-branding arrangement with AT&T.
Satellite and transmission expenses other. Satellite and transmission expenses other totaled
$181 million during the year ended December 31, 2007, an increase of $33 million or 22.5% compared
to 2006. This increase primarily resulted from higher operational costs associated with our
capital lease of Anik F3 which commenced commercial operations in April 2007 and the higher costs
associated with our enhanced content platform including a broader distribution of more extensive HD
programming. Satellite and transmission expenses other as a percentage of Subscriber-related
revenue increased to 1.7% from 1.6% in the year ended December 31, 2007 compared to 2006.
51
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Equipment, transitional services and other cost of sales. Equipment, transitional services and
other cost of sales totaled $282 million during the year ended December 31, 2007, a decrease of $8
million or 2.7% compared to 2006. This decrease primarily resulted from a decline in charges for
defective, slow moving and obsolete inventory and in the cost of non-DISH Network digital receivers
and related components sold to international customers. These decreases were partially offset by
an increase in the cost of domestic sales of DBS accessories.
Subscriber acquisition costs. Subscriber acquisition costs totaled $1.570 billion for the year
ended December 31, 2007, a decrease of $26 million or 1.6% compared to 2006. The decrease in
Subscriber acquisition costs was attributable to a decrease in gross new subscribers, a decrease
in SAC discussed below and a higher number of DISH Network subscribers participating in our
equipment lease program for new subscribers.
SAC. SAC was $656 during the year ended December 31, 2007 compared to $686 during 2006, a decrease
of $30, or 4.4%. This decrease was primarily attributable to the redeployment benefits of our
equipment lease program for new subscribers and lower average equipment costs, partially offset by
higher acquisition advertising. As a result of the Spin-off, we are likely to incur higher SAC as
we will be acquiring equipment, particularly digital receivers, from third parties. This equipment
was historically designed in-house and procured at our cost. We initially expect to acquire this
equipment from EchoStar at its cost, plus an additional amount representing an agreed margin on
that cost.
During the years ended December 31, 2007 and 2006, the amount of equipment capitalized under our
lease program for new subscribers totaled approximately $682 million and $817 million,
respectively. This decrease in capital expenditures under our lease program for new subscribers
resulted primarily from an increase in redeployment of equipment returned by disconnecting lease
program subscribers, decreased subscriber growth, fewer receivers per installation as the number of
dual tuner receivers we install continues to increase, lower average equipment costs and a
reduction in accessory costs.
As previously discussed, our SAC calculation does not include the benefit of payments we received
in connection with equipment not returned to us from disconnecting lease subscribers and returned
equipment that is made available for sale rather than being redeployed through our lease program.
During the years ended December 31, 2007 and 2006, these amounts totaled approximately $87 million
and $121 million, respectively.
General and administrative expenses. General and administrative expenses totaled $624 million
during the year ended December 31, 2007, an increase of $73 million or 13.2% compared to 2006.
This increase was primarily attributable to an increase in administrative costs to support the
growth of the DISH Network and outside professional fees. In addition, this increase primarily
related to the expensing of the in-process research and development costs associated with the
acquisition of Sling Media. General and administrative expenses represented 5.6% of Total
revenue during each of the years ended December 31, 2007 and 2006.
Litigation expense. During the years ended December 31, 2007 and 2006, we recorded Litigation
expense related to the Tivo case of $34 million and $94 million, respectively. The $94 million
reflects the jury verdict, supplemental damages and pre-judgment interest awarded by the Texas
court. The $34 million additional expense in 2007 represents the estimated cost of any software
infringement prior to the implementation of the alternative technology, plus interest subsequent to
the jury verdict. See Note 15 in the Notes to our Consolidated Financial Statements in Item 15 of
this Annual Report on Form 10-K for further discussion.
Depreciation and amortization. Depreciation and amortization expense totaled $1.329 billion
during the year ended December 31, 2007, an increase of $215 million or 19.3% compared to 2006.
The increase in Depreciation and amortization expense was primarily attributable to depreciation
on equipment leased to subscribers resulting from increased penetration of our equipment lease
programs, additional depreciation related to satellites and other depreciable assets placed in
service to support the DISH Network, and the write-off of costs associated with obsolete fixed
assets.
Interest expense, net of amounts capitalized. Interest expense totaled $405 million during the
year ended December 31, 2007, a decrease of $53 million or 11.5% compared to 2006. This decrease
primarily resulted from a net decrease in interest expense related to redemptions and issuances of
debt during 2006 and 2007.
52
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Other, net. Other, net expense totaled $56 million during the year ended December 31, 2007, a
decrease of $93 million compared to Other income of $37 million during 2006. The decrease in
Other primarily resulted from $56 million in charges to earnings for other-than-temporary
declines in fair value of our common stock investment in a foreign public company and a
non-marketable investment security during 2007. In addition, we had a decrease in net unrealized
and realized gains during 2007 compared to 2006.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $2.847 billion during
the year ended December 31, 2007, an increase of $478 million or 20.2% compared to 2006. The
following table reconciles EBITDA to the accompanying financial statements:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
2,847,010 |
|
|
$ |
2,369,058 |
|
Less: |
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
267,447 |
|
|
|
331,749 |
|
Income tax provision (benefit), net |
|
|
494,099 |
|
|
|
314,743 |
|
Depreciation and amortization |
|
|
1,329,410 |
|
|
|
1,114,294 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
756,054 |
|
|
$ |
608,272 |
|
|
|
|
|
|
|
|
EBITDA is not a measure determined in accordance with accounting principles generally accepted in
the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. EBITDA is used as a measurement of
operating efficiency and overall financial performance and we believe it to be a helpful measure
for those evaluating companies in the pay-TV industry. Conceptually, EBITDA measures the amount of
income generated each period that could be used to service debt, pay taxes and fund capital
expenditures. EBITDA should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP.
Income tax (provision) benefit, net. Our income tax provision was $494 million during the year
ended December 31, 2007, an increase of $179 million or 57.0% compared to during the same period in
2006. The increase in the provision was primarily related to the improvement in Income (loss)
before income taxes and an increase in the effective state tax rate due to changes in state
apportionment percentages. The year ended December 31, 2006 includes a credit of $13 million
related to the recognition of state net operating loss carryforwards (NOLs) for prior periods.
Net income (loss). Net income was $756 million during the year ended December 31, 2007, an
increase of $148 million compared to $608 million in 2006. The increase was primarily attributable
to the changes in revenue and expenses discussed above.
53
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable investment securities. We consider all liquid investments
purchased within 90 days of their maturity to be cash equivalents. See Item 7A. Quantitative
and Qualitative Disclosures About Market Risk for further discussion regarding our marketable
investment securities. As of December 31, 2008, our cash, cash equivalents and current marketable
investment securities totaled $559 million compared to $2.788 billion as of December 31, 2007, a
decrease of $2.229 billion.
Our principal source of liquidity during 2008 was cash generated by operating activities of $2.188
billion, approximately $750 million raised in issuing our 7 3/4% Senior Notes due 2015 and the net
sales of marketable and strategic investments of $166 million. Our primary uses of cash during
2008 were for the redemption of $1.5 billion of debt, the purchases of property and equipment of
$1.130 billion, the acquisition of 700 MHz wireless spectrum for $712 million, the distribution of
$1.532 billion to EchoStar related to the Spin-off, and the repurchase of 3.1 million shares of our
common stock for $83 million. In addition, we reclassified $240 million of marketable investment
securities on hand at December 31, 2007 to noncurrent assets during 2008 as recent events in the
credit markets have reduced or eliminated current liquidity for these investments.
The following discussion highlights our free cash flow and cash flow activities during the years
ended December 31, 2008, 2007 and 2006.
Free cash flow. We define free cash flow as Net cash flows from operating activities less
Purchases of property and equipment, as shown on our Consolidated Statements of Cash Flows. We
believe free cash flow is an important liquidity metric because it measures, during a given period,
the amount of cash generated that is available to repay debt obligations, make investments, fund
acquisitions and for certain other activities. Free cash flow is not a measure determined in
accordance with GAAP and should not be considered a substitute for Operating income, Net
income, Net cash flows from operating activities or any other measure determined in accordance
with GAAP. Since free cash flow includes investments in operating assets, we believe this non-GAAP
liquidity measure is useful in addition to the most directly comparable GAAP measure Net cash
flows from operating activities.
During the years ended December 31, 2008, 2007 and 2006, free cash flow was significantly impacted
by changes in operating assets and liabilities as shown in the Net cash flows from operating
activities section of our Consolidated Statements of Cash Flows included herein. Operating asset
and liability balances can fluctuate significantly from period to period and there can be no
assurance that free cash flow will not be negatively impacted by material changes in operating
assets and liabilities in future periods, since these changes depend upon, among other things,
managements timing of payments and control of inventory levels, and cash receipts. In addition to
fluctuations resulting from changes in operating assets and liabilities, free cash flow can vary
significantly from period to period depending upon, among other things, subscriber growth,
subscriber revenue, subscriber churn, subscriber acquisition costs including amounts capitalized
under our equipment lease programs, operating efficiencies, increases or decreases in purchases of
property and equipment and other factors.
The following table reconciles free cash flow to Net cash flows from operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Free cash flow |
|
$ |
1,058,454 |
|
|
$ |
1,172,198 |
|
|
$ |
882,924 |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
1,129,890 |
|
|
|
1,444,522 |
|
|
|
1,396,318 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
$ |
2,188,344 |
|
|
$ |
2,616,720 |
|
|
$ |
2,279,242 |
|
|
|
|
|
|
|
|
|
|
|
The decline in free cash flow from 2007 to 2008 of $114 million resulted from a decrease in Net
cash flows from operating activities of $429 million, or 16.4%, partially offset by a decrease in
Purchases of property and equipment of $315 million, or 21.8%. The decrease in Net cash flows
from operating activities was primarily attributable to a $351 million decrease in cash resulting
from changes in operating assets and liabilities and a $59 million decrease in net income, adjusted
to exclude non-cash changes in Depreciation and amortization expense and Realized and
54
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
unrealized
losses (gains) on investments. The decrease in cash resulting from changes in operating assets
and liabilities primarily relates to increases in cash outflows of
$619 million resulting from
changes in accounts payable, accounts receivable, income tax
receivable, deferred revenue and inventories, partially offset by a $277 million increase in net amounts payable to EchoStar. The
decrease in Purchases of property and equipment in 2008 was primarily attributable to a decline
in expenditures for satellite construction, corporate capital expenditures, and equipment under our
lease program for new subscribers, partially offset by increased spending for equipment under our
lease program for existing subscribers.
The improvement in free cash flow from 2006 to 2007 of $289 million resulted from an increase in
Net cash flows from operating activities of $337 million, or 14.8%, partially offset by an
increase in Purchases of property and equipment of $48 million, or 3.5%. The increase in Net
cash flows from operating activities was primarily attributable to a $602 million increase in net
income, including changes in: (i) Depreciation and amortization expense, (ii) Deferred tax
expense (benefit), and (iii) Realized and unrealized losses (gains) on investments. This
increase was partially offset by a $272 million decrease in cash resulting from changes in
operating assets and liabilities. The 2007 increase in Purchases of property and equipment was
primarily attributable to an increase in capital expenditures for satellite construction, and
equipment under our lease program for existing subscribers, partially offset by decreased spending
for equipment under our lease program for new subscribers.
Cash flows from operating activities. We typically reinvest the cash flow from operating
activities in our business primarily to grow our subscriber base and to expand our infrastructure.
For the years ended December 31, 2008, 2007 and 2006, we reported net cash flows from operating
activities of $2.188 billion, $2.617 billion, and $2.279 billion, respectively. See discussion of
changes in net cash flows from operating activities included in Free cash flow above.
Cash flows from investing activities. Our investing activities generally include purchases and
sales of marketable investment securities, strategic investments and cash used to grow our
subscriber base and expand our infrastructure. For the years ended December 31, 2008, 2007 and
2006, we reported net cash outflows from investing activities of $1.597 billion, $2.471 billion and
$2.149 billion, respectively. During the years ended December 31, 2008, 2007 and 2006, capital expenditures for new and existing
customer equipment totaled $920 million, $928 million and $985 million, respectively.
The decrease in net cash outflows from investing activities from 2007 to 2008 of $874 million
primarily resulted from a net decrease in purchases of marketable investment securities, a decrease
in cash used for purchases of property and equipment, a decrease in cash used for the purchases of
strategic investments, including Sling Media, and an increase in proceeds from the sale of
investments. The overall net decreases were partially offset by an increase in cash used for
purchases of FCC authorizations during 2008 compared to 2007.
The increase in net cash outflows from investing activities from 2006 to 2007 of $322 million
primarily resulted from an increase in cash used for the purchases of strategic investments,
including Sling Media, FCC licenses and capital expenditures, partially offset by a decrease in net
purchases of marketable investment securities during 2007.
Cash flows from financing activities. Our financing activities generally include net proceeds
related to the issuance of long-term debt, cash used for the repurchase or redemption of long-term
debt, payment of capital lease obligations, mortgages or other notes payable, and repurchases of
our Class A common stock. For the years ended December 31, 2008 and 2007, we reported net cash
outflows from financing activities of $1.412 billion and $976 million, respectively. For the year
ended December 31, 2006, we reported net cash inflows from financing activities of $1.022 billion.
The increase in net cash outflows from 2007 to 2008 includes an increase in cash outflows for debt
redemptions, distributions related to the Spin-off and stock repurchases, partially offset by an
increase in cash inflows related to issuance of new debt during 2008.
The increase in cash outflows from 2006 to 2007 primarily resulted from the issuance of $2 billion
of new debt during 2006.
55
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Other Liquidity Items
700 MHz Spectrum. We paid $712 million to acquire certain 700 MHz wireless licenses, which were
granted to us by the FCC in February 2009. We will be required to make significant additional
investments or partner with others to commercialize these licenses and satisfy FCC build-out
requirements. Part or all of our licenses may be terminated if we fail to satisfy these
requirements.
Subscriber churn. DISH Network lost approximately 102,000 net subscribers for the year ended
December 31, 2008, compared to adding approximately 675,000 net new subscribers during the same
period in 2007. This decrease primarily resulted from the decrease in gross new subscribers and an
increase in our subscriber churn rate of 1.86% compared to 1.70% for the same period in 2007. See
Results of Operations above for further discussion.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions over the past several years, accounting for approximately 17% of our gross
subscriber additions for the year ended December 31, 2008 and 19% of our gross subscriber additions
in the fourth quarter. This distribution relationship ended on January 31, 2009. AT&T has entered
into a new distribution relationship with DirecTV. It may be difficult for us to develop
alternative distribution channels that will fully replace AT&T and if we are unable to do so, our
gross and net subscriber additions may be further impaired, our subscriber churn may increase, and
our results of operations may be adversely affected. In addition, approximately one million of our
current subscribers were acquired through our distribution relationship with AT&T and subscribers
acquired through this channel have historically churned at a higher rate than our overall
subscriber base. Although AT&T is not permitted to target these subscribers for transition to
another pay-TV service and we and AT&T are required to maintain bundled billing and cooperative
customer service for these subscribers, these subscribers may still churn at higher than historical
rates following termination of the AT&T distribution relationship.
Satellites. Operation of our subscription television 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. 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
cause us to expend a significant portion of our cash to acquire or lease additional satellite
capacity.
Security Systems. Increases in theft of our signal, or our competitors signals, could in addition
to reducing new subscriber activations, also cause subscriber churn to increase. We use microchips
embedded in credit card-sized access cards, called smart cards, or security chips in our receiver
systems to control access to authorized programming content. Our signal encryption has been
compromised in the past and may be compromised in the future even though we continue to respond
with significant investment in security measures, such as security access device replacement programs and
updates in security software, that are intended to make signal theft more difficult. It has been
our prior experience that security measures may be only effective for short periods of time or not
at all and that we remain susceptible to additional signal theft. We cannot assure you that we
will be successful in reducing or controlling theft of our programming content. During the third
quarter of 2008, we began implementing a plan to replace our existing security access devices to re-secure our
system, which is expected to take approximately nine to twelve months to complete. We cannot
assure you that we will be successful in reducing or controlling theft of our programming content
and we may incur additional costs in the future if our security access device replacement plan is not
effective.
Stock Repurchases. Our board of directors previously authorized stock repurchases of up to $1.0
billion of our Class A common stock. During the year ended December 31, 2008, we repurchased 3.1
million shares of our common stock for $83 million. In November 2008, 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 authorized to repurchase up to $1.0 billion of our
outstanding shares through and including December 31, 2009. As of December 31, 2008, we may
repurchase up to $999 million under this plan.
56
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Subscriber Acquisition and Retention Costs. We incur significant up-front costs to acquire
subscribers, including advertising, retailer incentives, equipment, installation, and new customer
promotions. While we attempt to recoup these up-front costs over the lives of their subscription,
there can be no assurance that we will. We deploy business rules such as higher credit
requirements and contractual commitments, and we strive to provide outstanding customer service, to
increase the likelihood of customers keeping their DISH Network service over longer periods of
time. Our subscriber acquisition costs may vary significantly from period to period.
We incur significant costs to retain our existing customers, mostly by upgrading their equipment to
HD and DVR receivers. As with our subscriber acquisition costs, our retention spending includes
the cost of equipment and installation. We also offer free programming and/or promotional pricing
for limited periods for existing customers in exchange for a commitment. A major component of our
retention efforts includes the installation of equipment for customers who move. Our subscriber
retention costs may vary significantly from period to period.
57
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Other. We are also vulnerable to fraud, particularly in the acquisition of new subscribers. While
we are addressing the impact of subscriber fraud through a number of actions, including eliminating
certain payment options for subscribers, such as the use of pre-paid debit cards, there can be no
assurance that we will not continue to experience fraud which could impact our subscriber growth
and churn. The current economic downturn may create greater incentive for signal thefts and
subscriber frauds, which could lead to higher subscriber churn and reduced revenue.
Obligations and Future Capital Requirements
Contractual Obligations and Off-Balance Sheet Arrangements
Future maturities of our outstanding debt and contractual obligations as of December 31, 2008 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Long-term debt obligations |
|
$ |
4,775,000 |
|
|
$ |
25,000 |
|
|
$ |
|
|
|
$ |
1,000,000 |
|
|
$ |
|
|
|
$ |
500,000 |
|
|
$ |
3,250,000 |
|
Satellite-related obligations |
|
|
1,948,490 |
|
|
|
184,754 |
|
|
|
132,385 |
|
|
|
105,774 |
|
|
|
136,492 |
|
|
|
136,492 |
|
|
|
1,252,593 |
|
Capital lease obligations |
|
|
186,545 |
|
|
|
9,229 |
|
|
|
9,391 |
|
|
|
9,800 |
|
|
|
10,556 |
|
|
|
11,371 |
|
|
|
136,198 |
|
Operating lease obligations |
|
|
109,223 |
|
|
|
42,230 |
|
|
|
24,168 |
|
|
|
17,641 |
|
|
|
10,551 |
|
|
|
5,536 |
|
|
|
9,097 |
|
Purchase obligations |
|
|
1,397,990 |
|
|
|
1,304,489 |
|
|
|
43,651 |
|
|
|
14,859 |
|
|
|
15,334 |
|
|
|
15,827 |
|
|
|
3,830 |
|
Mortgages and other notes payable |
|
|
46,211 |
|
|
|
4,104 |
|
|
|
4,143 |
|
|
|
4,375 |
|
|
|
4,622 |
|
|
|
4,183 |
|
|
|
24,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,463,459 |
|
|
$ |
1,569,806 |
|
|
$ |
213,738 |
|
|
$ |
1,152,449 |
|
|
$ |
177,555 |
|
|
$ |
673,409 |
|
|
$ |
4,676,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above does not include $233 million of liabilities associated with unrecognized tax
benefits which were accrued under the provisions of FIN 48 and are included on our Consolidated
Balance Sheets as of December 31, 2008. Of this amount, it is reasonably possible that $106
million may be paid or settled within the next twelve months.
In general, we do not engage in off-balance sheet financing activities.
Interest on Long-Term Debt
We have semi-annual cash interest requirements for our outstanding long-term debt securities (see
Note 9 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on
Form 10-K for details), as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
|
Semi-Annual |
|
Debt Service |
|
|
Payment Dates |
|
Requirements |
6 3/8% Senior Notes due 2011 |
|
April 1 and October 1 |
|
$ |
63,750,000 |
|
3 % Convertible Subordinated Notes due 2011 |
|
June 30 and December 31 |
|
$ |
750,000 |
|
6 5/8% Senior Notes due 2014 |
|
April 1 and October 1 |
|
$ |
66,250,000 |
|
7 1/8% Senior Notes due 2016 |
|
February 1 and August 1 |
|
$ |
106,875,000 |
|
7% Senior Notes due 2013 |
|
April 1 and October 1 |
|
$ |
35,000,000 |
|
7 3/4% Senior Notes due 2015 |
|
May 31 and November 30 |
|
$ |
58,125,000 |
|
We also have periodic cash interest requirements for our outstanding capital lease obligations,
mortgages and other notes payable. Future cash interest requirements for all of our outstanding
long-term debt as of December 31, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Long-term debt |
|
$ |
1,943,786 |
|
|
$ |
330,500 |
|
|
$ |
330,000 |
|
|
$ |
330,000 |
|
|
$ |
266,250 |
|
|
$ |
266,250 |
|
|
$ |
420,786 |
|
Capital lease obligations, mortgages
and other notes payable |
|
|
126,541 |
|
|
|
16,436 |
|
|
|
15,454 |
|
|
|
14,516 |
|
|
|
13,512 |
|
|
|
12,436 |
|
|
|
54,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,070,327 |
|
|
$ |
346,936 |
|
|
$ |
345,454 |
|
|
$ |
344,516 |
|
|
$ |
279,762 |
|
|
$ |
278,686 |
|
|
$ |
474,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Satellite-Related Obligations
Satellites under Construction. As of December 31, 2008, we had entered into the following
contracts to construct new satellites which are contractually scheduled to be completed within the
next two years. Future commitments related to these satellites are included in the table above
under Satellite-related obligations except where noted below.
|
|
|
EchoStar XIV. During 2007, we entered into a contract for the construction of EchoStar
XIV, a DBS satellite, which is expected to be completed during 2009. |
|
|
|
|
EchoStar XV. In April 2008, we entered into a contract for the construction of EchoStar
XV, a DBS satellite, which is expected to be completed during 2010. |
Although the table above includes future commitments related to both the EchoStar XIV and EchoStar
XV satellites discussed above, it only includes the cost associated with one launch contract.
These amounts will increase when we contract for the launch of the second satellite.
In
addition, we have agreed to lease capacity on two satellites from EchoStar which are currently under
construction. Future commitments related to these satellites are included in the table above under
Satellite-related obligations.
|
|
|
Nimiq 5. In March 2008, we entered into a transponder service agreement with EchoStar
to lease capacity on Nimiq 5, a DBS satellite, which is expected to be completed during
2009. |
|
|
|
|
QuetzSat 1. In November 2008, we entered into a transponder service agreement with
EchoStar to lease capacity on QuetzSat 1, a DBS satellite, which is expected to be
completed during 2011. |
In certain circumstances the dates on which we are obligated to make these payments could be
delayed. These amounts will increase to the extent we procure insurance for our satellites or
contract for the construction, launch or lease of additional satellites.
Capital Lease Obligations
Anik F3. Anik F3, an FSS satellite, was launched and commenced commercial operation during April
2007. We have leased all 32 Ku-band FSS transponders on Anik F3 for a period of 15 years.
In accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases
(SFAS 13), we have accounted for the satellite component of this agreement as a capital lease
(see Note 9 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report
on Form 10-K). The commitment related to the present value of the net future minimum lease
payments for the satellite component of the agreement is included under Capital Lease Obligations
in the table above. The commitment related to future minimum payments designated for the lease of
the orbital slot and other executory costs are included under Satellite-Related Obligations in the
table above. The commitment related to the amount representing interest is included under Interest
on Long-Term Debt in the table above.
Future Capital Lease Obligation
Ciel II. Ciel II, a Canadian DBS satellite, was launched in December 2008 and commenced commercial
operation at the 129 degree orbital location in February 2009. Our initial ten-year term lease for
100% of the capacity on the satellite has been accounted for as a capital lease upon commencement of
commercial operation in February 2009. As of December 31, 2008, the commitment related to this
agreement is included under Satellite-related Obligations in the table above.
59
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Satellite Insurance
We currently have no commercial insurance coverage on the satellites we own. We do not use
commercial insurance to mitigate the potential financial impact of in-orbit failures because we
believe that the premium costs are uneconomical relative to the risk of satellite failure. 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. 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.
Purchase Obligations
Our 2009 purchase obligations primarily consist of binding purchase orders for receiver systems and
related equipment, digital broadcast operations, satellite and transponder leases, engineering and
for products and services related to the operation of our DISH Network. Our purchase obligations
also include certain guaranteed fixed contractual commitments to purchase programming content. Our
purchase obligations can fluctuate significantly from period to period due to, among other things,
managements control of inventory levels, and can materially impact our future operating asset and
liability balances, and our future working capital requirements.
Programming Contracts
In the normal course of business, we enter into contracts to purchase programming content in which
our payment obligations are fully contingent on the number of subscribers to whom we provide the
respective content. These programming commitments are not included in the Contractual obligations
and off-balance sheet arrangements table. The terms of our contracts typically range from one to
ten years with annual rate increases. Our programming expenses will continue to increase to the
extent we are successful growing our subscriber base. In addition, our margins may face further
downward pressure from price escalations in current contracts and the renewal of long term
programming contracts on less favorable pricing terms.
Future Capital Requirements
We expect to fund our future working capital, capital expenditure and debt service requirements
from cash generated from operations, existing cash and marketable investment securities balances,
and cash generated through new additional capital. The amount of capital required to fund our
future working capital and capital expenditure needs varies, depending on, among other things, the
rate at which we acquire new subscribers and the cost of subscriber acquisition and retention,
including capitalized costs associated with our new and existing subscriber equipment lease
programs. The amount of capital required will also depend on the levels of investment necessary to
support potential strategic initiatives, including our plans to expand our national and local HD
offerings and other strategic opportunities that may arise from time to time. Our capital
expenditures vary depending on the number of satellites leased or under construction at any point
in time, and could increase materially as a result of increased competition, significant satellite
failures, or continued general economic downturn. These factors could require that we raise
additional capital in the future.
From time to time we evaluate opportunities for strategic investments or acquisitions that may
complement our current services and products, enhance our technical capabilities, improve or
sustain our competitive position, or otherwise offer growth opportunities. We may make investments
in or partner with others to expand our business into mobile and portable video, data and voice
services. Future material investments or acquisitions may require that we obtain additional
capital, assume third party debt or incur other long-term obligations.
We paid $712 million to acquire certain 700 MHz wireless licenses, which were granted to us by the
FCC in February 2009. We will be required to make significant additional investments or partner
with others to commercialize these licenses and satisfy FCC build-out requirements. Part or all of
our licenses may be terminated for failure to satisfy these requirements.
60
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Recent developments in the financial markets have made it more difficult for issuers of high yield
indebtedness, such as us, to access capital markets at acceptable terms. These developments may
have a significant effect on our cost of financing and our liquidity position.
A portion of our investment portfolio is invested in asset backed securities, auction rate
securities, mortgage backed securities, special investment vehicles
and strategic investments and as a result a portion of
our portfolio has restricted liquidity. Liquidity in the markets for these investments has been
impaired in the past year and these market conditions have adversely affected our liquidity. In
addition, certain of these securities have defaulted or have been materially downgraded, causing us
to record impairment charges. If the credit ratings of these securities further deteriorate or the
lack of liquidity in the marketplace becomes prolonged, we may be required to record further
impairment charges. Moreover, the current significant volatility of domestic and global financial
markets has greatly affected the volatility and value of our marketable investment securities. To
the extent we require access to funds, we may need to sell these securities under unfavorable
market conditions, record further impairment charges and fall short of our financing needs.
Credit Ratings
Our current credit ratings are Ba3 and BB- on our long-term senior notes as rated by Moodys
Investor Service (Moodys) and Standard and Poors (S&P) Rating Service, respectively. Debt
ratings by the various rating agencies reflect each agencys opinion of the ability of issuers to
repay debt obligations as they come due.
According to Moodys, a Ba3 rating indicates that the obligations are judged to have speculative
elements and are subject to substantial credit risk. According to S&Ps, a BB- rating indicates
the issuer is less vulnerable to nonpayment of interest and principal obligations than other
speculative issues. However, the issuer faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions, which could lead to the obligors inadequate capacity
to meet its financial commitment on the obligation.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires
management to make estimates, judgments and assumptions that affect amounts reported therein.
Management bases its estimates, judgments and assumptions on historical experience and on various
other factors that are believed to be reasonable under the circumstances. Due to the inherent
uncertainty involved in making estimates, actual results reported in future periods may be affected
by changes in those estimates. The following represent what we believe are the critical accounting
policies that may involve a high degree of estimation, judgment and complexity. For a summary of
our significant accounting policies, including those discussed below, see Note 2 in the Notes to
the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
|
|
|
Capitalized satellite receivers. Since we retain ownership of certain equipment
provided pursuant to our subscriber equipment lease programs, we capitalize and depreciate
equipment costs that would otherwise be expensed at the time of sale. Such capitalized
costs are depreciated over the estimated useful life of the equipment, which is based on,
among other things, managements judgment of the risk of technological obsolescence.
Because of the inherent difficulty of making this estimate, the estimated useful life of
capitalized equipment may change based on, among other things, historical experience and
changes in technology as well as our response to competitive conditions. |
|
|
|
|
Accounting for investments in private and publicly-traded securities. We hold debt and
equity interests in companies, some of which are publicly traded and have highly volatile
prices. We record an investment impairment charge when we believe an investment has
experienced a decline in value that is judged to be other-than-temporary. We monitor our
investments for impairment by considering current factors including economic environment,
market conditions and the operational performance and other specific factors relating to
the business underlying the investment. Future adverse changes in these factors could
result in losses or an
inability to recover the carrying value of the investments that may not be reflected in an
investments current carrying value, thereby possibly requiring an impairment charge in the
future. |
61
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
|
|
|
Fair value of financial instruments. Fair value estimates of our financial instruments
are made at a point in time, based on relevant market data as well as the best information
available about the financial instrument. Illiquid credit markets have resulted in
inactive markets for certain of our financial instruments. As a result, there is no or
limited observable market data for these instruments. Fair value estimates for financial
instruments for which no or limited observable market data is available are based on
judgments regarding current economic conditions, liquidity discounts, currency, credit and
interest rate risks, loss experience and other factors. These estimates involve
significant uncertainties and judgments and cannot be determined with precision. As a
result, such calculated fair value estimates may not be realizable in a current sale or
immediate settlement of the instrument. In addition, changes in the underlying assumptions
used in the fair value measurement technique, including discount rates, liquidity risks,
and estimate of future cash flows, could significantly affect these fair value estimates,
which could have a material adverse impact on our financial position and results of
operations. |
|
|
|
|
Acquisition of investments in non-marketable investment securities. We calculate the
fair value of our interest in non-marketable investment securities either as consideration
given, or for non-cash acquisitions, based on the results of valuation analyses utilizing a
discounted cash flow or DCF model. The DCF methodology involves the use of various
estimates relating to future cash flow projections and discount rates for which significant
judgments are required. |
|
|
|
|
Valuation of long-lived assets. We evaluate the carrying value of long-lived assets to
be held and used, other than goodwill and intangible assets with indefinite lives, when
events and circumstances warrant such a review. We evaluate our satellite fleet for
recoverability as one asset group, see Note 2 in the Notes to the Consolidated Financial
Statements in Item 15 of this Annual Report on Form 10-K. The carrying value of a
long-lived asset or asset group is considered impaired when the anticipated undiscounted
cash flow from such asset or asset group is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the fair value
of the long-lived asset or asset group. Fair value is determined primarily using the
estimated cash flows associated with the asset or asset group under review, discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be disposed of by
sale are determined in a similar manner, except that fair values are reduced for estimated
selling costs. Changes in estimates of future cash flows could result in a write-down of
the asset in a future period. |
|
|
|
|
Valuation of goodwill and intangible assets with indefinite lives. We evaluate the
carrying value of goodwill and intangible assets with indefinite lives annually, and also
when events and circumstances warrant. We use estimates of fair value to determine the
amount of impairment, if any, of recorded goodwill and intangible assets with indefinite
lives. Fair value is determined primarily using the estimated future cash flows,
discounted at a rate commensurate with the risk involved. Changes in our estimates of
future cash flows could result in a write-down of goodwill and intangible assets with
indefinite lives in a future period, which could be material to our consolidated results of
operations and financial position. |
|
|
|
|
Allowance for doubtful accounts. Management estimates the amount of required allowances
for the potential non-collectibility of accounts receivable based upon past collection
experience and consideration of other relevant factors. However, past experience may not
be indicative of future collections and therefore additional charges could be incurred in
the future to reflect differences between estimated and actual collections. |
|
|
|
|
Inventory allowance. Management estimates the amount of allowance required for
potential obsolete inventory based upon past experience, the introduction of new technology
and consideration of other relevant factors. However, past experience may not be
indicative of future reserve requirements and therefore additional charges could be
incurred in the future to reflect differences between estimated and actual reserve
requirements. |
|
|
|
|
Stock-based compensation. We account for stock-based compensation in accordance with
the fair value recognition provisions of SFAS 123R. We use the Black-Scholes option
pricing model, which requires the input of subjective assumptions. These assumptions
include, among other things, estimating the length of time employees will retain their
vested stock options before exercising them (expected term); the estimated |
62
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
|
|
|
volatility of our common stock price over the expected term (volatility), and the number of
options that will ultimately not complete their vesting requirements (forfeitures), see
Note 14 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual
Report on Form 10-K. Changes in these assumptions can materially affect the estimate of
fair value of stock-based compensation. |
|
|
|
|
Income taxes. Our income tax policy is to record the estimated future tax effects of
temporary differences between the tax bases of assets and liabilities and amounts reported
in the accompanying consolidated balance sheets, as well as operating loss and tax credit
carryforwards. We follow the guidelines set forth in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109) regarding the recoverability
of any tax assets recorded on the balance sheet and provide any necessary valuation
allowances as required. Determining necessary valuation allowances requires us to make
assessments about the timing of future events, including the probability of expected future
taxable income and available tax planning opportunities. In accordance with SFAS 109, we
periodically evaluate our need for a valuation allowance based on both historical evidence,
including trends, and future expectations in each reporting period. Future performance
could have a significant effect on the realization of tax benefits, or reversals of
valuation allowances, as reported in our consolidated results of operations. |
|
|
|
|
Uncertainty in tax positions. We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109
(FIN 48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in accordance with SFAS 109 and
prescribes a recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax
return. Management evaluates the recognition and measurement of the benefit to be
recognized in the financial statements for uncertain tax positions based on applicable tax
law, regulations, case law, administrative rulings and pronouncements and the facts and
circumstances surrounding the tax position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. Changes in our estimates related to the recognition and
measurement of the amount recorded for uncertain tax positions could result in significant
changes in our income tax expense, which could be material to our consolidated results of
operations and financial position. |
|
|
|
|
Contingent liabilities. A significant amount of management judgment is required in
determining when, or if, an accrual should be recorded for a contingency and the amount of
such accrual. Estimates generally are developed in consultation with outside counsel and
are based on an analysis of potential outcomes. Due to the uncertainty of determining the
likelihood of a future event occurring and the potential financial statement impact of such
an event, it is possible that upon further development or resolution of a contingent
matter, a charge could be recorded in a future period that would be material to our
consolidated results of operations and financial position. |
New Accounting Pronouncements
Revised Business Combinations. In December 2007, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 141R (revised 2007), Business Combinations
(SFAS 141R). SFAS 141R replaces SFAS 141 and establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired,
including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS
141R also establishes disclosure requirements to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. We expect SFAS 141R will
have an impact on our consolidated financial statements, but the character and magnitude of the
specific effects will depend upon the type, terms and size of the acquisitions we consummate after
the effective date of January 1, 2009.
Noncontrolling Interests in Consolidated Financial Statements. In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and
to the noncontrolling interest, changes in a parents ownership interest and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also
establishes reporting requirements for providing
63
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
sufficient disclosures that clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. This standard is effective for fiscal years
beginning after December 15, 2008. We do not expect the adoption of SFAS 160 to have a material
impact on our financial position or results of operations.
Seasonality
Historically, the first half of the year generally produces fewer new subscribers than the second
half of the year, as is typical in the pay-TV service industry. However, we can not provide
assurance that this will continue in the future.
Inflation
Inflation has not materially affected our operations during the past three years. We believe that
our ability to increase the prices charged for our products and services in future periods will
depend primarily on competitive pressures.
Backlog
We do not have any material backlog of our products.
64
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks Associated With Financial Instruments
Our investments are exposed to interest rate and equity price risks, discussed below.
Interest Rate Risk
Cash and Marketable Securities. As of December 31, 2008, our restricted and unrestricted cash,
cash equivalents and current and noncurrent marketable investment securities had a fair value of
$756 million. Of that amount, a total of $740 million was invested in: (a) cash; (b) debt
instruments of the U.S. Government and its agencies; (c) commercial paper and corporate notes with
an overall average maturity of less than one year and rated in one of the four highest rating
categories by at least two nationally recognized statistical rating organizations; (d) instruments
with similar risk, duration and credit quality characteristics to the commercial paper described
above; and (e) auction rate securities (ARS), mortgage-backed securities (MBS) and asset-backed
securities. The primary purpose of these investing activities has been to preserve principal until
the cash is required to, among other things, fund operations, make strategic investments and expand
the business. Consequently, the size of this portfolio fluctuates significantly as cash is
received and used in our business.
Our investments in auction rate securities (ARS) and mortgage backed securities (MBS) are
reported at fair value. Recent events in the credit markets have reduced or eliminated current
liquidity for certain of our ARS and MBS investments. As a result, effective in 2008, we classify
these investments as noncurrent assets as we intend to hold these investments until they recover or
mature.
As of December 31, 2008, all of the $740 million was invested in fixed or variable rate
instruments. The value of these investments can be impacted by interest rate fluctuations, but
while an increase in interest rates would ordinarily adversely impact the fair value of fixed and
variable rate investments, we normally hold these investments to maturity. Further, the value
could be lowered by credit losses should economic conditions worsen.
Our cash, cash equivalents and marketable investment securities had an average annual return for
the year ended December 31, 2008 of 3.2%. A decrease in interest rates does have the effect of
reducing our future annual interest income from this portfolio, since funds would be re-invested at
lower rates as the instruments mature. A hypothetical 10% decrease in average interest rates
during 2008 would result in a decrease of approximately $5 million in annual interest income.
In general, our marketable investment securities portfolio includes debt and equity of public
companies we hold for strategic and financial purposes. As of December 31, 2008, we held strategic
and financial debt and equity investments of public companies with a fair value of $14 million.
These investments, which are concentrated in a small number of companies, are highly speculative
and have experienced and continue to experience volatility. The fair value of our strategic and
financial debt and equity investments can be significantly impacted by the risk of adverse changes
in securities markets generally, as well as risks related to the performance of the companies whose
securities we have invested in, risks associated with specific industries, and other factors.
These investments are subject to significant fluctuations in fair value due to the volatility of
the securities markets and of the underlying businesses. A hypothetical 10% adverse change in the
price of our public strategic debt and equity investments would result in approximately a $1
million decrease in the fair value of that portfolio.
Fixed Rate Debt, Mortgages and Other Notes Payable. At December 31, 2008, we had fixed-rate debt,
mortgages and other notes payable of $4.821 billion on our Consolidated Balance Sheets. We
estimated the fair value of this debt to be approximately $4.075 billion using quoted market prices
for our publicly traded debt, which constitutes approximately 99% of our debt, and an analysis
based on certain assumptions discussed below for our private debt. In completing our analysis for
our private debt, 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 credit spreads, volatility, and the impact of these factors on the value of
the notes. The fair value of our debt is affected by fluctuations in interest rates. A
hypothetical 10% decrease in assumed interest rates would increase the fair value of our debt by
approximately $193 million. To the extent interest rates increase, our costs of financing would
65
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued
increase at such time as we are required to refinance our debt. As of December 31, 2008, a
hypothetical 10% increase in assumed interest rates would increase our annual interest expense by
approximately $33 million.
Equity Risk
Other Investments. We are exposed to equity risk as it relates to changes in the market value of
our other investments which totaled $45 million as of December 31, 2008. We invest in equity
instruments of public and private companies for operational and strategic business purposes. These
securities are subject to significant fluctuations in fair value due to volatility of the stock
market and the industry in which the companies operate. A hypothetical 10% adverse change in the
price of these equity instruments would result in an approximate $5 million decrease in the fair
value of the portfolio.
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.
Derivative Financial Instruments
In general, we do not use derivative financial instruments for hedging or speculative purposes, but
we may do so in the future.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report beginning on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this report.
There has been no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Our internal control over financial reporting includes those policies and procedures that:
|
(i) |
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets; |
66
|
(ii) |
|
provide reasonable assurance that our transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and our directors; and |
|
|
(iii) |
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on our
financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management
concluded that our internal control over financial reporting was effective as of December 31, 2008.
The effectiveness of our internal control over financial reporting as of December 31, 2008 has been
audited by KPMG LLP, an independent registered public accounting firm, as stated in their report
which appears in Item 15(a) of this Annual Report on Form 10-K.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
The information required by this Item with respect to the identity and business experience of our
directors will be set forth in our Proxy Statement for the 2009 Annual Meeting of Shareholders
under the caption Election of Directors, which information is hereby incorporated herein by
reference.
The information required by this Item with respect to the identity and business experience of our
executive officers is set forth on page 15 of this report under the caption Executive Officers of
the Registrant.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in our Proxy Statement for the 2009 Annual
Meeting of Shareholders under the caption Executive Compensation and Other Information, which
information is hereby incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this Item will be set forth in our Proxy Statement for the 2009 Annual
Meeting of Shareholders under the captions Election of Directors, Equity Security Ownership and
Equity Compensation Plan Information, which information is hereby incorporated herein by
reference.
67
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth in our Proxy Statement for the 2009
Annual Meeting of Shareholders under the caption Certain Relationships and Related
Transactions, which information is hereby incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be set forth in our Proxy Statement for the 2009
Annual Meeting of Shareholders under the caption Principal Accountant Fees and Services, which
information is hereby incorporated herein by reference.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a) |
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The following documents are filed as part of this report: |
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Page |
|
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F-2 |
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F-4 |
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F-5 |
|
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F-6 |
|
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F-7 |
|
|
F-8 |
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(2) |
|
Financial Statement Schedules |
|
|
|
|
None. All schedules have been included in the Consolidated Financial Statements or
Notes thereto. |
|
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(3) |
|
Exhibits |
|
|
|
3.1(a)*
|
|
Amended and Restated Articles of Incorporation of DISH
Network (incorporated by reference to Exhibit 3.1(a)
on the Quarterly Report on Form 10-Q of DISH Network
for the quarter ended June 30, 2003, Commission File
No. 0-26176) as amended by the Certificate of
Amendment to the Articles of Incorporation of DISH
Network (incorporated by reference to Annex 1 on the
Definitive Information Statement on Schedule 14C filed
on December 31, 2007, Commission File No. 0-26176). |
|
|
|
3.1(b)*
|
|
Amended and Restated Bylaws of DISH Network
(incorporated by reference to Exhibit 3.1(b) on the
Quarterly Report on Form 10-Q of DISH Network for the
quarter ended June 30, 2003, Commission File No.
0-26176). |
|
|
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3.2(a)*
|
|
Articles of Incorporation of DDBS (incorporated by
reference to Exhibit 3.4(a) to the Registration
Statement on Form S-4 of DDBS, Registration No.
333-31929). |
|
|
|
3.2(b)*
|
|
Bylaws of DDBS (incorporated by reference to Exhibit
3.4(b) to the Registration Statement on Form S-4 of
DDBS, Registration No. 333-31929). |
|
|
|
4.1*
|
|
Registration Rights Agreement by and between DISH
Network and Charles W. Ergen (incorporated by
reference to Exhibit 4.8 to the Registration Statement
on Form S-1 of DISH Network, Registration No.
33-91276). |
68
4.2* |
|
Indenture, relating to DDBS 6 3/8% Senior Notes due 2011, dated as of October 2,
2003, between DDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of
DISH Network for the quarter ended September 30, 2003, Commission File
No.0-26176). |
|
4.3* |
|
First Supplemental Indenture, relating to the 6 3/8% Senior Notes Due 2011, dated
as of December 31, 2003 between DDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.14 to the Annual Report on Form
10-K of DISH Network for the year ended December 31, 2003, Commission File
No.0-26176). |
|
4.4* |
|
Indenture, relating to the 6 5/8% Senior Notes Due 2014, dated as of October 1,
2004 between DDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of
DISH Network filed October 1, 2004, Commission File No.0-26176). |
|
4.5* |
|
Indenture, relating to the 7 1/8% Senior Notes Due 2016, dated as of February 2,
2006 between DDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of
DISH Network filed February 3, 2006, Commission File No.0-26176). |
|
4.6* |
|
Indenture, relating to the 7% Senior Notes Due 2013, dated as of October 18, 2006
between DDBS and U.S. Bank Trust National Association, as Trustee (incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K of DISH Network
filed October 18, 2006, Commission File No.0-26176). |
|
4.7* |
|
Indenture, relating to the 7 3/4% Senior Notes Due 2015, dated as of May 27, 2008
between DDBS and U.S. Bank Trust National Association, as Trustee (incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K of DISH Network
filed May 28, 2008, Commission File No.0-26176). |
|
10.1* |
|
EchoStar 1995 Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to
the Registration Statement on Form S-1 of DISH Network, Registration No.
33-91276).** |
|
10.2* |
|
Amended and Restated DISH Network 1999 Stock Incentive Plan (incorporated by
reference to Exhibit A to DISH Networks Definitive Proxy Statement on Schedule
14A dated August 24, 2005).** |
|
10.3* |
|
1995 Non-employee Director Stock Option Plan (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8 of DISH Network,
Registration No. 333-05575).** |
|
10.4* |
|
Amended and Restated 2001 Non-employee Director Stock Option Plan (incorporated
by reference to Appendix A to DISH Networks Definitive Proxy Statement on
Schedule 14A dated April 7, 2006).** |
|
10.5* |
|
2002 Class B CEO Stock Option Plan (incorporated by reference to Appendix A to
DISH Networks Definitive Proxy Statement on Schedule 14A dated April 9, 2002).** |
69
10.6* |
|
Satellite Service Agreement, dated as of March 21, 2003, between SES Americom,
Inc., EchoStar Satellite Corporation and DISH Network (incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q of DISH Network for the
quarter ended March 31, 2003, Commission File No.0-26176). |
|
10.7* |
|
Amendment No. 1 to Satellite Service Agreement dated March 31, 2003 between SES
Americom Inc. and DISH Network (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended September 30,
2003, Commission File No.0-26176). |
|
10.8* |
|
Satellite Service Agreement dated as of August 13, 2003 between SES Americom Inc.
and DISH Network (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of DISH Network for the quarter ended September 30, 2003,
Commission File No.0-26176). |
|
10.9* |
|
Satellite Service Agreement, dated February 19, 2004, between SES Americom, Inc.
and DISH Network (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of DISH Network for the quarter ended March 31, 2004,
Commission File No.0-26176). |
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10.10* |
|
Amendment No. 1 to Satellite Service Agreement, dated March 10, 2004, between SES
Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended March 31,
2004, Commission File No.0-26176). |
|
10.11* |
|
Amendment No. 3 to Satellite Service Agreement, dated February 19, 2004, between
SES Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.3 to
the Quarterly Report on Form 10-Q of DISH Network for the quarter ended March 31,
2004, Commission File No.0-26176). |
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10.12* |
|
Whole RF Channel Service Agreement, dated February 4, 2004, between Telesat
Canada and DISH Network (incorporated by reference to Exhibit 10.4 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended March 31,
2004, Commission File No.0-26176). |
|
10.13* |
|
Letter Amendment to Whole RF Channel Service Agreement, dated March 25, 2004,
between Telesat Canada and DISH Network (incorporated by reference to Exhibit
10.5 to the Quarterly Report on Form 10-Q of DISH Network for the quarter ended
March 31, 2004, Commission File No.0-26176). |
|
10.14* |
|
Amendment No. 2 to Satellite Service Agreement, dated April 30, 2004, between SES
Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended June 30,
2004, Commission File No.0-26176). |
|
10.15* |
|
Second Amendment to Whole RF Channel Service Agreement, dated May 5, 2004,
between Telesat Canada and DISH Network (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q of DISH Network for the quarter ended
June 30, 2004, Commission File No.0-26176). |
|
10.16* |
|
Third Amendment to Whole RF Channel Service Agreement, dated October 12, 2004,
between Telesat Canada and DISH Network (incorporated by reference to Exhibit
10.22 to the Annual Report on Form 10-K of DISH Network for the year ended
December 31, 2004, Commission File No.0-26176). |
|
10.17* |
|
Amendment No. 4 to Satellite Service Agreement, dated October 21, 2004, between
SES Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.23
to the Annual Report on Form 10-K of DISH Network for the year ended December 31,
2004, Commission File No.0-26176). |
70
10.18* |
|
Amendment No. 3 to Satellite Service Agreement, dated November 19, 2004 between
SES Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.24
to the Annual Report on Form 10-K of DISH Network for the year ended December 31,
2004, Commission File No.0-26176). |
|
10.19* |
|
Amendment No. 5 to Satellite Service Agreement, dated November 19, 2004, between
SES Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.25
to the Annual Report on Form 10-K of DISH Network for the year ended December 31,
2004, Commission File No.0-26176). |
|
10.20* |
|
Amendment No. 6 to Satellite Service Agreement, dated December 20, 2004, between
SES Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.26
to the Annual Report on Form 10-K of DISH Network for the year ended December 31,
2004, Commission File No.0-26176). |
|
10.21* |
|
Description of the 2005 Long-Term Incentive Plan dated January 26, 2005
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of DISH Network for the quarter ended March 31, 2005, Commission File
No.0-26176).** |
|
10.22* |
|
Amendment No. 4 to Satellite Service Agreement, dated April 6, 2005, between SES
Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended June 30,
2005, Commission File No.0-26176). |
|
10.23* |
|
Amendment No. 5 to Satellite Service Agreement, dated June 20, 2005, between SES
Americom, Inc. and DISH Network (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended June 30,
2005, Commission File No.0-26176). |
|
10.24* |
|
Incentive Stock Option Agreement (Form A) (incorporated by reference to Exhibit
99.1 to the Current Report on Form 8-K of DISH Network filed July 7, 2005,
Commission File No.0-26176).** |
|
10.25* |
|
Incentive Stock Option Agreement (Form B) (incorporated by reference to Exhibit
99.2 to the Current Report on Form 8-K of DISH Network filed July 7, 2005,
Commission File No.0-26176).** |
|
10.26* |
|
Restricted Stock Unit Agreement (Form A) (incorporated by reference to Exhibit
99.3 to the Current Report on Form 8-K of DISH Network filed July 7, 2005,
Commission File No.0-26176).** |
|
10.27* |
|
Restricted Stock Unit Agreement (Form B) (incorporated by reference to Exhibit
99.4 to the Current Report on Form 8-K of DISH Network filed July 7, 2005,
Commission File No.0-26176).** |
|
10.28* |
|
Incentive Stock Option Agreement (1999 Long-Term Incentive Plan) (incorporated by
reference to Exhibit 99.5 to the Current Report on Form 8-K of DISH Network filed
July 7, 2005, Commission File No.0-26176).** |
|
10.29* |
|
Nonemployee Director Stock Option Agreement (incorporated by reference to Exhibit
99.6 to the Current Report on Form 8-K of DISH Network filed July 7, 2005,
Commission File No.0-26176).** |
|
10.30* |
|
Nonqualifying Stock Option Agreement (2005 Long-Term Incentive Plan (incorporated
by reference to Exhibit 99.7 to the Current Report on Form 8-K of DISH Network
filed July 7, 2005, Commission File No.0-26176).** |
71
10.31* |
|
Restricted Stock Unit Agreement (2005 Long-Term Incentive Plan) (incorporated by
reference to Exhibit 99.8 to the Current Report on Form 8-K of DISH Network filed
July 7, 2005, Commission File No.0-26176).** |
|
10.32* |
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Separation Agreement between EchoStar and DISH Network (incorporated by reference
from Exhibit 2.1 to the Form 10 (File No. 001-33807) of EchoStar). |
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10.33* |
|
Transition Services Agreement between EchoStar and DISH Network (incorporated by
reference from Exhibit 10.1 to the Form 10 (File No. 001-33807) of EchoStar). |
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10.34* |
|
Tax Sharing Agreement between EchoStar and DISH Network (incorporated by
reference from Exhibit 10.2 to the Form 10 (File No. 001-33807) of EchoStar). |
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10.35* |
|
Employee Matters Agreement between EchoStar and DISH Network (incorporated by
reference from Exhibit 10.3 to the Form 10 (File No. 001-33807) of EchoStar). |
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10.36* |
|
Intellectual Property Matters Agreement between EchoStar, EchoStar Acquisition
L.L.C., Echosphere L.L.C., DDBS, EIC Spain SL, EchoStar
Technologies L.L.C. and DISH Network (incorporated by reference from Exhibit 10.4
to the Form 10 (File No. 001-33807) of EchoStar). |
|
10.37* |
|
Management Services Agreement between EchoStar and DISH Network (incorporated by
reference from Exhibit 10.5 to the Form 10 (File No. 001-33807) of EchoStar). |
|
10.38* |
|
NIMIQ 5 Transponder Service Agreement, dated March 11,
2008, between Bell ExpressVu
Limited Partnership, acting through its general partner Bell ExpressVu Inc., on the one hand,
and EchoStar and DISH Network (solely as to the obligation set forth in Section 19.10), on
the other hand (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of DISH
Network for the quarter ended March 31, 2008, Commission File No.0-26176). |
|
10.39* |
|
NIMIQ 5 Transponder Service Agreement, dated March 11,
2008, between EchoStar and DISH Network L.L.C. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of
DISH Network for the quarter ended March 31, 2008, Commission File No.0-26176). |
|
10.40* |
|
Amendment No. 1 to Receiver Agreement dated
December 31, 2007 between EchoSphere L.L.C. and EchoStar Technologies L.L.C. (incorporated by reference to Exhibit 99.1 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended
September 30, 2008, Commission File No.0-26176). |
|
10.41* |
|
Amendment No. 1 to Broadcast Agreement dated
December 31, 2007 between EchoStar and EchoStar Satellite L.L.C. (incorporated by reference to Exhibit 99.2 to the
Quarterly Report on Form 10-Q of DISH Network for the quarter ended September 30, 2008, Commission File No.0-26176). |
|
10.42 |
|
Description of the 2008 Long-Term Incentive Plan dated December 22, 2008. |
|
21 |
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Subsidiaries of DISH Network Corporation. |
|
23.1 |
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
|
24.1 |
|
Powers of Attorney authorizing signature of James DeFranco, Cantey Ergen, Steven
R. Goodbarn, Gary Howard, David K. Moskowitz, Tom A. Ortolf and Carl E. Vogel. |
|
31.1 |
|
Section 302 Certification by Chairman, President and Chief Executive Officer. |
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31.2 |
|
Section 302 Certification by Executive Vice President and Chief Financial Officer. |
|
32.1 |
|
Section 906 Certification by Chairman, President and Chief Executive Officer. |
|
32.2 |
|
Section 906 Certification by Executive Vice President and Chief Financial Officer. |
|
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|
|
|
Filed herewith. |
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* |
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Incorporated by reference. |
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** |
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Constitutes a management contract or compensatory plan or arrangement. |
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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DISH NETWORK CORPORATION
|
|
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By: |
/s/ Bernard L. Han
|
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Bernard L. Han |
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Executive Vice President and Chief Financial Officer |
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|
Date: March 2, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
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Signature |
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Title |
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Date |
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/s/ Charles W. Ergen
Charles W. Ergen |
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Chief Executive Officer and Chairman
(Principal Executive Officer)
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March 2, 2009 |
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/s/ Bernard L. Han
Bernard L. Han |
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Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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March 2, 2009 |
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*
James DeFranco |
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Director
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March 2, 2009 |
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*
Cantey Ergen |
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Director
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March 2, 2009 |
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*
Steven R. Goodbarn |
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Director
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March 2, 2009 |
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*
Gary S. Howard |
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Director
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March 2, 2009 |
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*
David K. Moskowitz |
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Director
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March 2, 2009 |
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*
Tom A. Ortolf |
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Director
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March 2, 2009 |
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*
Carl E. Vogel |
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Director
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March 2, 2009 |
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* By: |
/s/ R. Stanton Dodge
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R. Stanton Dodge |
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Attorney-in-Fact |
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73
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Page |
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Consolidated Financial Statements: |
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F-2 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-8 |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
DISH Network Corporation:
We have audited the accompanying consolidated balance sheets of DISH Network Corporation and
subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated
statements of operations and comprehensive income (loss), changes in stockholders equity
(deficit), and cash flows for each of the years in the three-year period ended December 31, 2008.
We also have audited DISH Network Corporations internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). DISH Network
Corporations management is responsible for these consolidated financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on these consolidated financial statements and an opinion on the Companys internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of DISH Network Corporation and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive
income (loss), changes in stockholders equity (deficit), and cash flows for each of the years in
the three-year period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, DISH Network Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated Framework issued by COSO.
As discussed in note 2 to the accompanying consolidated financial statements, effective January 1,
2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting
for Uncertainty in Income Taxes.
/s/ KPMG LLP
Denver, Colorado
March 2, 2009
F-3
DISH NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
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As of December 31, |
|
|
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2008 |
|
|
2007 |
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Assets |
|
|
|
|
|
|
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Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
98,574 |
|
|
$ |
919,542 |
|
Marketable investment securities (Note 5) |
|
|
460,558 |
|
|
|
1,868,654 |
|
Trade accounts receivable other, net of allowance for doubtful accounts
of $15,207 and $14,019, respectively |
|
|
799,139 |
|
|
|
699,101 |
|
Trade accounts receivable EchoStar |
|
|
20,604 |
|
|
|
|
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Inventories, net |
|
|
426,671 |
|
|
|
306,915 |
|
Current deferred tax assets (Note 10) |
|
|
86,331 |
|
|
|
342,813 |
|
Income tax receivable |
|
|
148,747 |
|
|
|
|
|
Other current assets |
|
|
56,394 |
|
|
|
108,113 |
|
Other current assets EchoStar |
|
|
966 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,097,984 |
|
|
|
4,245,138 |
|
|
Noncurrent Assets: |
|
|
|
|
|
|
|
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Restricted cash and marketable investment securities (Note 5) |
|
|
83,606 |
|
|
|
172,520 |
|
Property and equipment, net (Note 7) |
|
|
2,663,289 |
|
|
|
4,058,189 |
|
FCC authorizations |
|
|
1,391,441 |
|
|
|
845,564 |
|
Intangible assets, net (Note 8) |
|
|
5,135 |
|
|
|
218,875 |
|
Goodwill (Note 8) |
|
|
|
|
|
|
256,917 |
|
Marketable and other investment securities (Note 5) |
|
|
158,296 |
|
|
|
187,886 |
|
Other noncurrent assets, net |
|
|
60,296 |
|
|
|
101,440 |
|
|
|
|
|
|
|
|
Total noncurrent assets |
|
|
4,362,063 |
|
|
|
5,841,391 |
|
|
|
|
|
|
|
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Total assets |
|
$ |
6,460,047 |
|
|
$ |
10,086,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Trade accounts payable other |
|
$ |
174,216 |
|
|
$ |
314,825 |
|
Trade accounts payable EchoStar |
|
|
297,629 |
|
|
|
|
|
Deferred revenue and other |
|
|
830,529 |
|
|
|
857,846 |
|
Accrued programming |
|
|
1,020,086 |
|
|
|
914,074 |
|
Other accrued expenses |
|
|
619,210 |
|
|
|
587,942 |
|
Current portion of capital lease obligations, mortgages and other notes payable (Note 9) |
|
|
13,333 |
|
|
|
50,454 |
|
3% Convertible Subordinated Note due 2011 (Note 9) |
|
|
25,000 |
|
|
|
|
|
3% Convertible Subordinated Note due 2010 (Note 9) |
|
|
|
|
|
|
500,000 |
|
5 3/4% Senior Notes due 2008 (Note 9) |
|
|
|
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,980,003 |
|
|
|
4,225,141 |
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion: |
|
|
|
|
|
|
|
|
6 3/8% Senior Notes due 2011 |
|
|
1,000,000 |
|
|
|
1,000,000 |
|
3% Convertible Subordinated Note due 2011 |
|
|
|
|
|
|
25,000 |
|
6 5/8% Senior Notes due 2014 |
|
|
1,000,000 |
|
|
|
1,000,000 |
|
7 1/8% Senior Notes due 2016 |
|
|
1,500,000 |
|
|
|
1,500,000 |
|
7% Senior Notes due 2013 |
|
|
500,000 |
|
|
|
500,000 |
|
7 3/4% Senior Notes due 2015 |
|
|
750,000 |
|
|
|
|
|
Capital lease obligations, mortgages and other notes payable, net of current portion (Note 9) |
|
|
219,423 |
|
|
|
550,250 |
|
Deferred tax liabilities |
|
|
235,551 |
|
|
|
386,493 |
|
Long-term deferred revenue, distribution and carriage payments and other long-term liabilities |
|
|
224,176 |
|
|
|
259,656 |
|
|
|
|
|
|
|
|
Total long-term obligations, net of current portion |
|
|
5,429,150 |
|
|
|
5,221,399 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
8,409,153 |
|
|
|
9,446,540 |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit): |
|
|
|
|
|
|
|
|
Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 257,117,733 and 255,138,160
shares issued, 208,968,052 and 210,125,360 shares outstanding, respectively |
|
|
2,571 |
|
|
|
2,551 |
|
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 |
|
|
2,090,527 |
|
|
|
2,033,865 |
|
Accumulated other comprehensive income (loss) |
|
|
(107,998 |
) |
|
|
46,698 |
|
Accumulated earnings (deficit) |
|
|
(2,492,804 |
) |
|
|
(84,456 |
) |
Treasury stock, at cost |
|
|
(1,443,786 |
) |
|
|
(1,361,053 |
) |
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(1,949,106 |
) |
|
|
639,989 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
6,460,047 |
|
|
$ |
10,086,529 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DISH NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (L0SS)
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related revenue |
|
$ |
11,455,575 |
|
|
$ |
10,690,976 |
|
|
$ |
9,422,274 |
|
Equipment sales and other revenue |
|
|
124,261 |
|
|
|
399,399 |
|
|
|
396,212 |
|
Equipment sales EchoStar |
|
|
11,601 |
|
|
|
|
|
|
|
|
|
Transitional services and other revenue EchoStar |
|
|
25,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
11,617,187 |
|
|
|
11,090,375 |
|
|
|
9,818,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related expenses (exclusive of depreciation shown
below Note 7) |
|
|
5,977,355 |
|
|
|
5,496,579 |
|
|
|
4,807,872 |
|
Satellite and transmission expenses (exclusive of depreciation
shown below Note 7): |
|
|
|
|
|
|
|
|
|
|
|
|
EchoStar |
|
|
305,322 |
|
|
|
|
|
|
|
|
|
Other |
|
|
32,407 |
|
|
|
180,687 |
|
|
|
147,450 |
|
Equipment, transitional services and other cost of sales |
|
|
169,917 |
|
|
|
281,722 |
|
|
|
289,680 |
|
Subscriber acquisition costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales subscriber promotion subsidies EchoStar (exclusive of
depreciation shown below Note 7) |
|
|
167,508 |
|
|
|
123,730 |
|
|
|
134,112 |
|
Other subscriber promotion subsidies |
|
|
1,124,103 |
|
|
|
1,219,943 |
|
|
|
1,246,836 |
|
Subscriber acquisition advertising |
|
|
240,130 |
|
|
|
226,742 |
|
|
|
215,355 |
|
|
|
|
|
|
|
|
|
|
|
Total subscriber acquisition costs |
|
|
1,531,741 |
|
|
|
1,570,415 |
|
|
|
1,596,303 |
|
General and administrative expenses EchoStar |
|
|
53,373 |
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
490,662 |
|
|
|
624,251 |
|
|
|
551,547 |
|
Litigation expense (Note 15) |
|
|
|
|
|
|
33,907 |
|
|
|
93,969 |
|
Depreciation and amortization (Note 7) |
|
|
1,000,230 |
|
|
|
1,329,410 |
|
|
|
1,114,294 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
9,561,007 |
|
|
|
9,516,971 |
|
|
|
8,601,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,056,180 |
|
|
|
1,573,404 |
|
|
|
1,217,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
51,217 |
|
|
|
137,872 |
|
|
|
126,401 |
|
Interest expense, net of amounts capitalized |
|
|
(369,878 |
) |
|
|
(405,319 |
) |
|
|
(458,150 |
) |
Other, net |
|
|
(168,713 |
) |
|
|
(55,804 |
) |
|
|
37,393 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(487,374 |
) |
|
|
(323,251 |
) |
|
|
(294,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,568,806 |
|
|
|
1,250,153 |
|
|
|
923,015 |
|
Income tax (provision) benefit, net (Note 10) |
|
|
(665,859 |
) |
|
|
(494,099 |
) |
|
|
(314,743 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
$ |
608,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(3,278 |
) |
|
|
8,793 |
|
|
|
7,355 |
|
Unrealized holding gains (losses) on available-for-sale securities |
|
|
(291,664 |
) |
|
|
(12,655 |
) |
|
|
61,928 |
|
Recognition of previously unrealized (gains) losses on
available-for-sale securities included in net income (loss) |
|
|
189,513 |
|
|
|
(4,944 |
) |
|
|
(34 |
) |
Deferred income tax (expense) benefit |
|
|
(10,017 |
) |
|
|
5,630 |
|
|
|
(23,405 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
787,501 |
|
|
$ |
752,878 |
|
|
$ |
654,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) available to common stockholders |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
$ |
608,272 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) available to common stockholders |
|
$ |
909,585 |
|
|
$ |
765,571 |
|
|
$ |
618,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share weighted-average
common shares outstanding |
|
|
448,786 |
|
|
|
447,302 |
|
|
|
444,743 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share weighted-average
common shares outstanding |
|
|
460,226 |
|
|
|
456,834 |
|
|
|
452,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) |
|
$ |
2.01 |
|
|
$ |
1.69 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) |
|
$ |
1.98 |
|
|
$ |
1.68 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DISH NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(Dollars in thousands, except per share amounts)
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Accumulated |
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Deficit and |
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Accumulated |
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Additional |
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Other |
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|
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|
Class A and B Common Stock |
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Paid-In |
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Comprehensive |
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Treasury |
|
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|
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|
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Issued |
|
|
Treasury |
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Outstanding |
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Amount |
|
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Capital |
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|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
Balance, December 31, 2005 |
|
|
488,488 |
|
|
|
(44,584 |
) |
|
|
443,904 |
|
|
$ |
4,885 |
|
|
$ |
1,860,774 |
|
|
$ |
(1,382,907 |
) |
|
$ |
(1,349,376 |
) |
|
$ |
(866,624 |
) |
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|
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|
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SAB 108 adjustments, net of tax of $37.4 million |
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|
|
|
|
|
|
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(62,345 |
) |
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|
|
|
|
|
(62,345 |
) |
Issuance of Class A common stock: |
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Exercise of stock options |
|
|
1,520 |
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|
|
|
|
|
|
1,520 |
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|
|
15 |
|
|
|
21,475 |
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|
|
|
|
|
|
|
|
|
|
21,490 |
|
Employee benefits |
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|
820 |
|
|
|
|
|
|
|
820 |
|
|
|
8 |
|
|
|
22,094 |
|
|
|
|
|
|
|
|
|
|
|
22,102 |
|
Employee Stock Purchase Plan |
|
|
89 |
|
|
|
|
|
|
|
89 |
|
|
|
1 |
|
|
|
2,466 |
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|
|
|
|
|
|
|
|
|
2,467 |
|
Class A common stock repurchases, at cost |
|
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|
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|
(429 |
) |
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|
(429 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
(11,677 |
) |
|
|
(11,677 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,645 |
|
|
|
|
|
|
|
|
|
|
|
17,645 |
|
Income tax (expense) benefit related to stock awards and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,785 |
|
|
|
|
|
|
|
|
|
|
|
2,785 |
|
Change in unrealized holding gains (losses)
on available-for-sale securities, net |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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61,894 |
|
|
|
|
|
|
|
61,894 |
|
Foreign currency translation |
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
7,355 |
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|
|
|
|
|
|
7,355 |
|
Deferred income tax (expense) benefit attributable to
unrealized holding gains (losses) on available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,405 |
) |
|
|
|
|
|
|
(23,405 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
658 |
|
|
|
|
|
|
|
|
|
|
|
658 |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608,272 |
|
|
|
|
|
|
|
608,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance, December 31, 2006 |
|
|
490,917 |
|
|
|
(45,013 |
) |
|
|
445,904 |
|
|
$ |
4,909 |
|
|
$ |
1,927,897 |
|
|
$ |
(791,136 |
) |
|
$ |
(1,361,053 |
) |
|
$ |
(219,383 |
) |
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|
|
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|
|
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|
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Issuance of Class A common stock: |
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|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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Exercise of stock options |
|
|
2,111 |
|
|
|
|
|
|
|
2,111 |
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|
|
21 |
|
|
|
51,790 |
|
|
|
|
|
|
|
|
|
|
|
51,811 |
|
Employee benefits |
|
|
466 |
|
|
|
|
|
|
|
466 |
|
|
|
5 |
|
|
|
17,669 |
|
|
|
|
|
|
|
|
|
|
|
17,674 |
|
Employee Stock Purchase Plan |
|
|
80 |
|
|
|
|
|
|
|
80 |
|
|
|
1 |
|
|
|
2,877 |
|
|
|
|
|
|
|
|
|
|
|
2,878 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,016 |
|
|
|
|
|
|
|
|
|
|
|
23,016 |
|
Income tax (expense) benefit related to stock awards and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,615 |
|
|
|
|
|
|
|
|
|
|
|
10,615 |
|
Change in unrealized holding gains (losses)
on available-for-sale securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,253 |
) |
|
|
|
|
|
|
(11,253 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,447 |
|
|
|
|
|
|
|
2,447 |
|
Deferred income tax (expense) benefit attributable to
unrealized holding gains (losses) on available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,630 |
|
|
|
|
|
|
|
5,630 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756,054 |
|
|
|
|
|
|
|
756,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
493,574 |
|
|
|
(45,013 |
) |
|
|
448,561 |
|
|
$ |
4,936 |
|
|
$ |
2,033,864 |
|
|
$ |
(37,758 |
) |
|
$ |
(1,361,053 |
) |
|
$ |
639,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,259 |
|
|
|
|
|
|
|
1,259 |
|
|
|
12 |
|
|
|
19,033 |
|
|
|
|
|
|
|
|
|
|
|
19,045 |
|
Employee benefits |
|
|
604 |
|
|
|
|
|
|
|
604 |
|
|
|
6 |
|
|
|
19,369 |
|
|
|
|
|
|
|
|
|
|
|
19,375 |
|
Employee Stock Purchase Plan |
|
|
116 |
|
|
|
|
|
|
|
116 |
|
|
|
1 |
|
|
|
1,965 |
|
|
|
|
|
|
|
|
|
|
|
1,966 |
|
Class A common stock repurchases, at cost |
|
|
|
|
|
|
(3,137 |
) |
|
|
(3,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82,733 |
) |
|
|
(82,733 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,349 |
|
|
|
|
|
|
|
|
|
|
|
15,349 |
|
Income tax (expense) benefit related to stock awards and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
947 |
|
|
|
|
|
|
|
|
|
|
|
947 |
|
Change in unrealized holding gains (losses)
on available-for-sale securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,151 |
) |
|
|
|
|
|
|
(102,151 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,278 |
) |
|
|
|
|
|
|
(3,278 |
) |
Deferred income tax (expense) benefit attributable to
unrealized holding gains (losses) on available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,017 |
) |
|
|
|
|
|
|
(10,017 |
) |
Capital distribution to EchoStar in connection with the Spin-off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,350,545 |
) |
|
|
|
|
|
|
(3,350,545 |
) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
902,947 |
|
|
|
|
|
|
|
902,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
495,553 |
|
|
|
(48,150 |
) |
|
|
447,403 |
|
|
$ |
4,955 |
|
|
$ |
2,090,527 |
|
|
$ |
(2,600,802 |
) |
|
$ |
(1,443,786 |
) |
|
$ |
(1,949,106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
DISH NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
$ |
608,272 |
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,000,230 |
|
|
|
1,329,410 |
|
|
|
1,114,294 |
|
Equity in losses (earnings) of affiliates |
|
|
1,519 |
|
|
|
5,866 |
|
|
|
4,749 |
|
Realized and unrealized losses (gains) on investments |
|
|
169,370 |
|
|
|
45,620 |
|
|
|
(53,543 |
) |
Non-cash, stock-based compensation |
|
|
15,349 |
|
|
|
23,016 |
|
|
|
17,645 |
|
Deferred tax expense (benefit) (Note 10) |
|
|
392,318 |
|
|
|
398,931 |
|
|
|
259,396 |
|
Other, net |
|
|
7,328 |
|
|
|
7,529 |
|
|
|
5,693 |
|
Change in noncurrent assets |
|
|
7,832 |
|
|
|
2,657 |
|
|
|
54,462 |
|
Change in long-term deferred revenue, distribution and carriage payments and other long-term liabilities |
|
|
(98,957 |
) |
|
|
(15,475 |
) |
|
|
26,018 |
|
Changes in current assets and current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable other |
|
|
(138,768 |
) |
|
|
(25,764 |
) |
|
|
(190,218 |
) |
Allowance for doubtful accounts |
|
|
1,188 |
|
|
|
(987 |
) |
|
|
3,483 |
|
Income tax receivable |
|
|
(148,747 |
) |
|
|
|
|
|
|
|
|
Trade accounts receivable EchoStar |
|
|
(20,604 |
) |
|
|
|
|
|
|
|
|
Inventories |
|
|
(158,498 |
) |
|
|
(88,364 |
) |
|
|
16,743 |
|
Other current assets |
|
|
18,403 |
|
|
|
13,783 |
|
|
|
5,700 |
|
Trade accounts payable |
|
|
(120,739 |
) |
|
|
32,019 |
|
|
|
47,182 |
|
Trade accounts payable EchoStar |
|
|
297,629 |
|
|
|
|
|
|
|
|
|
Deferred revenue and other |
|
|
(27,317 |
) |
|
|
25,473 |
|
|
|
54,082 |
|
Accrued programming and other accrued expenses |
|
|
87,861 |
|
|
|
106,952 |
|
|
|
305,284 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
2,188,344 |
|
|
|
2,616,720 |
|
|
|
2,279,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable investment securities |
|
|
(4,648,931 |
) |
|
|
(3,653,939 |
) |
|
|
(2,250,197 |
) |
Sales and maturities of marketable investment securities |
|
|
4,708,338 |
|
|
|
3,078,432 |
|
|
|
1,522,962 |
|
Purchases of property and equipment |
|
|
(1,129,890 |
) |
|
|
(1,444,522 |
) |
|
|
(1,396,318 |
) |
Change in restricted cash and marketable investment securities |
|
|
79,638 |
|
|
|
2,267 |
|
|
|
(1,243 |
) |
FCC authorizations |
|
|
(711,871 |
) |
|
|
(97,463 |
) |
|
|
|
|
Investment in Sling Media, net of in-process research and development and cash acquired (Note 11) |
|
|
|
|
|
|
(319,928 |
) |
|
|
|
|
Purchase of strategic investments included in noncurrent marketable and other investment securities |
|
|
|
|
|
|
(71,903 |
) |
|
|
(27,572 |
) |
Proceeds from sale of strategic investment |
|
|
106,200 |
|
|
|
33,474 |
|
|
|
9,682 |
|
Other |
|
|
(955 |
) |
|
|
2,750 |
|
|
|
(6,282 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
(1,597,471 |
) |
|
|
(2,470,832 |
) |
|
|
(2,148,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of cash and cash equivalents to EchoStar in connection with the Spin-off (Note 1) |
|
|
(585,147 |
) |
|
|
|
|
|
|
|
|
Proceeds from issuance of 7 1/8% Senior Notes due 2016 |
|
|
|
|
|
|
|
|
|
|
1,500,000 |
|
Proceeds from issuance of 7% Senior Notes due 2013 |
|
|
|
|
|
|
|
|
|
|
500,000 |
|
Proceeds from issuance of 7 3/4% Senior Notes due 2013 |
|
|
750,000 |
|
|
|
|
|
|
|
|
|
Redemption of 3% Convertible Subordinated Note due 2010 |
|
|
(500,000 |
) |
|
|
|
|
|
|
|
|
Repurchases and redemption of 5 3/4% Senior Notes due 2008 |
|
|
(1,000,000 |
) |
|
|
|
|
|
|
|
|
Redemption of 5 3/4% Convertible Subordinated Notes due 2008 |
|
|
|
|
|
|
(999,985 |
) |
|
|
|
|
Redemption of Floating Rate Senior Notes due 2008 |
|
|
|
|
|
|
|
|
|
|
(500,000 |
) |
Repurchases and redemption of 9 1/8% Senior Notes due 2009 |
|
|
|
|
|
|
|
|
|
|
(441,964 |
) |
Deferred debt issuance costs |
|
|
(4,972 |
) |
|
|
|
|
|
|
(14,210 |
) |
Repayment of capital lease obligations, mortgages and other notes payable |
|
|
(10,000 |
) |
|
|
(43,723 |
) |
|
|
(41,015 |
) |
Class A common stock repurchases (Note 12) |
|
|
(82,733 |
) |
|
|
|
|
|
|
(11,677 |
) |
Net proceeds from Class A common stock options exercised and Class A common stock
issued under Employee Stock Purchase Plan |
|
|
21,011 |
|
|
|
54,674 |
|
|
|
23,957 |
|
Excess tax benefits recognized on stock option exercises |
|
|
|
|
|
|
13,018 |
|
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
(1,411,841 |
) |
|
|
(976,016 |
) |
|
|
1,022,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(820,968 |
) |
|
|
(830,128 |
) |
|
|
1,152,421 |
|
Cash and cash equivalents, beginning of period |
|
|
919,542 |
|
|
|
1,749,670 |
|
|
|
597,249 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
98,574 |
|
|
$ |
919,542 |
|
|
$ |
1,749,670 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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® television service, which provides a direct broadcast satellite (DBS) subscription
television service in the United States and had 13.678 million subscribers as of December 31, 2008.
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.
Spin-off of Technology and Certain Infrastructure Assets
On January 1, 2008, we completed a tax-free 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 now 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 both companies is owned beneficially by Charles W.
Ergen, our Chief Executive Officer and Chairman of our board of directors. The two entities
consist of the following:
|
|
|
DISH Network Corporation which retained its subscription television business, the
DISH Network®, and |
|
|
|
|
EchoStar Corporation which sells equipment, including set-top boxes and related
components, to DISH Network and international customers, and provides digital broadcast
operations and satellite services to DISH Network and other customers. |
The Spin-off of EchoStar did not result in the discontinuance of any of our ongoing operations as
the cash flows related to, among others things, purchases of set-top boxes, transponder leasing and
digital broadcasting services that we purchase from EchoStar continue to be included in our
operations.
Our shareholders of record on December 27, 2007 received one share of EchoStar common stock for
every five shares of each class of DISH Network common stock they held as of the record date.
F-8
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
The table below summarizes the assets and liabilities that were distributed to EchoStar in
connection with the Spin-off. The distribution was accounted for at historical cost given the
nature of the distribution.
|
|
|
|
|
|
|
January 1, |
|
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
|
|
|
Assets |
|
|
|
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
585,147 |
|
Marketable investment securities |
|
|
947,120 |
|
Trade accounts receivable, net |
|
|
38,054 |
|
Inventories, net |
|
|
31,000 |
|
Current deferred tax assets |
|
|
8,459 |
|
Other current assets |
|
|
32,351 |
|
|
|
|
|
Total current assets |
|
|
1,642,131 |
|
Restricted cash and marketable investment securities |
|
|
3,150 |
|
Property and equipment, net |
|
|
1,516,604 |
|
FCC authorizations |
|
|
165,994 |
|
Intangible assets, net |
|
|
214,544 |
|
Goodwill |
|
|
256,917 |
|
Other noncurrent assets, net |
|
|
93,707 |
|
|
|
|
|
Total assets |
|
$ |
3,893,047 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Current Liabilities: |
|
|
|
|
Trade accounts payable |
|
$ |
5,825 |
|
Deferred revenue and other accrued expenses |
|
|
38,460 |
|
Current portion of capital lease obligations, mortgages and other notes payable |
|
|
40,533 |
|
|
|
|
|
Total current liabilities |
|
|
84,818 |
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion: |
|
|
|
|
Capital lease obligations, mortgages and other notes payable, net of current portion |
|
|
341,886 |
|
Deferred tax liabilities |
|
|
115,798 |
|
|
|
|
|
Total long-term obligations, net of current portion |
|
|
457,684 |
|
|
|
|
|
Total liabilities |
|
|
542,502 |
|
|
|
|
|
|
|
|
|
|
Net assets distributed |
|
$ |
3,350,545 |
|
|
|
|
|
F-9
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
We consolidate all majority owned subsidiaries and investments in entities in which we have
controlling influence. 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. For entities that are considered variable interest entities we apply the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation
of Variable Interest Entities An Interpretation of ARB No. 51 (FIN 46R). All significant
intercompany accounts and transactions have been eliminated in consolidation. Certain prior year
amounts have been reclassified to conform to the current year presentation.
Variable rate demand notes (VRDNs), which we previously reported as cash and cash equivalents,
were reclassified to current marketable investment securities for the prior periods (see Note 5).
As a result, Purchases of marketable investment securities and Sales and maturities of
marketable investment securities in Net cash flows from investing activities on our Consolidated
Statements of Cash Flows have been reclassified for all prior periods. The ongoing purchase and
sale of VRDNs now appear on our cash flow statement under Cash flows from investing activities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States (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 revenues and expenses for each
reporting period. Estimates are used in accounting for, among other things, allowances for
uncollectible accounts, inventory allowances, self-insurance obligations, deferred taxes and
related valuation allowances, uncertain tax positions, loss contingencies, fair values of financial
instruments, fair value of options granted under our stock-based compensation plans, fair values of
assets and liabilities acquired in business combinations, capital leases, asset impairments, useful
lives of property, equipment and intangible assets, retailer commissions, programming expenses,
subscriber lives and royalty obligations. Illiquid credit markets and general downward 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 Consolidated Financial Statements. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected prospectively in the period they occur.
Foreign Currency Translation
The functional currency of the majority of our foreign subsidiaries is the U.S. dollar because
their sales and purchases are predominantly denominated in that currency. However, for our
subsidiaries where the functional currency is the local currency, we translate assets and
liabilities into U.S. dollars at the period-end exchange rate and revenues and expenses based on
the exchange rates at the time such transactions arise, if known, or at the average rate for the
period. The difference is recorded to equity as a component of other comprehensive income (loss).
Financial assets and liabilities denominated in currencies other than the functional currency are
recorded at the exchange rate at the time of the transaction and subsequent gains and losses
related to changes in the foreign currency are included in Other income or expense in our
Consolidated Statements of Operations and Comprehensive Income (Loss). Net transaction gains
(losses) during 2008, 2007 and 2006 were not significant.
F-10
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Cash and Cash Equivalents
We consider all liquid investments purchased with an original maturity of 90 days or less to be
cash equivalents. Cash equivalents as of December 31, 2008 and 2007 consist of money market funds,
government bonds, corporate notes and commercial paper. The cost of these investments approximates
their fair value.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. We depend on EchoStar for the production of our receivers and many
components of our receiver systems. Manufactured inventories include materials, labor, freight-in,
royalties and manufacturing overhead.
Marketable Investment Securities
We currently classify all marketable investment securities as available-for-sale. We adjust the
carrying value of our available-for-sale securities to fair value and report the related temporary
unrealized gains and losses as a separate component of Accumulated other comprehensive income
(loss) within Total stockholders equity (deficit), net of related deferred income tax.
Declines in the fair value of a marketable investment security which are determined to be
other-than-temporary are recognized in the Consolidated Statements of Operations and
Comprehensive Income (Loss), thus establishing a new cost basis for such investment.
We evaluate our marketable investment securities portfolio on a quarterly basis to determine
whether declines in the fair value of these securities are other-than-temporary. This quarterly
evaluation consists of reviewing, among other things:
|
|
|
the fair value of our marketable investment securities compared to the carrying amount, |
|
|
|
|
the historical volatility of the price of each security, and |
|
|
|
|
any market and company specific factors related to each security. |
Declines in the fair value of investments below cost basis are generally accounted for as follows:
|
|
|
Length of Time |
|
|
Investment Has Been In a |
|
Treatment of the Decline in Value |
Continuous Loss Position |
|
(absent specific factors to the contrary) |
Less than six months
|
|
Generally, considered temporary. |
Six to nine months
|
|
Evaluated on a case by case basis to
determine whether any company or
market-specific factors exist which would
indicate that such decline is
other-than-temporary. |
Greater than nine months
|
|
Generally, considered other-than-temporary.
The decline in value is recorded as a charge
to earnings. |
Property and Equipment
Property and equipment are stated at cost. The costs of satellites under construction, including
certain amounts prepaid under our satellite service agreements, are capitalized during the
construction phase, assuming the eventual successful launch and in-orbit operation of the
satellite. If a satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was incurred. The amount of any such loss would be
reduced to the extent of insurance proceeds estimated to be received, if any. Depreciation is recorded on a straight-line basis over lives ranging from one to forty years.
Repair and maintenance costs are charged to expense when incurred. Renewals and betterments are
capitalized.
F-11
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Long-Lived Assets
We account for impairments of long-lived assets in accordance with the provisions of Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). We review our long-lived assets and identifiable finite lived intangible
assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Based on the guidance under SFAS 144, we evaluate our
satellite fleet for recoverability as one asset group. For assets which are held and used in
operations, the asset would be impaired if the carrying value of the asset (or asset group)
exceeded its undiscounted future net cash flows. Once an impairment is determined, the actual
impairment is reported as the difference between the carrying value and the fair value as estimated
using discounted cash flows. Assets which are to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. We consider relevant cash flow, estimated future
operating results, trends and other available information in assessing whether the carrying value
of assets are recoverable.
Goodwill and Other Intangible Assets
We account for our goodwill and intangible assets in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which
requires goodwill and indefinite lived intangible assets with indefinite useful lives not be
amortized, but to be tested for impairment annually or whenever indicators of impairments arise.
Intangible assets that have finite lives are amortized over their estimated useful lives and tested
for impairment as described above for long-lived assets. Our intangible assets with indefinite
lives primarily consist of FCC licenses. Generally, we have determined that our FCC licenses have
indefinite useful lives due to the following:
|
|
|
FCC spectrum is a non-depleting asset; |
|
|
|
|
Existing DBS licenses are integral to our business and will contribute to cash
flows indefinitely; |
|
|
|
|
Replacement satellite applications are generally authorized by the FCC subject to
certain conditions, without substantial cost under a stable regulatory, legislative
and legal environment; |
|
|
|
|
Maintenance expenditures in order to obtain future cash flows are not significant; |
|
|
|
|
DBS licenses are not technologically dependent; and |
|
|
|
|
We intend to use these assets indefinitely. |
In accordance with the guidance of Emerging Issues Task Force (EITF) Issue No. 02-7, Unit of
Accounting for Testing Impairment of Indefinite-Lived Intangible Assets (EITF 02-7), we combine
all our indefinite lived FCC licenses into a single unit of accounting. The analysis encompasses
future cash flows from satellites transmitting from such licensed orbital locations, including
revenue attributable to programming offerings from such satellites, the direct operating and
subscriber acquisition costs related to such programming, and future capital costs for replacement
satellites. Projected revenue and cost amounts include current and projected subscribers. In
conducting our annual impairment test in 2008, we determined that the estimated fair value of the
FCC licenses, calculated using the discounted cash flow analysis, exceeded their carrying amount.
F-12
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Other Investment Securities
Generally, we account for our unconsolidated equity investments under either the equity method or
cost method of accounting. Because these equity securities are generally not publicly traded, it
is not practical to regularly estimate the fair value of the investments; however, these
investments are subject to an evaluation for other-than-temporary impairment on a quarterly basis.
This quarterly evaluation consists of reviewing, among other things, company business plans and
current financial statements, if available, for factors that may indicate an impairment of our
investment. Such factors may include, but are not limited to, cash flow concerns, material
litigation, violations of debt covenants and changes in business strategy. The fair value of these
equity investments is not estimated unless there are identified changes in circumstances that may
indicate an impairment exists and these changes are likely to have a significant adverse effect on
the fair value of the investment. When impairments occur related to our foreign investments, any
Cumulative translation adjustment associated with these investments will remain in Accumulated
other comprehensive income (loss) within Total stockholders equity (deficit) on our
Consolidated Balance Sheets until the investments are sold or otherwise liquidated; at which time,
they will be released into our Consolidated Statements of Operations and Comprehensive Income
(Loss).
Long-Term Deferred Revenue, Distribution and Carriage Payments
Certain programmers provide us up-front payments. Such amounts are deferred and in accordance with
EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor (EITF 02-16) are recognized as reductions to Subscriber-related
expenses on a straight-line basis over the relevant remaining contract term (up to 10 years). The
current and long-term portions of these deferred credits are recorded in the Consolidated Balance
Sheets in Deferred revenue and other and Long-term deferred revenue, distribution and carriage
payments and other long-term liabilities, respectively.
In addition, from time to time we receive equity interests in content providers in consideration
for or in conjunction with affiliation agreements. We account for these equity interests received
at fair value in accordance with EITF Issue No. 00-8, Accounting by a Grantee for an Equity
Instrument to be Received in Conjunction with Providing Goods or Services (EITF 00-8). In
accordance with the guidance under EITF 02-16, we record the corresponding amount as a deferred
liability that is generally recognized as a reduction of Subscriber-related expenses ratably over
the term of the related agreements. These deferred liabilities are included as a component of
current Deferred revenue and other and Long-term deferred revenue, distribution and carriage
payments and other long-term liabilities on our Consolidated Balance Sheets.
Sales Taxes
In accordance with the guidance of EITF Issue No. 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement (EITF 06-3), we
account for sales taxes imposed on our goods and services on a net basis in our Consolidated
Statements of Operations and Comprehensive Income (Loss). Since we primarily act as an agent for
the governmental authorities, the amount charged to the customer is collected and remitted directly
to the appropriate jurisdictional entity.
Income Taxes
We establish a provision for income taxes currently payable or receivable and for income tax
amounts deferred to future periods in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires that deferred tax assets or
liabilities be recorded for the estimated future tax effects of differences that exist between the
book and tax basis of assets and liabilities. Deferred tax assets are offset by valuation
allowances in accordance with SFAS 109, when we believe it is more likely than not that such net
deferred tax assets will not be realized.
F-13
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Accounting for Uncertainty in Income Taxes
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
Fair Value of Financial Instruments
Fair values for our publicly traded debt securities are based on quoted market prices. The fair
values of our private debt is 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, among other things,
regarding credit spreads, and the impact of these factors on the value of the notes.
Deferred Debt Issuance Costs
Costs of issuing debt are generally deferred and amortized to interest expense over the terms of
the respective notes (Note 9).
Revenue Recognition
We recognize revenue when an arrangement exists, prices are determinable, collectibility is
reasonably assured and the goods or services have been delivered. Revenue from our subscription
television services is recognized when programming is broadcast to subscribers. Programming
payments received from subscribers in advance of the broadcast or service period are recorded as
Deferred revenue and other in the Consolidated Balance Sheets until earned. For certain of our
promotions relating to our receiver systems, subscribers are charged an upfront fee. A portion of
this fee may be deferred and recognized over 48 to 60 months, depending on whether the fee is
received from existing or new subscribers. Revenue from advertising sales is recognized when the
related services are performed.
Subscriber fees for equipment rental, additional outlets and fees for receivers with multiple
tuners, high definition (HD) receivers, digital video recorders (DVRs), and HD DVRs, our
DishHOME Protection Plan and other services are recognized as revenue, monthly as earned. Revenue
from equipment sales and equipment upgrades are recognized upon shipment to customers.
Revenue from equipment sales to AT&T, Inc. (AT&T) pursuant to our original agreement with AT&T is
deferred and recognized over the estimated average co-branded subscriber life. Revenue from
installation and certain other services performed at the request of AT&T is recognized upon
completion of the services. Further, development and implementation fees received from AT&T will
continue to be recognized over the estimated average subscriber life of all subscribers acquired
under both the original and revised agreements with AT&T.
Accounting for certain of our existing and new subscriber promotions which include programming
discounts and subscriber rebates falls under the scope of EITF Issue No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Capital
Products) (EITF 01-9). In accordance with EITF 01-9, programming revenues under these
promotions are recorded as earned at the discounted monthly rate charged to the subscriber. See Subscriber Acquisition Promotions below for
discussion regarding the accounting for costs under these promotions.
F-14
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Subscriber-Related Expenses
The cost of television programming distribution rights is generally incurred on a per subscriber
basis and various upfront carriage payments are recognized when the related programming is
distributed to subscribers. The cost of television programming rights to distribute live sporting
events for a season or tournament is charged to expense using the straight-line method over the
course of the season or tournament. Subscriber-related expenses in the Consolidated Statements
of Operations and Comprehensive Income (Loss) principally include programming expenses, costs
incurred in connection with our in-home service and call center operations, billing costs,
refurbishment and repair costs related to receiver systems, subscriber retention and other variable
subscriber expenses. These costs are recognized as the services are performed or as incurred.
Subscriber-related expenses also include the cost of sales from equipment sales, and expenses
related to installation and other services from our original agreement with AT&T. Cost of sales
from equipment sales to AT&T are deferred and recognized over the estimated average co-branded
subscriber life. Expenses from installation and certain other services performed at the request of
AT&T are recognized as the services are performed. Under the revised AT&T agreement, we include
costs from equipment and installations in Subscriber acquisition costs or, for leased equipment,
in capital expenditures, rather than in Subscriber-related expenses. We continue to include in
Subscriber-related expenses the costs deferred from equipment sales made to AT&T. These costs
are amortized over the estimated life of the subscribers acquired under the original AT&T
agreement.
Subscriber Acquisition Costs
Subscriber acquisition costs in our Consolidated Statements of Operations and Comprehensive Income
(Loss) consist of costs incurred to acquire new subscribers through third parties and our direct
customer acquisition distribution channel. Subscriber acquisition costs include the following line
items from our Consolidated Statements of Operations and Comprehensive Income (Loss):
|
|
|
Cost of sales subscriber promotion subsidies includes the cost of our receiver
systems sold to retailers and other distributors of our equipment and receiver systems
sold directly by us to subscribers. |
|
|
|
Other subscriber promotion subsidies includes net costs related to promotional
incentives and costs related to installation. |
|
|
|
Subscriber acquisition advertising includes advertising and marketing expenses
related to the acquisition of new DISH Network subscribers. Advertising costs are
expensed as incurred. |
Accounting for dealer sales under our promotions falls within the scope of EITF 01-9. In
accordance with that guidance, we characterize amounts paid to our independent dealers as
consideration for equipment installation services and for equipment buydowns (commissions and
rebates) as a reduction of revenue. We expense payments for equipment installation services as
Other subscriber promotion subsidies. Our payments for equipment buydowns represent a partial or
complete return of the dealers purchase price and are, therefore, netted against the proceeds
received from the dealer. We report the net cost from our various sales promotions through our
independent dealer network as a component of Other subscriber promotion subsidies. No net
proceeds from the sale of subscriber related equipment pursuant to our subscriber acquisition
promotions are recognized as revenue.
Equipment Lease Programs
DISH Network subscribers have the choice of leasing or purchasing the satellite receiver and other
equipment necessary to receive our programming. Most of our new subscribers choose to lease
equipment and thus we retain title to such equipment. Equipment leased to new and existing
subscribers is capitalized and depreciated over their estimated useful lives.
F-15
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Research and Development Costs
Research and development costs are expensed as incurred. For the year ended December 31, 2008, we
did not incur any research and development costs. For the years ended December 31, 2007 and 2006,
research and development costs were $79 million and $57 million, respectively. The research and
development costs incurred in prior years related to the set-top box business and acquisition of
Sling Media which were distributed to EchoStar in connection with the Spin-off.
New Accounting Pronouncements
Revised Business Combinations
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 141R (revised 2007), Business Combinations (SFAS 141R). SFAS 141R
replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, including goodwill, the
liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes
disclosure requirements to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. We expect SFAS 141R will have an impact on our
consolidated financial statements, but the character and magnitude of the specific effects will
depend upon the type, terms and size of the acquisitions we consummate after the effective date of
January 1, 2009.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held by parties other
than the parent, the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parents ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes
reporting requirements for providing sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling owners. This standard
is effective for fiscal years beginning after December 15, 2008. We do not expect the adoption of
SFAS 160 to have a material impact on our financial position or results of operations.
3. Basic and Diluted Net Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) requires
entities to present both basic earnings per share (EPS) and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income (loss) by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options were
exercised and convertible securities were converted to common stock.
F-16
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
The potential dilution from our subordinated notes convertible into common stock was computed using
the if converted method. The potential dilution from stock options exercisable into common stock
for the periods below was computed using the treasury stock method based on the average market
value of our Class A common stock. The following table reflects the basic and diluted
weighted-average shares outstanding used to calculate basic and diluted earnings per share.
Earnings per share amounts for all periods are presented below in accordance with the requirements
of SFAS 128.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income (loss) per share Net income (loss) |
|
$ |
902,947 |
|
|
$ |
756,054 |
|
|
$ |
608,272 |
|
Interest on dilutive subordinated convertible notes, net of related tax effect |
|
|
6,638 |
|
|
|
9,517 |
|
|
|
9,834 |
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income (loss) per common share |
|
$ |
909,585 |
|
|
$ |
765,571 |
|
|
$ |
618,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per common share
weighted-average common shares outstanding |
|
|
448,786 |
|
|
|
447,302 |
|
|
|
444,743 |
|
Dilutive impact of options outstanding |
|
|
2,659 |
|
|
|
2,267 |
|
|
|
677 |
|
Dilutive impact of subordinated notes convertible into common shares |
|
|
8,781 |
|
|
|
7,265 |
|
|
|
7,265 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share
weighted-average diluted common shares outstanding |
|
|
460,226 |
|
|
|
456,834 |
|
|
|
452,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) |
|
$ |
2.01 |
|
|
$ |
1.69 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) |
|
$ |
1.98 |
|
|
$ |
1.68 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Class A common stock issuable upon conversion of: |
|
|
|
|
|
|
|
|
|
|
|
|
5 3/4% Convertible Subordinated Notes due 2008 |
|
|
|
|
|
|
|
|
|
|
23,100 |
|
3% Convertible Subordinated Note due 2010 (1) |
|
|
8,299 |
|
|
|
6,866 |
|
|
|
6,866 |
|
3% Convertible Subordinated Note due 2011 (2) |
|
|
482 |
|
|
|
399 |
|
|
|
399 |
|
|
|
|
(1) |
|
Effective as of close of business on January 15, 2008, the conversion price was
adjusted to $60.25 per share (8,298,755 shares) as a result of the Spin-off. |
|
(2) |
|
Effective as of close of business on January 15, 2008, the conversion price was
adjusted to $51.88 per share (481,881 shares) as a result of the Spin-off. |
As of December 31, 2008, 2007 and 2006, there were options to purchase 4.9 million, 1.3 million and
10.2 million shares of Class A common stock outstanding, respectively, not included in the above
denominator 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 long term incentive plans is contingent upon meeting
certain long-term goals which have not yet been achieved. As a consequence, the following are not
included in the diluted EPS calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
(In thousands) |
Performance based options |
|
|
10,253 |
|
|
|
10,112 |
|
|
|
11,007 |
|
Restricted performance units |
|
|
633 |
|
|
|
617 |
|
|
|
725 |
|
F-17
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
4. Statements of Cash Flow Data
The following presents our supplemental cash flow statement disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Cash paid for interest |
|
$ |
385,936 |
|
|
$ |
405,915 |
|
|
$ |
418,587 |
|
Capitalized interest |
|
|
16,880 |
|
|
|
18,088 |
|
|
|
20,091 |
|
Cash received for interest |
|
|
44,843 |
|
|
|
97,575 |
|
|
|
73,337 |
|
Cash paid for income taxes |
|
|
430,408 |
|
|
|
87,994 |
|
|
|
37,742 |
|
Employee benefits paid in Class A common stock |
|
|
19,375 |
|
|
|
17,674 |
|
|
|
22,102 |
|
Satellites financed under capital lease obligations |
|
|
|
|
|
|
198,219 |
|
|
|
|
|
Satellite and other vendor financing |
|
|
24,469 |
|
|
|
|
|
|
|
15,000 |
|
Net assets contributed in connection with the Spin-off, excluding cash and cash equivalents |
|
|
2,765,398 |
|
|
|
|
|
|
|
|
|
5. 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 December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
Marketable investment securities: |
|
|
|
|
|
|
|
|
Current marketable investment securities VRDNs |
|
$ |
239,611 |
|
|
$ |
261,275 |
|
Current marketable investment securities strategic |
|
|
13,561 |
|
|
|
576,814 |
|
Current marketable investment securities other |
|
|
207,386 |
|
|
|
1,030,565 |
|
|
|
|
|
|
|
|
Total current marketable investment securities |
|
|
460,558 |
|
|
|
1,868,654 |
|
Restricted marketable investment securities (1) |
|
|
22,407 |
|
|
|
58,894 |
|
Noncurrent marketable investment securities ARS and MBS (2) |
|
|
113,394 |
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment securities |
|
|
596,359 |
|
|
|
1,927,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents: |
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents (1) |
|
|
61,199 |
|
|
|
113,626 |
|
|
|
|
|
|
|
|
Total restricted cash and cash equivalents |
|
|
61,199 |
|
|
|
113,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment securities: |
|
|
|
|
|
|
|
|
Other investment securities cost method |
|
|
15,794 |
|
|
|
108,355 |
|
Other investment securities equity method |
|
|
26,785 |
|
|
|
68,127 |
|
Other investment securities fair value method |
|
|
2,323 |
|
|
|
11,404 |
|
|
|
|
|
|
|
|
Total other investment securities |
|
|
44,902 |
|
|
|
187,886 |
|
|
|
|
|
|
|
|
|
Total marketable investment securities, restricted cash and other investment securities |
|
$ |
702,460 |
|
|
$ |
2,229,060 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Restricted marketable investment securities and restricted cash and cash equivalents
are included in Restricted cash and marketable investment securities on our Consolidated
Balance Sheets. |
|
(2) |
|
Noncurrent marketable investment securities ARS and MBS are included in
Marketable and other investment securities on our Consolidated Balance Sheets. |
Marketable Investment Securities
Our marketable securities portfolio consists of various debt and equity instruments, all of which
are classified as available-for-sale (see Note 2).
F-18
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
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. While they are classified as marketable
investment securities, VRDNs can be liquidated per the put option on a same day or on a five
business day settlement basis.
Current Marketable Investment Securities Strategic
Our strategic marketable investment securities are highly speculative and have experienced and
continue to experience volatility. As of December 31, 2008, a significant portion of our strategic
investment portfolio consisted of securities of a single issuer and the value of that portfolio
therefore depends on the value of that issuer.
Current Marketable Investment Securities other
Our current marketable securities portfolio includes investments in various debt and equity
instruments including corporate bonds, corporate equity securities and government bonds. As of
December 31, 2007, our Current marketable investment securities other included $947 million of
current marketable investment securities that were distributed to EchoStar in connection with the
Spin-off (see Note 1), of which $491 million were classified as strategic.
Restricted Marketable Investment Securities
As of December 31, 2008 and 2007, our restricted marketable investment securities, together with
our restricted cash, included amounts required as collateral for our letters of credit.
Additionally, restricted cash and marketable investment securities as of December 31, 2007 included
$101 million in escrow related to our litigation with Tivo. On October 6, 2008, the Supreme Court
denied our petition for certiorari. As a result, approximately $105 million was released from the
escrow account to Tivo.
Noncurrent Marketable Investment Securities ARS and MBS
We also have investments in auction rate securities (ARS) and mortgage backed securities (MBS)
which are classified as available-for-sale securities and reported at fair value. Recent events in
the credit markets have reduced or eliminated current liquidity for certain of our ARS and MBS
investments. As a result, effective in 2008, we classify these investments as noncurrent assets as
we intend to hold these investments until they recover or mature.
The valuation of our ARS and MBS investments portfolio is subject to uncertainties that are
difficult to estimate. The fair values of these securities are estimated utilizing a combination
of comparable instruments and liquidity assumptions. These analyses consider, among other items,
the collateral underlying the investments, credit ratings, and liquidity. These securities were
also compared, when possible, to other observable market data with similar characteristics.
For our ARS and MBS investments, 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 by Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (SFAS 157). These inputs include
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.
F-19
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Other Investment Securities
We have several strategic investments in certain equity securities which are included in noncurrent
Marketable and other investment securities on our Consolidated Balance Sheets accounted for using
the cost, equity or fair value methods of accounting. The decrease in other investment securities
as of December 31, 2008 compared to December 31, 2007 primarily resulted from the distribution of
assets to EchoStar in connection with the Spin-off (see Note 1) and the sale of one of our cost
method investments.
Our ability to realize value from our strategic investments in companies that are not publicly
traded depends on the success of those companies businesses and their ability to obtain sufficient
capital to execute their business plans. Because private markets are not as liquid as public
markets, there is also increased risk that we will not be able to sell these investments, or that
when we desire to sell them we will not be able to obtain fair value for them.
Unrealized Gains (Losses) on Marketable Investment Securities
As of December 31, 2008 and 2007, we had accumulated unrealized gains (losses), net of related tax
effect, of $116 million in net losses and $30 million in gains, respectively, as a part of
Accumulated other comprehensive income (loss) within Total stockholders equity (deficit).
During 2008, we established a full valuation allowance for the tax assets associated with these
losses. The components of our available-for-sale investments are detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Marketable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Securities |
|
|
Gains |
|
|
Losses |
|
|
Net |
|
|
Securities |
|
|
Gains |
|
|
Losses |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VRDNs |
|
$ |
239,611 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
261,275 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
ARS and MBS |
|
|
113,394 |
|
|
|
|
|
|
|
(103,943 |
) |
|
|
(103,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (including restricted) |
|
|
231,863 |
|
|
|
|
|
|
|
(12,442 |
) |
|
|
(12,442 |
) |
|
|
1,313,432 |
|
|
|
6,847 |
|
|
|
(647 |
) |
|
|
6,200 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
11,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352,840 |
|
|
|
38,425 |
|
|
|
(14,787 |
) |
|
|
23,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment securities |
|
$ |
596,359 |
|
|
$ |
|
|
|
$ |
(116,385 |
) |
|
$ |
(116,385 |
) |
|
$ |
1,927,547 |
|
|
$ |
45,272 |
|
|
$ |
(15,434 |
) |
|
$ |
29,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, restricted and non-restricted marketable investment securities include
debt securities of $464 million with contractual maturities of one year or less and $121 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.
F-20
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Marketable Investment Securities in a Loss Position
In accordance with the guidance of FASB Staff Position Number 115-1 (FSP 115-1) The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, 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 December 31,
2008, the unrealized losses on our investments in debt securities primarily represent investments
in auction rate, mortgage and asset-backed securities. We are not aware of any specific factors
which indicate that the underlying issuers of these investments 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. In addition, we have the ability and intent to hold our investments in these debt
securities until they recover or mature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary |
|
|
As of December 31, 2008 |
|
|
|
Reason for |
|
|
Total |
|
|
Less than Six Months |
|
|
Six to Nine Months |
|
|
Nine Months or More |
|
Investment |
|
Unrealized |
|
|
Fair |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Category |
|
Loss |
|
|
Value |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
Temporary market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
fluctuations |
|
$ |
295,676 |
|
|
|
2,070 |
|
|
|
(540 |
) |
|
$ |
8,114 |
|
|
$ |
(24 |
) |
|
$ |
285,492 |
|
|
$ |
(115,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
295,676 |
|
|
$ |
2,070 |
|
|
$ |
(540 |
) |
|
$ |
8,114 |
|
|
$ |
(24 |
) |
|
$ |
285,492 |
|
|
$ |
(115,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
|
|
|
(In thousands) |
|
Debt securities |
|
Temporary market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fluctuations |
|
$ |
524,577 |
|
|
$ |
361,347 |
|
|
$ |
(6,425 |
) |
|
$ |
163,230 |
|
|
$ |
(1,909 |
) |
|
$ |
|
|
|
$ |
|
|
Equity securities |
|
Temporary market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fluctuations |
|
|
188,476 |
|
|
|
186,352 |
|
|
|
(16,192 |
) |
|
|
2,124 |
|
|
|
(1,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
713,053 |
|
|
$ |
547,699 |
|
|
$ |
(22,617 |
) |
|
$ |
165,354 |
|
|
$ |
(2,936 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Effective January 1, 2008, we adopted SFAS 157, for all financial instruments and non-financial
instruments accounted for at fair value on a recurring basis. SFAS 157 establishes a new framework
for measuring fair value and expands related disclosures. Broadly, the SFAS 157 framework requires
fair value to be determined 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. SFAS 157 establishes market or
observable inputs as the preferred source of values, followed by unobservable inputs or assumptions
based on hypothetical transactions in the absence of market inputs.
|
|
|
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 |
|
|
|
|
Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring assumptions based on the best information available. |
Our assets measured at fair value on a recurring basis were as follows (in thousands):
F-21
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value As of December 31, |
|
|
|
2008 |
|
Assets |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(In thousands) |
|
Marketable investment securities |
|
$ |
596,359 |
|
|
$ |
16,029 |
|
|
$ |
475,974 |
|
|
$ |
104,356 |
|
Other investment securities |
|
|
2,323 |
|
|
|
|
|
|
|
|
|
|
|
2,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
598,682 |
|
|
$ |
16,029 |
|
|
$ |
475,974 |
|
|
$ |
106,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Changes in Level 3 instruments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
Current and |
|
|
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
Marketable |
|
|
Other |
|
|
|
|
|
|
|
Investment |
|
|
Investment |
|
|
|
Total |
|
|
Securities |
|
|
Securities |
|
Balance as of January 1, 2008 |
|
$ |
211,999 |
|
|
$ |
200,595 |
|
|
$ |
11,404 |
|
Transfers in (out) of level 3, net |
|
|
21,262 |
|
|
|
21,262 |
|
|
|
|
|
Net realized/unrealized gains/(losses) included in earnings |
|
|
(10,152 |
) |
|
|
(1,071 |
) |
|
|
(9,081 |
) |
Net realized/unrealized gains/(losses) included in other comprehensive income |
|
|
(107,851 |
) |
|
|
(107,851 |
) |
|
|
|
|
Purchases, issuances and settlements, net |
|
|
(8,579 |
) |
|
|
(8,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
106,679 |
|
|
$ |
104,356 |
|
|
$ |
2,323 |
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses on Sales and Changes in Carrying Values of Investments
Other, net income and expense included on our 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 Years Ended December 31, |
|
Other Income (Expense): |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Marketable investment securities gains (losses) on sales/exchange |
|
$ |
2,095 |
|
|
$ |
13,608 |
|
|
$ |
30,302 |
|
Marketable investment securities other-than-temporary impairments |
|
|
(191,404 |
) |
|
|
|
|
|
|
|
|
Other investment securities gains (losses) on sales/exchanges |
|
|
53,473 |
|
|
|
8,358 |
|
|
|
58,345 |
|
Other investment securities unrealized gains (losses) on fair value
investments and other-than-temporary impairments |
|
|
(33,534 |
) |
|
|
(66,733 |
) |
|
|
(32,928 |
) |
Other |
|
|
657 |
|
|
|
(11,037 |
) |
|
|
(18,326 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(168,713 |
) |
|
$ |
(55,804 |
) |
|
$ |
37,393 |
|
|
|
|
|
|
|
|
|
|
|
6. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Finished goods DBS |
|
$ |
238,343 |
|
|
$ |
170,463 |
|
Raw materials |
|
|
146,353 |
|
|
|
70,103 |
|
Work-in-process used |
|
|
61,663 |
|
|
|
67,542 |
|
Work-in-process new |
|
|
2,414 |
|
|
|
13,546 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
448,773 |
|
|
|
321,654 |
|
Inventory allowance |
|
|
(22,102 |
) |
|
|
(14,739 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
426,671 |
|
|
$ |
306,915 |
|
|
|
|
|
|
|
|
F-23
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
7. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable |
|
|
|
|
|
Life |
|
As of December 31, |
|
|
|
(In Years) |
|
2008 |
|
|
2007 |
|
|
|
|
|
(In thousands) |
|
Equipment leased to customers |
|
2-5 |
|
$ |
3,021,149 |
|
|
$ |
2,773,085 |
|
EchoStar I |
|
12 |
|
|
201,607 |
|
|
|
201,607 |
|
EchoStar II (1) |
|
N/A |
|
|
|
|
|
|
228,694 |
|
EchoStar III (2) |
|
12 |
|
|
|
|
|
|
234,083 |
|
EchoStar IV fully depreciated (2) |
|
N/A |
|
|
|
|
|
|
78,511 |
|
EchoStar V |
|
9 |
|
|
203,511 |
|
|
|
203,511 |
|
EchoStar VI (2) |
|
12 |
|
|
|
|
|
|
244,305 |
|
EchoStar VII |
|
12 |
|
|
177,000 |
|
|
|
177,000 |
|
EchoStar VIII (2) |
|
12 |
|
|
|
|
|
|
175,801 |
|
EchoStar IX (2) |
|
12 |
|
|
|
|
|
|
127,376 |
|
EchoStar X |
|
12 |
|
|
177,192 |
|
|
|
177,192 |
|
EchoStar XI |
|
12 |
|
|
200,198 |
|
|
|
|
|
EchoStar XII (2) |
|
10 |
|
|
|
|
|
|
190,051 |
|
Satellites acquired under capital lease agreements (3) |
|
10-15 |
|
|
223,423 |
|
|
|
775,050 |
|
Furniture, fixtures, equipment and other |
|
1-10 |
|
|
419,758 |
|
|
|
997,521 |
|
Buildings and improvements |
|
1-40 |
|
|
64,872 |
|
|
|
260,153 |
|
Land |
|
|
|
|
3,760 |
|
|
|
33,182 |
|
Construction in progress |
|
|
|
|
403,778 |
|
|
|
772,661 |
|
|
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
|
$ |
5,096,248 |
|
|
$ |
7,649,783 |
|
Accumulated depreciation |
|
|
|
|
(2,432,959 |
) |
|
|
(3,591,594 |
) |
Property and equipment, net |
|
|
|
$ |
2,663,289 |
|
|
$ |
4,058,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
EchoStar II experienced a failure that rendered the satellite a total loss and was
written-off during the second quarter 2008 (see further discussion below). |
|
(2) |
|
These satellites were transferred to EchoStar in connection with the Spin-off. |
|
(3) |
|
The capital lease agreements for AMC-15 and AMC-16 were contributed to EchoStar in
connection with the Spin-off. |
F-24
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Construction in progress consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Progress amounts for satellite construction, including certain amounts
prepaid under satellite service agreements and launch costs |
|
$ |
383,040 |
|
|
$ |
685,758 |
|
Software related projects |
|
|
12,102 |
|
|
|
8,802 |
|
Uplinking equipment |
|
|
|
|
|
|
52,095 |
|
Other |
|
|
8,636 |
|
|
|
26,006 |
|
|
|
|
|
|
|
|
Construction in progress |
|
$ |
403,778 |
|
|
$ |
772,661 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Equipment leased to customers |
|
$ |
827,599 |
|
|
$ |
854,533 |
|
|
$ |
686,125 |
|
Satellites |
|
|
89,435 |
|
|
|
245,349 |
|
|
|
231,977 |
|
Furniture, fixtures, equipment and other |
|
|
73,447 |
|
|
|
179,854 |
|
|
|
152,204 |
|
Identifiable intangible assets subject to amortization |
|
|
5,009 |
|
|
|
39,893 |
|
|
|
36,787 |
|
Buildings and improvements |
|
|
4,740 |
|
|
|
9,781 |
|
|
|
7,201 |
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
1,000,230 |
|
|
$ |
1,329,410 |
|
|
$ |
1,114,294 |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expense categories included in our accompanying Consolidated Statements
of Operations and Comprehensive Income (Loss) do not include depreciation expense related to
satellites or equipment leased to customers.
The cost of our satellites includes capitalized interest of $17 million, $18 million, and $20
million during the years ended December 31, 2008, 2007 and 2006, respectively.
Our Satellites
We presently utilize twelve satellites in geostationary orbit approximately 22,300 miles above the
equator, five of which are owned by us. Each of the owned satellites had an original estimated
minimum useful life of at least 12 years. We lease capacity on seven satellites from EchoStar with
terms of up to two years and we account for these as operating leases. (See Note 19 for further
discussion of our satellite leases with EchoStar.) We also lease two satellites from third
parties, which are accounted for as capital leases pursuant to Statement of Financial Accounting
Standards No. 13, Accounting for Leases (SFAS 13). The capital leases are depreciated over the
shorter of the economic life or the term of the satellite service agreement.
F-25
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original |
|
|
|
|
|
|
Degree |
|
Useful |
|
|
|
|
Launch |
|
Orbital |
|
Life |
|
Lease Term |
Satellites |
|
Date |
|
Location |
|
(Years) |
|
(Years) |
Owned: |
|
|
|
|
|
|
|
|
EchoStar I |
|
December 1995 |
|
148 |
|
12 |
|
|
EchoStar V |
|
September 1999 |
|
129 |
|
12 |
|
|
EchoStar VII |
|
February 2002 |
|
119 |
|
12 |
|
|
EchoStar X |
|
February 2006 |
|
110 |
|
12 |
|
|
EchoStar XI |
|
July 2008 |
|
110 |
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Leased from EchoStar: |
|
|
|
|
|
|
|
|
EchoStar III |
|
October 1997 |
|
61.5 |
|
12 |
|
2 |
EchoStar IV (1) |
|
May 1998 |
|
77 |
|
12 |
|
Month to month |
EchoStar VI |
|
July 2000 |
|
72.7 |
|
12 |
|
2 |
EchoStar VIII (1) |
|
August 2002 |
|
77 |
|
12 |
|
2 |
EchoStar IX |
|
August 2003 |
|
121 |
|
12 |
|
Month to month |
EchoStar XII |
|
July 2003 |
|
61.5 |
|
10 |
|
2 |
AMC-15 (1) |
|
December 2004 |
|
105 |
|
10 |
|
Month to month |
|
|
|
|
|
|
|
|
|
Leased from Other
Third Party: |
|
|
|
|
|
|
|
|
Anik F3 (2) |
|
April 2007 |
|
118.7 |
|
15 |
|
15 |
Ciel II (3) |
|
December 2008 |
|
129 |
|
10 |
|
10 |
|
|
|
|
|
|
|
|
|
Under Construction: |
|
|
|
|
|
|
|
|
Owned: |
|
|
|
|
|
|
|
|
EchoStar XIV |
|
Late 2009 |
|
119 |
|
12 |
|
|
EchoStar XV |
|
Late 2010 |
|
119 |
|
12 |
|
|
Leased from EchoStar: |
|
|
|
|
|
|
|
|
Nimiq 5 (4) |
|
Late 2009 |
|
72.7 |
|
10 |
|
10 |
QuetzSat-1 (4) |
|
2011 |
|
77 |
|
10 |
|
10 |
|
|
|
(1) |
|
We currently do not lease the entire capacity available on these satellites.
|
|
(2) |
|
This satellite is accounted for as a capital lease. |
|
(3) |
|
Ciel II was placed in service in February 2009 and will be accounted for as a capital
lease. |
|
(4) |
|
Lease payments will commence when the satellite is placed into service. |
Satellite Anomalies
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.
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.
F-26
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
While we believe that overall our satellite fleet is generally in good condition, during 2008 and
prior periods, certain satellites in our fleet have experienced anomalies, some of which have had a
significant adverse impact on their commercial operation. There can be no assurance that future
anomalies will not cause further losses which could impact commercial operation, or the remaining
lives, of the satellites. See discussion of evaluation of impairment in Long-Lived Satellite
Assets below. Recent developments with respect to our satellites are discussed below.
Owned Satellites
EchoStar I. EchoStar I, a 7000 class satellite, designed and manufactured by Lockheed Martin
Corporation (Lockheed), is currently functioning properly in orbit. However, similar Lockheed
Series 7000 class satellites have experienced total in-orbit failures, including our own EchoStar
II, discussed below. While no telemetry or other data indicates EchoStar I would be expected to
experience a similar failure, Lockheed has been unable to conclude these and other Series 7000
satellites will not experience similar failures. EchoStar I, which is fully depreciated, can
operate up to 16 transponders at 130 watts per channel. During prior years, the satellite
experienced anomalies resulting in the possible loss of two solar array strings. The anomalies
have not impacted commercial operation of the satellite to date. Even if permanent loss of the two
solar array strings is confirmed, the satellite is not expected to be impacted since it is equipped
with a total of 104 solar array strings, only approximately 98 of which are required to assure full
power.
EchoStar II. During July 2008, our EchoStar II satellite experienced a failure that rendered the
satellite a total loss. EchoStar II had been operating primarily as a back-up satellite, but had
provided local network channel service to Alaska and six other small markets. All programming and
other services previously broadcast from EchoStar II were restored to Echostar I within several
hours after the failure. The $6 million book value of EchoStar II was written-off during the third
quarter 2008.
EchoStar V. EchoStar V was originally designed with a minimum 12-year design life. Momentum wheel
failures in prior years, together with relocation of the satellite between orbital locations,
resulted in increased fuel consumption, as previously disclosed. In addition, to date, EchoStar V
has experienced anomalies resulting in the loss of 13 solar array strings. These issues have not
impacted commercial operation of the satellite. However, during 2005, as a result of the momentum
wheel failures and the increased fuel consumption, we reduced the remaining estimated useful life
of the satellite. As of October 2008, EchoStar V was fully depreciated.
EchoStar VII. During 2006, EchoStar VII experienced an anomaly which resulted in the loss of a
receiver. Service was quickly restored through a spare receiver. These receivers process signals
sent from our uplink center for transmission back to earth by the satellite. The design life of
the satellite has not been affected and the anomaly is not expected to result in the loss of other
receivers on the satellite. However, there can be no assurance future anomalies will not cause
further receiver losses which could impact the useful life or commercial operation of the
satellite. In the event the spare receiver placed in operation following the 2006 anomaly also
fails, there would be no impact to the satellites ability to provide service to the entire
continental United States (CONUS) when operating in CONUS mode. However, we would lose one-fifth
of the spot beam capacity when operating in spot beam mode.
EchoStar X. EchoStar X was designed with 49 spot beams which use up to 42 active 140 watt
traveling wave tube amplifiers (TWTAs) to provide standard definition and HD local channels and other
programming to markets across the United States. During January 2008, the satellite experienced an
anomaly which resulted in the failure of one solar array circuit out of a total of 24 solar array
circuits, approximately 22 of which are required to assure full power for the original minimum
12-year design life of the satellite. The design life of the satellite has not been affected.
However, there can be no assurance future anomalies will not cause further losses, which could
impact commercial operation of the satellite or its useful life.
F-27
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Leased Satellites
EchoStar III. EchoStar III was originally designed to operate a maximum of 32 DBS transponders in
CONUS at approximately 120 watts per channel, switchable to 16 transponders operating at over 230
watts per channel, and was equipped with a total of 44 TWTAs to provide redundancy. As a result of
past TWTA failures only 18 transponders are currently available for use. Due to redundancy
switching limitations and specific channel authorizations, we can only operate on 15 of our FCC
authorized frequencies at the 61.5 degree location. While we do not expect a large number of
additional TWTAs to fail in any year, and the failures have not reduced the original minimum
12-year design life of the satellite, it is likely that additional TWTA failures will occur from
time to time in the future, and such failures could further impact commercial operation of the
satellite.
EchoStar IV. EchoStar IV was originally designed to operate a maximum of 32 DBS transponders in
CONUS at approximately 120 watts per channel, switchable to 16 transponders operating at over 230
watts per channel. As a result of past TWTA failures, only six transponders are currently
available for use. There can be no assurance that further material degradation, or total loss of
use, of EchoStar IV will not occur in the immediate future.
EchoStar VI. EchoStar VI, which is being used as an in-orbit spare, was originally equipped with
108 solar array strings, approximately 102 of which are required to assure full power availability
for the operational life of the satellite. Prior to 2008, EchoStar VI experienced anomalies
resulting in the loss of 22 solar array strings, reducing the number of functional solar array
strings to 86. Although the operational life of the satellite has not been affected, commercial
operability has been reduced. The satellite was designed to operate 32 DBS transponders in CONUS
at approximately 125 watts per channel, switchable to 16 transponders operating at approximately
225 watts per channel. The power reduction resulting from the solar array failures currently
limits us to operation of a maximum of 25 transponders in standard power mode, or 12 transponders
in high power mode. The number of transponders to which power can be provided is expected to
decline in the future at the rate of approximately one transponder every three years.
EchoStar VIII. EchoStar VIII was designed to operate 32 DBS transponders in CONUS at approximately
120 watts per channel, switchable to 16 transponders operating at approximately 240 watts per
channel. EchoStar VIII also includes spot-beam technology. This satellite has experienced several
anomalies since launch, but none have reduced the operational life. However, there can be no
assurance that future anomalies will not cause further losses which could materially impact its
commercial operation, or result in a total loss of the satellite.
EchoStar IX. EchoStar IX was designed to operate 32 FSS transponders in CONUS at approximately 110
watts per channel, along with transponders that can provide services in the Ka-Band (a Ka-band
payload). The satellite also includes a C-band payload which is owned by a third party. Prior to
2008, EchoStar IX experienced anomalies resulting in the loss of three solar array strings and the
loss of one of its three momentum wheels, two of which are utilized during normal operations. A
spare wheel was switched in at the time. These anomalies have not impacted the commercial
operation of the satellite.
EchoStar XII. EchoStar XII was designed to operate 13 DBS transponders at 270 watts per channel in
CONUS mode, or 22 spot beams using a combination of 135 and 65 watt TWTAs. We currently operate
the satellite in spot beam/CONUS hybrid mode. EchoStar XII has a total of 24 solar array circuits,
approximately 22 of which are required to assure full power for the original minimum operational
life of the satellite. Prior to 2008, eight solar array circuits on EchoStar XII have experienced
anomalous behavior resulting in both temporary and permanent solar array circuit failures.
Although the design life of the satellite has not been affected, these circuit failures have
resulted in a reduction in power to the satellite which will preclude us from using the full
complement of transponders on EchoStar XII for the operational life of the satellite.
F-28
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
AMC-14. In connection with the Spin-off, we distributed our AMC-14 satellite lease agreement with
SES Americom (SES) to EchoStar with the intent to lease the entire capacity of the satellite from
EchoStar. During March 2008, AMC-14 experienced a launch anomaly and failed to reach its intended
orbit. SES subsequently declared the AMC-14 satellite a total loss due to a lack of viable options
to reposition the satellite to its proper geostationary orbit. We did not incur any financial
liability as a result of the AMC-14 satellite being declared a total loss.
Long-Lived Satellite Assets. Based on the guidance under SFAS 144, we evaluate our satellite fleet
for recoverability as one asset group. 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 (none of which caused a loss of service to
subscribers for an extended period) are not considered to be significant events that would require
evaluation for impairment recognition pursuant to the guidance under SFAS 144. 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.
8. FCC Authorizations, Intangible Assets and Goodwill
During 2007, we participated in an FCC auction for licenses in the 1.4 GHz band and were the
winning bidder for several licenses with total winning bids of $57 million. We contributed these
licenses to EchoStar in the Spin-off.
During 2008, we paid $712 million to acquire certain 700 MHz wireless licenses, which were granted
to us by the FCC in February 2009. The 700 MHz spectrum is being returned by television
broadcasters when they move to digital from analog signals by June 12, 2009. We will be required
to make significant additional investments or partner with others to commercialize these licenses
and satisfy FCC build-out requirements.
As of December 31, 2008 and 2007, our identifiable intangibles subject to amortization consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Intangible |
|
|
Accumulated |
|
|
Intangible |
|
|
Accumulated |
|
|
|
Assets |
|
|
Amortization |
|
|
Assets |
|
|
Amortization |
|
|
|
(In thousands) |
|
Contract based |
|
$ |
|
|
|
$ |
|
|
|
$ |
192,845 |
|
|
$ |
(60,754 |
) |
Customer and reseller relationships |
|
|
|
|
|
|
|
|
|
|
96,898 |
|
|
|
(70,433 |
) |
Technology-based |
|
|
5,814 |
|
|
|
(679 |
) |
|
|
69,797 |
|
|
|
(9,478 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,814 |
|
|
$ |
(679 |
) |
|
$ |
359,540 |
|
|
$ |
(140,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of these intangible assets, recorded on a straight line basis over an average finite
useful life of five years, was $5 million, $40 million and $37 million for the years ended December
31, 2008, 2007 and 2006, respectively.
F-29
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Estimated future amortization of our identifiable intangible assets as of December 31, 2008 is as
follows (in thousands):
|
|
|
|
|
For the Years Ending December 31, |
|
|
|
|
2009 |
|
$ |
1,163 |
|
2010 |
|
|
1,163 |
|
2011 |
|
|
1,163 |
|
2012 |
|
|
1,163 |
|
2013 |
|
|
483 |
|
Thereafter |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,135 |
|
|
|
|
|
9. Long-Term Debt
3% Convertible Subordinated Note due 2010
During the third quarter 2008, we repaid our $500 million 3% Convertible Subordinated Note due in
2010.
5 3/4% Senior Notes due 2008
During the third quarter 2008, we repurchased $28 million of our 5 3/4% Senior Notes due 2008 in open
market transactions. During October 2008, the remaining balance of $972 million was redeemed.
6 3/8% Senior Notes due 2011
The 6 3/8% Senior Notes mature October 1, 2011. Interest accrues at an annual rate of 6 3/8% and
is payable semi-annually in cash, in arrears on April 1 and October 1 of each year.
The 6 3/8% Senior Notes are redeemable, in whole or in part, at any time at a redemption price
equal to 100% of their principal amount plus a make-whole premium, as defined in the related
indenture, together with accrued and unpaid interest.
The 6 3/8% Senior Notes are:
|
|
|
general unsecured senior obligations of DDBS; |
|
|
|
|
ranked equally in right of payment with all of DDBS and the guarantors existing
and future unsecured senior debt; and |
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness. |
The indenture related to the 6 3/8% Senior Notes contains restrictive covenants that, among other
things, impose limitations on the ability of DDBS and its restricted subsidiaries to:
|
|
|
incur additional indebtedness or enter into sale and leaseback transactions; |
|
|
|
|
pay dividends or make distribution on DDBS capital stock or repurchase DDBS
capital stock; |
|
|
|
|
make certain investments; |
|
|
|
|
create liens; |
|
|
|
|
enter into transactions with affiliates; |
|
|
|
|
merge or consolidate with another company; and |
|
|
|
|
transfer and 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 holders 6 3/8% Senior Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase.
F-30
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
3% Convertible Subordinated Note due 2011
The 3% Convertible Subordinated Note, which was sold to CenturyTel Service Group, LLC (CTL) in a
privately negotiated transaction, matures August 25, 2011 and is convertible into 398,724 shares of
our Class A common stock at the option of CTL at $62.70 per share, subject to adjustment in certain
circumstances. Effective as of close of business on January 15, 2008, the conversion price was
adjusted to $51.88 per share (481,881 shares) as a result of the Spin-off. Interest accrues at an
annual rate of 3% and is payable semi-annually in cash, in arrears on June 30 and December 31 of
each year.
The 3% Convertible Subordinated Note due 2011 is:
|
|
|
a general unsecured obligation; |
|
|
|
|
ranked junior in right of payment with all of our existing and future senior debt; |
|
|
|
|
ranked equal in right of payment to our existing convertible subordinated debt; and |
|
|
|
|
ranked equal in right of payment to all other existing and future indebtedness
whenever the instrument expressly provides that such indebtedness ranks equal with the
3% Convertible Subordinated Note due 2011. |
The indenture related to the 3% Convertible Subordinated Note due 2011 contains certain restrictive
covenants that do not impose material limitations on us.
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 the holders 3% Convertible Subordinated Note due
2011 at a purchase price equal to 100% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon, to the date of repurchase. Commencing August 25, 2009, we may
redeem, and CTL may require us to purchase, all or a portion of the note without premium.
Therefore, during the third quarter 2008, this note was reclassified to current liabilities on our
Consolidated Balance Sheets.
6 5/8% Senior Notes due 2014
The 6 5/8% Senior Notes mature October 1, 2014. Interest accrues at an annual rate of 6 5/8% and
is payable semi-annually in cash, in arrears on April 1 and October 1 of each year.
The 6 5/8% Senior Notes are redeemable, in whole or in part, at any time at a redemption price
equal to 100% of their principal amount plus a make-whole premium, as defined in the related
indenture, together with accrued and unpaid interest.
The 6 5/8% Senior Notes are:
|
|
|
general unsecured senior obligations of DDBS; |
|
|
|
|
ranked equally in right of payment with all of DDBS and the guarantors existing
and future unsecured senior debt; and |
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness. |
The indenture related to the 6 5/8% Senior Notes contains restrictive covenants that, among other
things, impose limitations on the ability of DDBS and its restricted subsidiaries to:
|
|
|
incur additional indebtedness or enter into sale and leaseback transactions; |
|
|
|
|
pay dividends or make distribution on DDBS capital stock or repurchase DDBS
capital stock; |
|
|
|
|
make certain investments; |
|
|
|
|
create liens; |
|
|
|
|
enter into transactions with affiliates; |
|
|
|
|
merge or consolidate with another company; and |
|
|
|
|
transfer and sell assets. |
In the event of a change of control, as defined in the related indenture, we would be required to
make an
F-31
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
offer to repurchase all or any part of a holders 6 5/8% Senior Notes at a purchase price equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon,
to the date of repurchase.
7 1/8% Senior Notes due 2016
On February 2, 2006, we sold $1.5 billion aggregate principal amount of our ten-year, 7 1/8% Senior
Notes due February 1, 2016. Interest accrues at an annual rate of 7 1/8% and is payable
semi-annually in cash, in arrears on February 1 and August 1 of each year.
The 7 1/8% Senior Notes 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.
The 7 1/8% Senior Notes are:
|
|
|
general unsecured senior obligations of DDBS; |
|
|
|
|
ranked equally in right of payment with all of DDBS and the guarantors existing
and future unsecured senior debt; and |
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness. |
The indenture related to the 7 1/8% Senior Notes contains restrictive covenants that, among other
things, impose limitations on the ability of DDBS and its restricted subsidiaries to:
|
|
|
incur additional debt; |
|
|
|
|
pay dividends or make distribution on DDBS capital stock or repurchase DDBS
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 and 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 holders 7 1/8% Senior Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase.
7% Senior Notes due 2013
On October 18, 2006, we sold $500.0 million aggregate principal amount of our seven-year, 7%
Senior Notes due October 1, 2013. Interest accrues at an annual rate of 7% and is payable
semi-annually in cash, in arrears on April 1 and October 1 of each year.
The 7% Senior Notes 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 October 1, 2009, we may also redeem up to 35%
of each of the 7% Senior Notes at specified premiums with the net cash proceeds from certain equity
offerings or capital contributions.
The 7% Senior Notes are:
|
|
|
general unsecured senior obligations of DDBS; |
|
|
|
|
ranked equally in right of payment with all of DDBS and the guarantors existing
and future unsecured senior debt; and |
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness. |
F-32
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
The indenture related to the 7% Senior Notes contains restrictive covenants that, among other
things, impose limitations on the ability of DDBS and its restricted subsidiaries to:
|
|
|
incur additional debt; |
|
|
|
|
pay dividends or make distribution on DDBS capital stock or repurchase DDBS
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 and 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 holders 7% Senior Notes at a purchase price equal
to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase.
7 3/4% Senior Notes due 2015
On May 27, 2008, we sold $750 million aggregate principal amount of our seven-year, 7 3/4% Senior
Notes due May 31, 2015. Interest accrues at an annual rate of 7 3/4% and is payable semi-annually
in cash, in arrears on May 31 and November 30 of each year, commencing on November 30, 2008. The
net proceeds that we received from the sale of the notes were used for general corporate
purposes.
The 7 3/4% Senior Notes 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 31, 2011, we may also redeem up to 35% of
each of the 7 3/4% Senior Notes at specified premiums with the net cash proceeds from certain equity
offerings or capital contributions.
The 7 3/4% Senior Notes are:
|
|
|
general unsecured senior obligations of DDBS; |
|
|
|
|
ranked equally in right of payment with all of DDBS and the guarantors existing
and future unsecured senior debt; and |
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness. |
The indenture related to the 7 3/4% Senior Notes contains restrictive covenants that, among other
things, impose limitations on the ability of DDBS and its restricted subsidiaries to:
|
|
|
incur additional debt; |
|
|
|
|
pay dividends or make distribution on DDBS capital stock or repurchase DDBS
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 and 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 holders 7 3/4% Senior Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase.
F-33
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Interest on Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
|
Semi-Annual |
|
Debt Service |
|
|
Payment Dates |
|
Requirements |
6 3/8% Senior Notes due 2011 |
|
April 1 and October 1 |
|
$ |
63,750,000 |
|
3% Convertible Subordinated Note due 2011 |
|
June 30 and December 31 |
|
$ |
750,000 |
|
6 5/8% Senior Notes due 2014 |
|
April 1 and October 1 |
|
$ |
66,250,000 |
|
7 1/8% Senior Notes due 2016 |
|
February 1 and August 1 |
|
$ |
106,875,000 |
|
7 % Senior Notes due 2013 |
|
April 1 and October 1 |
|
$ |
35,000,000 |
|
7 3/4% Senior Notes due 2015 |
|
May 31 and November 30 |
|
$ |
58,125,000 |
|
Our ability to meet our debt service requirements will depend on, among other factors, the
successful execution of our business strategy, which is subject to uncertainties and contingencies
beyond our control.
Fair Value of our Long-Term Debt
The following table summarizes the book and fair values of our debt facilities at December 31, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Book Value |
|
|
Fair Value |
|
|
Book Value |
|
|
Fair Value |
|
|
|
(In thousands) |
|
3% Convertible Subordinated Note due 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
500,000 |
|
|
$ |
489,270 |
|
5 3/4% Senior Notes due 2008 |
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
997,500 |
|
6 3/8% Senior Notes due 2011 |
|
|
1,000,000 |
|
|
|
899,000 |
|
|
|
1,000,000 |
|
|
|
1,019,000 |
|
3% Convertible Subordinated Note due 2011 |
|
|
25,000 |
|
|
|
23,768 |
|
|
|
25,000 |
|
|
|
23,463 |
|
6 5/8% Senior Notes due 2014 |
|
|
1,000,000 |
|
|
|
840,300 |
|
|
|
1,000,000 |
|
|
|
995,000 |
|
7 1/8% Senior Notes due 2016 |
|
|
1,500,000 |
|
|
|
1,246,890 |
|
|
|
1,500,000 |
|
|
|
1,522,500 |
|
7 % Senior Notes due 2013 |
|
|
500,000 |
|
|
|
419,000 |
|
|
|
500,000 |
|
|
|
505,000 |
|
7 3/4% Senior Notes due 2015 |
|
|
750,000 |
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
Mortgages and other notes payable |
|
|
46,211 |
|
|
|
46,211 |
|
|
|
37,157 |
|
|
|
37,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
4,821,211 |
|
|
$ |
4,075,169 |
|
|
$ |
5,562,157 |
|
|
$ |
5,588,890 |
|
Capital lease obligations (1) |
|
|
186,545 |
|
|
|
N/A |
|
|
|
563,547 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,007,756 |
|
|
$ |
4,075,169 |
|
|
$ |
6,125,704 |
|
|
$ |
5,588,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pursuant to SFAS 107 Disclosures about Fair Value of Financial Instruments, disclosures
regarding fair value of capital leases is not required. |
As of December 31, 2008 and 2007, the carrying value is equal to or approximates fair value for
cash and cash equivalents, marketable investment securities, trade accounts receivable, net of
allowance for doubtful accounts, and current liabilities due to their short-term nature.
F-34
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Capital Lease Obligations, Mortgages and Other Notes Payable
Capital lease obligations, mortgages and other notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Satellites and other capital lease obligations |
|
$ |
186,545 |
|
|
$ |
563,547 |
|
8% note payable for EchoStar VII satellite vendor financing, payable over 13 years from launch |
|
|
9,881 |
|
|
|
10,906 |
|
8% note payable for EchoStar IX satellite vendor financing, payable over 14 years from launch |
|
|
|
|
|
|
8,139 |
|
6% note payable for EchoStar X satellite vendor financing, payable over 15 years from launch |
|
|
12,498 |
|
|
|
13,248 |
|
6% note payable for EchoStar XI satellite vendor financing, payable over 15 years from launch |
|
|
17,500 |
|
|
|
|
|
Mortgages and other unsecured notes payable due in installments through 2017
with interest rates ranging from approximately 2% to 13% |
|
|
6,332 |
|
|
|
4,864 |
|
|
|
|
|
|
|
|
Total |
|
$ |
232,756 |
|
|
$ |
600,704 |
|
Less current portion |
|
|
(13,333 |
) |
|
|
(50,454 |
) |
|
|
|
|
|
|
|
Capital lease obligations, mortgages and other notes payable, net of current portion |
|
$ |
219,423 |
|
|
$ |
550,250 |
|
|
|
|
|
|
|
|
Capital Lease Obligations
Anik F3. Anik F3, an FSS satellite, was launched and commenced commercial operation during April
2007. This satellite is accounted for as a capital lease pursuant to SFAS 13 and depreciated over
the term of the satellite service agreement. We have leased all of the 32 Ku-band transponders on
Anik F3 for a period of 15 years.
As of December 31, 2008 and 2007, we had $223 million and $775 million capitalized for the
estimated fair value of satellites acquired under capital leases included in Property and
equipment, net, with related accumulated depreciation of $26 million and $175 million,
respectively. This decrease during 2008 related to the contribution of the AMC-15 and AMC-16
satellite lease agreements to EchoStar in connection with the Spin-off. In our Consolidated
Statements of Operations and Comprehensive Income (Loss), we recognized $15 million, $66 million
and $55 million in depreciation expense on satellites acquired under capital lease agreements
during the years ended December 31, 2008, 2007 and 2006, respectively.
Future minimum lease payments under the capital lease obligation, together with the present value
of the net minimum lease payments as of December 31, 2008 are as follows (in thousands):
|
|
|
|
|
For the Year Ending December 31, |
|
|
|
|
2009 |
|
$ |
48,799 |
|
2010 |
|
|
48,297 |
|
2011 |
|
|
48,000 |
|
2012 |
|
|
48,000 |
|
2013 |
|
|
48,000 |
|
Thereafter |
|
|
400,000 |
|
|
|
|
|
Total minimum lease payments |
|
|
641,096 |
|
Less: Amount representing lease of the orbital location and estimated executory costs (primarily
insurance and maintenance) including profit thereon, included in total minimum lease payments |
|
|
(346,719 |
) |
|
|
|
|
Net minimum lease payments |
|
|
294,377 |
|
Less: Amount representing interest |
|
|
(107,832 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
186,545 |
|
Less: Current portion |
|
|
(9,229 |
) |
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
177,316 |
|
|
|
|
|
F-35
DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Future maturities of our outstanding long-term debt, including the current portion, are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Long-term debt obligations |
|
$ |
4,775,000 |
|
|
$ |
25,000 |
|
|
$ |
|
|
|
$ |
1,000,000 |
|
|
$ |
|
|
|
$ |
500,000 |
|
|
$ |
3,250,000 |