Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

Form 10-Q

 

(Mark One)

 

T

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

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011.

 

OR

 

o

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

 

FOR THE TRANSITION PERIOD FROM                               TO                                .

 

Commission File Number:  0-26176

 

DISH Network Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

88-0336997

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

9601 South Meridian Boulevard

 

 

Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip code)

 

(303) 723-1000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 31, 2011, the registrant’s outstanding common stock consisted of 207,735,717 shares of Class A common stock and 238,435,208 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Disclosure Regarding Forward-Looking Statements

 

i

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets —
September 30, 2011 and December 31, 2010 (Unaudited)

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the
Nine Months Ended September 30, 2011 and 2010 (Unaudited)

 

3

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

4

 

 

 

 

Item 2.

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

 

41

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

61

 

 

 

 

Item 4.

Controls and Procedures

 

63

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

64

 

 

 

 

Item 1A.

Risk Factors

 

69

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

None

 

 

 

 

Item 4.

(Removed and Reserved)

 

None

 

 

 

 

Item 5.

Other Information

 

70

 

 

 

 

Item 6.

Exhibits

 

71

 

 

 

 

 

Signatures

 

72

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

·                  Competition from digital media companies that provide/facilitate the delivery of video content via the Internet, could materially adversely affect us.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  Technology in our industry changes rapidly and could cause our services and products to become obsolete.  We may have to upgrade or replace subscriber equipment and make substantial investments in our infrastructure to remain competitive.

 

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

 

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

 

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

 

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

 

·                  If Voom prevails in its breach of contract suit against us, we could be required to pay substantial damages, which would have a material adverse affect on our financial position and results of operations.

 

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

 

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Table of Contents

 

·                  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 to us.  Our business would be adversely affected if EchoStar ceases to provide these services to us and we are unable to obtain suitable replacement services from third parties.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

 

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

 

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

 

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

 

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

 

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

 

iii



Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,045,516

 

$

640,672

 

Marketable investment securities (Note 4)

 

2,319,146

 

2,299,705

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $14,661 and $29,650, respectively

 

807,451

 

771,898

 

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

 

17,966

 

14,155

 

Inventory

 

667,490

 

487,575

 

Deferred tax assets

 

211,432

 

216,899

 

Other current assets

 

354,291

 

142,489

 

Total current assets

 

5,423,292

 

4,573,393

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities (Note 4)

 

120,846

 

144,437

 

Property and equipment, net of accumulated depreciation of $2,809,738 and $2,684,521, respectively

 

3,184,594

 

3,232,348

 

FCC authorizations

 

1,391,441

 

1,391,441

 

Marketable and other investment securities (Note 4)

 

107,543

 

121,926

 

Investment in DBSD North America (Note 4)

 

1,285,512

 

102,591

 

TerreStar Transaction (Note 9)

 

1,345,000

 

 

Other noncurrent assets, net

 

177,262

 

66,017

 

Total noncurrent assets

 

7,612,198

 

5,058,760

 

Total assets

 

$

13,035,490

 

$

9,632,153

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

205,691

 

$

161,767

 

Trade accounts payable - EchoStar

 

308,764

 

238,997

 

Deferred revenue and other

 

824,991

 

803,768

 

Accrued programming

 

1,036,123

 

1,089,988

 

Litigation accrual (Note 10)

 

65,580

 

619,022

 

Other accrued expenses

 

684,868

 

554,864

 

Current portion of long-term debt and capital lease obligations

 

945,886

 

1,030,895

 

Total current liabilities

 

4,071,903

 

4,499,301

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

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

 

7,461,596

 

5,484,041

 

Deferred tax liabilities

 

1,156,434

 

567,686

 

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

 

242,222

 

214,568

 

Total long-term obligations, net of current portion

 

8,860,252

 

6,266,295

 

Total liabilities

 

12,932,155

 

10,765,596

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 263,851,377 and 260,917,977 shares issued, 207,733,177 and 204,799,717 shares outstanding, respectively

 

2,639

 

2,609

 

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

 

2,252,678

 

2,171,799

 

Accumulated other comprehensive income (loss)

 

44,875

 

93,357

 

Accumulated earnings (deficit)

 

(631,366

)

(1,834,619

)

Treasury stock, at cost

 

(1,569,459

)

(1,569,459

)

Total DISH Network stockholders’ equity (deficit)

 

101,751

 

(1,133,929

)

 Noncontrolling interest

 

1,584

 

486

 

Total stockholders’ equity (deficit)

 

103,335

 

(1,133,443

)

Total liabilities and stockholders’ equity (deficit)

 

$

13,035,490

 

$

9,632,153

 

 

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

 

1



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscriber-related revenue

 

$

3,229,345

 

$

3,185,515

 

$

9,739,784

 

$

9,362,974

 

Equipment and merchandise sales, rental and other revenue

 

362,088

 

11,894

 

648,107

 

42,231

 

Equipment sales, services and other revenue - EchoStar

 

11,218

 

10,319

 

29,052

 

28,960

 

Total revenue

 

3,602,651

 

3,207,728

 

10,416,943

 

9,434,165

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses (exclusive of depreciation shown separately below - Note 6):

 

 

 

 

 

 

 

 

 

Subscriber-related expenses

 

1,702,661

 

1,684,583

 

5,125,315

 

4,972,403

 

Satellite and transmission expenses:

 

 

 

 

 

 

 

 

 

EchoStar

 

108,442

 

107,524

 

332,713

 

316,109

 

Other

 

9,769

 

10,113

 

29,788

 

30,201

 

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

 

150,356

 

14,997

 

262,026

 

53,903

 

Subscriber acquisition costs:

 

 

 

 

 

 

 

 

 

Cost of sales - subscriber promotion subsidies - EchoStar

 

69,003

 

57,173

 

186,297

 

123,809

 

Other subscriber promotion subsidies

 

234,495

 

286,206

 

673,285

 

866,317

 

Subscriber acquisition advertising

 

91,320

 

103,094

 

232,936

 

273,750

 

Total subscriber acquisition costs

 

394,818

 

446,473

 

1,092,518

 

1,263,876

 

General and administrative expenses - EchoStar

 

13,788

 

12,424

 

38,260

 

35,393

 

General and administrative expenses

 

368,832

 

143,001

 

831,406

 

425,868

 

Litigation expense (Note 10)

 

 

91,097

 

(316,949

)

151,999

 

Depreciation and amortization (Note 6)

 

229,146

 

242,859

 

695,892

 

746,967

 

Total costs and expenses

 

2,977,812

 

2,753,071

 

8,090,969

 

7,996,719

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

624,839

 

454,657

 

2,325,974

 

1,437,446

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

8,527

 

6,265

 

23,414

 

18,356

 

Interest expense, net of amounts capitalized

 

(155,601

)

(108,619

)

(419,344

)

(336,256

)

Other, net

 

20,298

 

22,327

 

12,137

 

23,254

 

Total other income (expense)

 

(126,776

)

(80,027

)

(383,793

)

(294,646

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

498,063

 

374,630

 

1,942,181

 

1,142,800

 

Income tax (provision) benefit, net

 

(179,085

)

(129,652

)

(739,039

)

(409,923

)

Net income (loss)

 

318,978

 

244,978

 

1,203,142

 

732,877

 

Less: Net income (loss) attributable to noncontrolling interest

 

(121

)

14

 

(111

)

(24

)

Net income (loss) attributable to DISH Network common shareholders

 

$

319,099

 

$

244,964

 

$

1,203,253

 

$

732,901

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

318,978

 

$

244,978

 

$

1,203,142

 

$

732,877

 

Foreign currency translation adjustments

 

(892

)

(13,476

)

(7,792

)

(13,476

)

Unrealized holding gains (losses) on available-for-sale securities, net of tax

 

(132,065

)

17,542

 

(38,996

)

13,833

 

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

 

(56

)

1,871

 

(1,694

)

768

 

Deferred income tax (expense) benefit

 

 

5,067

 

 

5,067

 

Comprehensive income (loss)

 

185,965

 

255,982

 

1,154,660

 

739,069

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(121

)

14

 

(111

)

(24

)

Comprehensive income (loss) attributable to DISH Network common shareholders

 

$

186,086

 

$

255,968

 

$

1,154,771

 

$

739,093

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

446,133

 

445,662

 

445,034

 

446,789

 

Diluted

 

447,731

 

446,332

 

446,476

 

447,575

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

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

 

$

0.72

 

$

0.55

 

$

2.70

 

$

1.64

 

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

 

$

0.71

 

$

0.55

 

$

2.70

 

$

1.64

 

 

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

 

2



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2011

 

2010

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

1,203,142

 

$

732,877

 

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

 

 

 

 

 

Depreciation and amortization

 

695,892

 

746,967

 

Realized and unrealized losses (gains) on investments

 

(14,092

)

(25,895

)

Non-cash, stock-based compensation

 

25,595

 

12,326

 

Deferred tax expense (benefit)

 

590,849

 

104,469

 

Other, net

 

14,471

 

14,315

 

Change in noncurrent assets

 

(62,646

)

(412

)

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

 

27,651

 

(112,926

)

Changes in current assets and current liabilities, net

 

(489,706

)

62,221

 

Net cash flows from operating activities

 

1,991,156

 

1,533,942

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(5,101,420

)

(4,170,764

)

Sales and maturities of marketable investment securities

 

4,793,861

 

4,288,546

 

Purchases of property and equipment

 

(593,912

)

(832,280

)

Launch service assigned from EchoStar (Note 12)

 

 

(102,913

)

Change in restricted cash and marketable investment securities

 

24,097

 

(4,385

)

Investment in DBSD North America

 

(1,127,098

)

 

TerreStar Transaction (Note 9)

 

(1,345,000

)

 

Acquisition of Blockbuster, net of cash acquired of $107,061

 

(126,523

)

 

Purchase of other strategic investments

 

(9,275

)

 

Proceeds from sale of strategic investments

 

11,327

 

20,413

 

Other

 

(542

)

(383

)

Net cash flows from investing activities

 

(3,474,485

)

(801,766

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

2,000,000

 

 

Debt issuance costs

 

(27,167

)

 

Repayment of long-term debt and capital lease obligations

 

(26,206

)

(21,979

)

Repurchases of 6 3/8% Senior Notes due 2011

 

(85,358

)

 

Class A common stock repurchases

 

 

(106,683

)

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

 

26,924

 

4,983

 

Other

 

4,296

 

16

 

Net cash flows from financing activities

 

1,892,489

 

(123,663

)

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

(4,316

)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

404,844

 

608,513

 

Cash and cash equivalents, beginning of period

 

640,672

 

105,844

 

Cash and cash equivalents, end of period

 

$

1,045,516

 

$

714,357

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

351,506

 

$

354,998

 

Capitalized interest

 

$

 

$

17,139

 

Cash received for interest

 

$

25,583

 

$

30,758

 

Cash paid for income taxes

 

$

30,777

 

$

511,550

 

Employee benefits paid in Class A common stock

 

$

24,803

 

$

29,127

 

Vendor financing

 

$

 

$

40,000

 

Satellites and other assets financed under capital lease obligations

 

$

3,583

 

$

786

 

 

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

 

3



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Organization and Business Activities

 

Principal Business

 

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

 

·                  DISH Network.  The DISH Network® direct broadcast satellite (“DBS”) subscription television service in the United States had 13.945 million subscribers as of September 30, 2011.  The DISH Network DBS System consists of Federal Communications Commission (“FCC”) licenses authorizing us to use DBS and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, leased fiber network, in-home service and call center operations, and certain other assets utilized in our operations.

 

·                  Blockbuster.  On April 26, 2011, we completed the acquisition of most of the assets of Blockbuster, Inc. (“Blockbuster Acquisition”).  We acquired Blockbuster operations in the United States and in certain foreign countries.  Blockbuster primarily offers movies and video games for sale and rental through multiple distribution channels such as retail stores, by-mail, digital devices, the blockbuster.com website and the BLOCKBUSTER On Demand service.

 

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

 

2.              Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 10-K”).  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2011 include the results of operations for Blockbuster from the acquisition date of April 26, 2011 to September 30, 2011.  See the accounting policies below for changes related to the Blockbuster Acquisition.

 

4



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

Blockbuster Rental Library Inventory

 

Our rental library inventory consists of movies and video games available for rental by customers and previously rented movies and video games that are available for sale.  Our rental library inventory is carried at cost and includes an allocation of costs incurred in our distribution center to prepare this product for our stores.  This inventory is amortized over its estimated useful life ranging from six to 24 months, depending on the title, down to an estimated residual value.  Because of the relatively short useful lives of this inventory and because this inventory is available for sale to customers at any time, we view these assets as current assets.

 

Blockbuster Merchandise Inventory

 

Our merchandise inventory consists primarily of new and traded movies and video games and other general merchandise, including confections, and are stated at the lower of cost or market value.  We include in the cost of our merchandise inventory an allocation of costs incurred in our distribution center to prepare this product for our stores.  Merchandise inventory costs are determined using the weighted-average method, the use of which approximates the first-in, first-out basis.

 

Revenue Recognition

 

We recognize revenue when an arrangement exists, prices are determinable, collectibility is reasonably assured and the goods or services have been delivered.

 

5



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

DISH Network Segment

 

Revenue from our subscription television services is recognized when programming is broadcast to subscribers.  Payments received from subscribers in advance of the broadcast or service period are recorded as “Deferred revenue and other” in our Condensed Consolidated Balance Sheets until earned.

 

For certain of our promotions, subscribers are charged an upfront fee.  A portion of these fees may be deferred and recognized over the estimated subscriber life for new subscribers or the estimated remaining life for existing subscribers ranging from 18 months to five years.  Revenue from advertising sales is recognized when the related services are performed.

 

Subscriber fees for equipment rental, including DVRs, additional outlets and fees for receivers with multiple tuners, and our in-home service operations are recognized as revenue as earned.  Revenue from equipment sales and equipment upgrades are recognized upon shipment to customers.

 

Certain of our existing and new subscriber promotions include programming discounts.  Programming revenues are recorded as earned at the discounted monthly rate charged to the subscriber.

 

Blockbuster Segment

 

Rental revenue is generally recognized at the time of rental or sale.  Rental revenue is generated from the rental of movies and video games and any eventual sale of previously rented items.

 

Certain rental and subscription programs allow customers to rent a specified or unlimited number of titles during a specific period.  We recognize rental revenues from the sale of these programs and our online subscription service over the term of the service.

 

We offer our customers the opportunity to download movies for a specific viewing period or permanently purchase a movie from our web-site.  We recognize revenue when the movie is successfully downloaded by the customer, which, based on our current technology, occurs at the time the customer plays the movie for the first time.

 

Foreign Currency Translation and Transactions

 

The financial statements of our foreign operations were prepared in their respective local currencies and translated into U.S. dollars for reporting purposes.  The assets and liabilities are translated at exchange rates in effect at the balance sheet date, while results of operations are translated at average exchange rates for the respective periods.  The cumulative effects of exchange rate changes on net assets are included as a part of “Accumulated other comprehensive income (loss).”

 

Fair Value of Financial Instruments

 

As of September 30, 2011 and December 31, 2010, the carrying value for cash and cash equivalents, marketable investment securities, trade accounts receivable, net of allowance for doubtful accounts, and current liabilities is equal to or approximates fair value due to their short-term nature or proximity to current market rates.

 

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 regarding, among other things, credit spreads, and the impact of these factors on the value of the notes.  See Note 7 for the fair value of our long-term debt.

 

6



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

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

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) attributable to DISH Network common shareholders

 

$

319,099

 

$

244,964

 

$

1,203,253

 

$

732,901

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

446,133

 

445,662

 

445,034

 

446,789

 

Dilutive impact of stock awards outstanding

 

1,598

 

670

 

1,442

 

786

 

Diluted

 

447,731

 

446,332

 

446,476

 

447,575

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

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

 

$

0.72

 

$

0.55

 

$

2.70

 

$

1.64

 

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

 

$

0.71

 

$

0.55

 

$

2.70

 

$

1.64

 

 

As of September 30, 2011 and 2010, there were stock awards to purchase 5.3 million and 11.1 million shares, respectively, of Class A common stock outstanding, not included in the weighted-average common shares outstanding above, as their effect is antidilutive.

 

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

 

 

 

As of September 30,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Performance based options

 

11,028

 

11,003

 

Restricted Performance Units and other

 

1,376

 

1,518

 

Total

 

12,404

 

12,521

 

 

7



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

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

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

1,024,275

 

$

1,334,081

 

Current marketable investment securities - strategic

 

334,727

 

211,141

 

Current marketable investment securities - other

 

960,144

 

754,483

 

Total current marketable investment securities

 

2,319,146

 

2,299,705

 

Restricted marketable investment securities (1)

 

55,974

 

62,196

 

Noncurrent marketable investment securities - ARS and MBS (2)

 

104,738

 

119,121

 

Total marketable investment securities

 

2,479,858

 

2,481,022

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

64,872

 

82,241

 

 

 

 

 

 

 

Other investment securities:

 

 

 

 

 

Other investment securities - cost method (2)

 

2,805

 

2,805

 

Investment in DBSD North America

 

1,285,512

 

102,591

 

Total other investment securities

 

1,288,317

 

105,396

 

 

 

 

 

 

 

Total marketable investment securities, restricted cash and other investment securities

 

$

3,833,047

 

$

2,668,659

 

 


(1)

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

 

 

(2)

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

 

Marketable Investment Securities

 

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

 

Current Marketable Investment Securities - VRDNs

 

Variable rate demand notes (“VRDNs”) are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.  All of the put options are secured by a pledged liquidity source.  Our VRDN portfolio is comprised of investments in many municipalities, which are backed by financial institutions or other highly rated companies that serve as the pledged liquidity source.  While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.

 

8



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Current Marketable Investment Securities - Strategic

 

Our current strategic marketable investment securities include strategic and financial investments in public companies that are highly speculative and have experienced and continue to experience volatility.  As of September 30, 2011, a significant portion of our strategic investment portfolio consisted of securities of several issuers, and a significant portion of the value of that portfolio depends on the value of those issuers.

 

Current Marketable Investment Securities - Other

 

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

 

Restricted Cash and Marketable Investment Securities

 

As of September 30, 2011 and December 31, 2010, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds and for our litigation with ESPN (See Note 10).

 

Noncurrent Marketable Investment Securities — ARS and MBS

 

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

 

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

 

Fair Value Election.  As of September 30, 2011 our ARS and MBS noncurrent marketable investment securities portfolio of $105 million includes $55 million of securities accounted for under the fair value method.

 

Other Investment Securities

 

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

 

Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital 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.

 

9



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Investment in DBSD North America

 

Over the past several years, we have made various strategic investments in DBSD North America Inc. (“DBSD North America”), a subsidiary of Pendrell Corporation, formerly known as ICO Global Communications (Holdings) Limited (“ICO”).  DBSD North America is developing an advanced hybrid system which combines both satellite and terrestrial communications capable of supporting wireless voice, data and/or Internet services throughout the United States.  We have committed, through various agreements described below, to acquire 100% of the equity of reorganized DBSD North America for approximately $1.4 billion.  Our ultimate acquisition of 100% of the equity of reorganized DBSD North America is subject to the satisfaction of certain conditions, including approval by the FCC and DBSD North America’s emergence from bankruptcy.  In the event that necessary approval from the FCC is not obtained, we have the right to direct DBSD North America to sell substantially all of its assets under Section 363 of the bankruptcy code.  Because of our ownership of certain claims and DBSD North America debt, and our rights under the Implementation Agreement (as defined below), we are entitled to receive substantially all of the proceeds of any such sales.  There can be no assurance, however, that such sales will result in proceeds equal to the value of the claims or DBSD North America debt held by us.  While we hold a material amount of financial instruments in DBSD North America, we do not have the power to direct its activities and will not until the acquisition is closed.  DBSD North America will be consolidated into our financial statements if the acquisition is approved and DBSD North America has emerged from bankruptcy.  As of September 30, 2011, our total investment in DBSD North America is $1.286 billion and is included on our Condensed Consolidated Balance Sheets under the caption “Investment in DBSD North America.” The following paragraphs discuss the various components of our investment in DBSD North America.

 

Investment in DBSD North America.  As of September 30, 2011 and December 31, 2010, our other investment securities portfolio included DBSD North America’s 7.5% Convertible Senior Secured Notes due 2009 of $112 million and $56 million, respectively.  In addition, as of September 30, 2011 and December 31, 2010, we held a $47 million line of credit pursuant to the Amended and Restated Revolving Credit Agreement, dated as of April 7, 2008 between us and DBSD North America.  During the nine months ended September 30, 2011, we made additional investments in DBSD North America pursuant to various agreements discussed below.

 

Investment Agreement.  On February 1, 2011, we entered into an $88 million Credit Facility with DBSD North America and committed to acquire 100% of the equity of reorganized DBSD North America (the “Investment Agreement”) for approximately $1.4 billion subject to certain adjustments, including interest accruing on DBSD North America’s existing debt.  As of September 30, 2011, we had funded $66 million under the Credit Facility.

 

On February 24, 2011 and again on March 15, 2011, we amended the Investment Agreement (the “Revised Investment Agreement”).  Pursuant to the Revised Investment Agreement, on March 22, 2011, we initiated a tender offer to purchase all of DBSD North America’s outstanding 7.5% Convertible Senior Secured Notes due 2009, certain claims against a DBSD North America’s debtor affiliate and certain allowed claims against DBSD North America.  The tender offer expired on April 18, 2011 and on April 20, 2011 we made payments of approximately $727 million to purchase tendered DBSD North America’s 7.5% Convertible Senior Secured Notes due 2009, and $19 million in payments for certain claims against a DBSD North America’s debtor affiliate and claims against DBSD North America.

 

Restructuring Support Agreement and Implementation Agreement.  In connection with the Revised Investment Agreement on March 15, 2011, we entered into a restructuring support agreement (the “Restructuring Support Agreement”) and an implementation agreement (the “Implementation Agreement”) with ICO, the parent company of DBSD North America, pursuant to which ICO provided us with certain assets, rights and ICO’s support of the reorganization of DBSD North America in exchange for approximately $325 million, of which $315 million has been paid.  On March 21, 2011, we paid $35 million to ICO pursuant to the Implementation Agreement.  On April 26, 2011, we made a second payment of approximately $280 million to ICO pursuant to the Implementation Agreement for the capital stock of DBSD North America.  We have also agreed to indemnify ICO against certain liabilities in connection with certain pending litigation related to DBSD North America.

 

10



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

All of our investments in DBSD North America are accounted for under the cost method of accounting, except for the 7.5% Convertible Senior Secured Notes due 2009.  We account for unrealized gains and losses associated with the 7.5% Convertible Senior Secured Notes due 2009 as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit)” on our Condensed Consolidated Balance Sheets.

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

As of September 30, 2011 and December 31, 2010, we had accumulated net unrealized gains of $53 million and $93 million, both net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  A full valuation allowance has been established against any deferred taxes that are capital in nature.  The components of our available-for-sale investments are detailed in the table below.

 

 

 

As of September 30, 2011

 

As of December 31, 2010

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

1,024,275

 

$

 

$

 

$

 

$

1,334,081

 

$

 

$

 

$

 

ARS and MBS

 

49,349

 

998

 

(12,844

)

(11,846

)

56,430

 

902

 

(12,262

)

(11,360

)

ARS fair value election

 

55,389

 

 

 

 

62,691

 

 

 

 

Other (including restricted)

 

1,032,222

 

5,574

 

(8,136

)

(2,562

)

832,798

 

9,330

 

(1,676

)

7,654

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

318,623

 

74,206

 

(85,880

)

(11,674

)

195,022

 

82,565

 

(8,429

)

74,136

 

Subtotal

 

2,479,858

 

80,778

 

(106,860

)

(26,082

)

2,481,022

 

92,797

 

(22,367

)

70,430

 

Investment in DBSD North America (1)

 

839,009

 

78,749

 

 

78,749

 

55,823

 

22,926

 

 

22,926

 

Total

 

$

3,318,867

 

$

159,527

 

$

(106,860

)

$

52,667

 

$

2,536,845

 

$

115,723

 

$

(22,367

)

$

93,356

 

 


(1)

Of our total investment in DBSD North America of $1.286 billion as of September 30, 2011 and $103 million as of December 31, 2010, only our $839 million and $56 million, respectively, investment in the 7.5% Convertible Senior Secured Notes due 2009 are accounted for as available-for-sale investments.

 

As of September 30, 2011, restricted and non-restricted marketable investment securities include debt securities of $1.917 billion with contractual maturities of one year or less and $244 million with contractual maturities greater than one year, excluding our $839 million available-for-sale investment in DBSD North America.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

11



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have been in an unrealized loss position, aggregated by investment category.  As of September 30, 2011 and December 31, 2010, the unrealized losses on our investments in equity securities represent investments in broad-based indexes and several companies in the telecommunications and technology industries.  We are not aware of any specific factors which indicate the unrealized losses in these investments are due to anything other than temporary market fluctuations.  As of September 30, 2011 and December 31, 2010, the unrealized losses on our investments in debt securities primarily represent investments in auction rate, mortgage and asset-backed securities.  We do not intend to sell our investments in these debt securities before they recover or mature, and it is more likely than not that we will hold these investments until that time.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these marketable investment securities are related to temporary market fluctuations.

 

 

 

As of September 30, 2011

 

As of December 31, 2010

 

 

 

Investment Category

 

Investment Category

 

 

 

Debt 
Securities

 

Equity 
Securities

 

Total

 

Debt 
Securities

 

Equity 
Securities

 

Total

 

 

 

(In thousands)

 

Less than Six Months:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

482,720

 

$

172,351

 

$

655,071

 

$

93,072

 

$

26,890

 

$

119,962

 

Unrealized loss

 

(5,491

)

(85,880

)

(91,371

)

(174

)

(8,429

)

(8,603

)

Six to Nine Months:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

218,174

 

 

218,174

 

26,182

 

 

26,182

 

Unrealized loss

 

(1,474

)

 

(1,474

)

(103

)

 

(103

)

Nine Months or More:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

114,601

 

 

114,601

 

193,603

 

 

193,603

 

Unrealized loss

 

(14,015

)

 

(14,015

)

(13,661

)

 

(13,661

)

Total Fair Value

 

$

815,495

 

$

172,351

 

$

987,846

 

$

312,857

 

$

26,890

 

$

339,747

 

 

Fair Value Measurements

 

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

 

·                  Level 1, defined as observable inputs being quoted prices in active markets for identical assets;

 

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

 

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

 

12



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

 

 

As of

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

1,024,275

 

$

 

$

1,024,275

 

$

 

$

1,334,081

 

$

 

$

1,334,081

 

$

 

ARS and MBS

 

104,738

 

 

3,667

 

101,071

 

119,121

 

 

6,031

 

113,090

 

Other (including restricted)

 

1,032,222

 

4,200

 

1,027,003

 

1,019

 

832,798

 

21,835

 

810,883

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

318,623

 

318,623

 

 

 

195,022

 

195,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

2,479,858

 

322,823

 

2,054,945

 

102,090

 

2,481,022

 

216,857

 

2,150,995

 

113,170

 

Investment in DBSD North America (1)

 

839,009

 

 

 

839,009

 

55,823

 

 

 

55,823

 

Total

 

$

3,318,867

 

$

322,823

 

$

2,054,945

 

$

941,099

 

$

2,536,845

 

$

216,857

 

$

2,150,995

 

$

168,993

 

 


(1)     Of our total investment in DBSD North America of $1.286 billion as of September 30, 2011 and $103 million as of December 31, 2010, only our $839 million and $56 million, respectively, investment in the 7.5% Convertible Senior Secured Notes due 2009 are accounted for as available-for-sale investments.

 

Changes in Level 3 instruments are as follows:

 

 

 

Level 3
Investment 
Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2010

 

$

168,993

 

Net realized and unrealized gains (losses) included in earnings

 

(9,146

)

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

 

56,339

 

Purchases

 

727,364

 

Settlements

 

(2,451

)

Balance as of September 30, 2011

 

$

941,099

 

 

13



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

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

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Other Income (Expense):

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

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

 

$

11,668

 

$

19,227

 

$

13,400

 

$

19,237

 

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

 

12,361

 

6,818

 

(7,147

)

6,818

 

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

 

 

 

10,000

 

1,545

 

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

 

(2,161

)

(3,858

)

(2,161

)

(1,712

)

Other

 

(1,570

)

140

 

(1,955

)

(2,634

)

Total

 

$

20,298

 

$

22,327

 

$

12,137

 

$

23,254

 

 

5.              Inventory

 

Inventory consists of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

DISH Network:

 

 

 

 

 

Finished goods - DBS

 

$

294,565

 

$

305,068

 

Raw materials

 

179,144

 

143,111

 

Work-in-process - used

 

29,301

 

36,186

 

Work-in-process - new

 

1,059

 

3,210

 

 

 

504,069

 

487,575

 

Blockbuster:

 

 

 

 

 

Rental library

 

81,070

 

 

Merchandise

 

82,351

 

 

Total Blockbuster

 

163,421

 

 

Total inventory

 

$

667,490

 

$

487,575

 

 

14



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

6.              Property and Equipment

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense consists of the following:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

Equipment leased to customers

 

$

180,080

 

$

199,442

 

$

552,097

 

$

630,188

 

Satellites

 

32,087

 

30,544

 

96,265

 

78,426

 

Buildings, furniture, fixtures, equipment and other

 

16,979

 

12,873

 

47,530

 

38,353

 

Total depreciation and amortization

 

$

229,146

 

$

242,859

 

$

695,892

 

$

746,967

 

 

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

 

Satellites

 

We currently utilize 13 satellites in geostationary orbit approximately 22,300 miles above the equator, six of which we own and depreciate over the useful life of each satellite.  We currently utilize capacity on five satellites from EchoStar, which are accounted for as operating leases.  See Note 12 for further discussion of our satellite leases with EchoStar.  We also lease two satellites from third parties, which are accounted for as capital leases and are depreciated over the shorter of the economic life or the term of the satellite agreement.

 

Operation of our 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 high definition (“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.

 

Prior to 2011, certain satellites in our fleet experienced anomalies, some of which have had a significant adverse impact on their remaining useful life and/or commercial operation.  There can be no assurance that future anomalies will not further impact the remaining useful life and/or commercial operation of any of these satellites.  See “Long-Lived Satellite Assets” below for further discussion of evaluation of impairment.  There can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We do not anticipate carrying insurance for any of the in-orbit satellites that we use, and we will bear the risk associated with any in-orbit satellite failures.  Recent developments with respect to certain of our satellites are discussed below.

 

15



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Owned Satellites

 

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

 

Leased Satellites

 

EchoStar VIII.  EchoStar VIII was designed to operate 32 DBS transponders in the continental United States at approximately 120 watts per channel, switchable to 16 DBS transponders operating at approximately 240 watts per channel.  EchoStar VIII was also designed with spot-beam technology.  This satellite has experienced several anomalies prior to 2011, and during January 2011 the satellite experienced an anomaly, which temporarily disrupted electrical power to some components causing an interruption of broadcast service.  In addition, it has now been determined one of the two on-board computers used to control the satellite failed in connection with this anomaly.  None of these anomalies has impacted the commercial operation or estimated useful life of the satellite.  However, there can be no assurance that this anomaly or any future anomalies will not reduce its useful life or impact its commercial operation.

 

QuetzSat-1.  QuetzSat-1 was launched on September 29, 2011.  During 2008, we entered into a ten-year transponder service agreement with EchoStar which will be accounted for as an operating lease.  We will lease 24 DBS transponders on QuetzSat-1 when the satellite is placed into commercial operation.  QuetzSat-1 is expected to replace EchoStar VIII during the first quarter 2012.  See Note 12 for further discussion.

 

Long-Lived Satellite Assets

 

We evaluate our satellite fleet for impairment as one asset group and test for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  While certain of the anomalies discussed above, and previously disclosed, may be considered to represent a significant adverse change in the physical condition of an individual satellite, based on the redundancy designed within each satellite and considering the asset grouping, these anomalies are not considered to be significant events that would require evaluation for impairment recognition.  Unless and until a specific satellite is abandoned or otherwise determined to have no service potential, the net carrying amount related to the satellite would not be written off.

 

7.              Long-Term Debt

 

6 3/4% Senior Notes due 2021

 

On May 5, 2011, we issued $2.0 billion aggregate principal amount of our ten-year, 6 3/4% Senior Notes due June 1, 2021 at an issue price of 99.093%.  Interest accrues at an annual rate of 6 3/4% and is payable semi-annually in cash, in arrears on June 1 and December 1 of each year, commencing on December 1, 2011.

 

The 6 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 June 1, 2014, we may also redeem up to 35% of each of the 6 3/4% Senior Notes at specified premiums with the net cash proceeds from certain equity offerings or capital contributions.

 

16



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

The 6 3/4% Senior Notes are:

 

·                  general unsecured senior obligations of DISH DBS Corporation (“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 3/4% 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 distributions 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 or sell assets.

 

In the event of a change of control, as defined in the related indenture, we would be required to make an offer to repurchase all or any part of a holder’s 6 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.

 

Fair Value of our Long-Term Debt

 

The following table summarizes the carrying and fair values of our debt facilities as of September 30, 2011 and December 31, 2010:

 

 

 

As of

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

 

 

(In thousands)

 

6 3/8% Senior Notes due 2011 (1)

 

$

914,642

 

$

914,642

 

$

1,000,000

 

$

1,032,500

 

7 % Senior Notes due 2013

 

500,000

 

527,000

 

500,000

 

532,815

 

6 5/8% Senior Notes due 2014

 

1,000,000

 

1,035,000

 

1,000,000

 

1,032,500

 

7 3/4% Senior Notes due 2015

 

750,000

 

778,125

 

750,000

 

798,750

 

7 1/8% Senior Notes due 2016

 

1,500,000

 

1,515,945

 

1,500,000

 

1,548,600

 

7 7/8% Senior Notes due 2019

 

1,400,000

 

1,435,000

 

1,400,000

 

1,463,000

 

6 3/4% Senior Notes due 2021

 

2,000,000

 

1,920,000

 

 

 

Mortgages and other notes payable

 

72,230

 

72,230

 

77,965

 

77,965

 

Subtotal

 

8,136,872

 

$

8,197,942

 

6,227,965

 

$

6,486,130

 

Capital lease obligations (2)

 

270,610

 

NA

 

286,971

 

NA

 

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

 

$

8,407,482

 

 

 

$

6,514,936

 

 

 

 


(1)          During the three months ended September 30, 2011, we repurchased $85 million of our 6 3/8% Senior Notes due 2011 in open market transactions.  On October 3, 2011, we redeemed the remaining $915 million principal balance of our 6 3/8% Senior Notes due 2011.

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

 

17



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DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

8.              Stock-Based Compensation

 

Stock Incentive Plans

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance and non-performance based stock incentives.  As of September 30, 2011, we had outstanding under these plans stock options to acquire 22.6 million shares of our Class A common stock and 1.4 million restricted stock units.  Stock options granted prior to and on September 30, 2011 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of approximately ten years.  While historically we have issued stock awards subject to vesting, typically at the rate of 20% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives.  As of September 30, 2011, we had 72.9 million shares of our Class A common stock available for future grant under our stock incentive plans.

 

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

 

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

 

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

 

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

 

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

 

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

 

As of September 30, 2011, the following stock awards were outstanding:

 

 

 

As of September 30, 2011

 

 

 

DISH Network Awards

 

EchoStar Awards

 

Stock Awards Outstanding

 

Stock
Options

 

Restricted
Stock
Units

 

Stock
Options

 

Restricted
Stock
Units

 

Held by DISH Network employees

 

19,540,791

 

1,220,872

 

823,454

 

57,786

 

Held by EchoStar employees

 

3,011,803

 

211,124

 

N/A

 

N/A

 

Total

 

22,552,594

 

1,431,996

 

823,454

 

57,786

 

 

18



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

Stock Award Activity

 

Our stock option activity was as follows:

 

 

 

For the Nine Months

 

 

 

Ended September 30, 2011

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Total options outstanding, beginning of period

 

21,918,500

 

$

18.62

 

Granted

 

3,210,000

 

$

28.55

 

Exercised

 

(1,567,056

)

$

15.78

 

Forfeited and cancelled

 

(1,008,850

)

$

17.57

 

Total options outstanding, end of period

 

22,552,594

 

$

20.63

 

Performance based options outstanding, end of period (1)

 

11,027,625

 

$

18.30

 

Exercisable at end of period

 

7,543,468

 

$

22.61

 

 


(1)   These stock options are included in the caption “Total options outstanding, end of period.”  See discussion of the 2005 LTIP, 2008 LTIP and other employee performance awards below.

 

We realized tax benefits from stock awards exercised during the three and nine months ended September 30, 2011 and 2010 as follows:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

Tax benefit from stock awards exercised

 

$

713

 

$

80

 

$

7,122

 

$

1,351

 

 

Based on the closing market price of our Class A common stock on September 30, 2011, the aggregate intrinsic value of our stock options was as follows:

 

 

 

As of September 30, 2011

 

 

 

Options
Outstanding

 

Options
Exercisable

 

 

 

(In thousands)

 

Aggregate intrinsic value

 

$

129,148

 

$

25,616

 

 

19



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Our restricted stock unit activity was as follows:

 

 

 

For the Nine Months

 

 

 

Ended September 30, 2011

 

 

 

Restricted
Stock
Units

 

Weighted-
Average
Grant Date
Fair Value

 

Total restricted stock units outstanding, beginning of period

 

1,564,332

 

$

23.00

 

Granted

 

300,000

 

$

30.67

 

Vested

 

(6,875

)

$

11.09

 

Forfeited and cancelled

 

(425,461

)

$

26.44

 

Total restricted stock units outstanding, end of period

 

1,431,996

 

$

23.66

 

Restricted Performance Units outstanding, end of period (1)

 

1,375,871

 

$

23.35

 

 


(1)   These Restricted Performance Units are included in the caption “Total restricted stock units outstanding, end of period.”  See discussion of the 2005 LTIP, 2008 LTIP and other employee performance awards below.

 

Long-Term Performance Based Plans

 

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

 

Contingent compensation related to the 2005 LTIP will not be recorded in our financial statements unless and until management concludes achievement of the performance condition is probable.  Given the competitive nature of our business, small variations in subscriber churn, gross new subscriber addition rates and certain other factors can significantly impact subscriber growth.  Consequently, while it was determined that achievement of the goal was not probable as of September 30, 2011, that assessment could change in the future.

 

If all of the stock awards under the 2005 LTIP were vested and the goal had been met or if we had determined that achievement of the goal was probable during the nine months ended September 30, 2011, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below.  If the goal is met and there are unvested stock awards at that time, the vested amounts would be expensed immediately on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized ratably over the remaining vesting period.

 

 

 

2005 LTIP

 

 

 

Total

 

Vested
Portion (1)

 

 

 

(In thousands)

 

DISH Network awards held by DISH Network employees

 

$

36,373

 

$

26,207

 

EchoStar awards held by DISH Network employees

 

7,122

 

5,120

 

Total

 

$

43,495

 

$

31,327

 

 


(1)   Represents the amount of this award that has met the foregoing vesting schedule and would therefore vest upon achievement of the performance condition.

 

20



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

Although no awards vest until the company attains the performance goals, compensation related to the 2008 LTIP will be recorded based on management’s assessment of the probability of meeting the remaining goals.  If the remaining goals are probable of being achieved, we will begin recognizing the associated non-cash, stock-based compensation expense on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the estimated period to achieve the goal.  See table below titled “Estimated Remaining Non-Cash, Stock-Based Compensation Expense.”

 

During the first quarter 2011, we determined that all of the 2008 LTIP performance goals are probable of achievement.  As of September 30, 2011, 25% of the 2008 LTIP awards had vested.  We are recognizing the associated non-cash stock-based compensation expense on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the estimated period for vesting of the remaining 75% of the awards, as indicated in the table below titled “Non-Cash, Stock-Based Compensation Expense Recognized.”

 

Other Employee Performance Awards.  In addition to the above long-term, performance stock incentive plans, we have other stock awards that vest based on certain other company-specific subscriber and financial goals.  Exercise of these stock awards is contingent on achieving certain performance goals.

 

Additional compensation related to these awards will be recorded based on management’s assessment of the probability of meeting the remaining performance goals.  If the remaining goals are probable of being achieved, we will begin recognizing the associated non-cash, stock-based compensation expense on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the estimated period to achieve the goal.  See table below titled “Estimated Remaining Non-Cash, Stock-Based Compensation Expense.”

 

Although no awards vest until the performance goals are attained, we determined that certain goals were probable of achievement and, as a result, recorded non-cash, stock-based compensation expense for the three and nine months ended September 30, 2011 and 2010, as indicated in the table below titled “Non-Cash, Stock-Based Compensation Expense Recognized.”

 

Given the competitive nature of our business, small variations in subscriber churn, gross new subscriber addition rates and certain other factors can significantly impact subscriber growth.  Consequently, while it was determined that achievement of certain company-specific subscriber and financial goals was not probable as of September 30, 2011, that assessment could change at any time.

 

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

 

Estimated Remaining Non-Cash, Stock-Based Compensation Expense

 

2008 LTIP

 

Other
Employee
Performance
Awards

 

 

 

(In thousands)

 

Remaining expense estimated to be recognized during 2011

 

$

1,828

 

$

1,086

 

Estimated contingent expense subsequent to 2011

 

9,051

 

51,237

 

Total estimated remaining expense over the term of the plan

 

$

10,879

 

$

52,323

 

 

21



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Non-Cash, Stock-Based Compensation Expense Recognized

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

2008 LTIP

 

$

2,507

 

$

781

 

$

16,806

 

$

2,392

 

Other employee performance awards

 

159

 

15

 

147

 

247

 

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

 

$

2,666

 

$

796

 

$

16,953

 

$

2,639

 

 

Of the 22.6 million stock options and 1.4 million restricted stock units outstanding under our stock incentive plans as of September 30, 2011, the following awards were outstanding pursuant to our performance based stock incentive plans:

 

 

 

As of September 30, 2011

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise Price

 

Performance Based Stock Options

 

 

 

 

 

2005 LTIP

 

3,350,000

 

$

22.93

 

2008 LTIP

 

4,477,625

 

$

11.48

 

Other employee performance awards

 

3,200,000

 

$

23.01

 

Total

 

11,027,625

 

$

18.30

 

 

 

 

 

 

 

Restricted Performance Units and Other

 

 

 

 

 

2005 LTIP

 

443,996

 

 

 

2008 LTIP

 

31,875

 

 

 

Other employee performance awards

 

900,000

 

 

 

Total

 

1,375,871

 

 

 

 

Stock-Based Compensation

 

During the nine months ended September 30, 2010, we incurred $3 million of additional non-cash, stock-based compensation cost in connection with the Stock Option Adjustment discussed previously.  This amount is included in the table below.  Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the three and nine months ended September 30, 2011 and 2010 and was allocated to the same expense categories as the base compensation for such employees:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

Subscriber-related

 

$

335

 

$

227

 

$

1,652

 

$

910

 

General and administrative

 

6,365

 

2,889

 

23,943

 

11,416

 

Total non-cash, stock-based compensation

 

$

6,700

 

$

3,116

 

$

25,595

 

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