Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

Form 10-Q

 

(Mark One)

 

x                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012.

 

OR

 

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

 

Commission File Number:  0-26176

 

DISH Network Corporation

(Exact name of registrant as specified in its charter)

 

Nevada		88-0336997
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
9601 South Meridian Boulevard
Englewood, Colorado		80112
(Address of principal executive offices)		(Zip code)

 

(303) 723-1000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

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

 

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

 

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

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

 

As of April 30, 2012, the registrant’s outstanding common stock consisted of 211,376,861 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 — March 31, 2012 and December 31, 2011 (Unaudited)	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the Three Months Ended March 31, 2012 and 2011 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2012 and 2011 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	58
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	None
Item 4.	Mine Safety Disclosures	None
Item 5.	Other Information	None
Item 6.	Exhibits	65
	Signatures	66

 

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

Competition and Economic Risks Affecting our Business

 

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

 

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

 

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

 

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

 

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

 

Operational and Service Delivery Risks Affecting our Business

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

i

---

Table of Contents

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Acquisition and Capital Structure Risks Affecting our Business

 

·                   We made a substantial investment to acquire certain wireless spectrum licenses and other assets from DBSD North America and TerreStar.  We will be required to make significant additional investments or partner with others to commercialize these assets.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ii

Table of Contents

 

Legal and Regulatory Risks Affecting our Business

 

·                   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.

 

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

 

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

 

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

 

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

 

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

 

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

 

·                   Our business depends on 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.

 

·                   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, unless the context otherwise requires.

 

iii

Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

		As of
		March 31,			December 31,
		2012			2011
Assets
Current Assets:
Cash and cash equivalents		$	1,358,668		$	609,108
Marketable investment securities (Note 5)		1,334,546			1,431,745
Trade accounts receivable - other, net of allowance for doubtful accounts of $11,679 and $12,350, respectively		757,565			778,443
Trade accounts receivable - EchoStar, net of allowance for doubtful accounts of zero		19,002			16,374
Inventory		670,008			707,151
Deferred tax assets		73,014			73,014
Other current assets		136,674			131,988
Total current assets		4,349,477			3,747,823
Noncurrent Assets:
Restricted cash and marketable investment securities (Note 5)		133,872			132,435
Property and equipment, net of accumulated depreciation of $2,919,747 and $2,862,626, respectively (Note 7 and 8)		4,313,678			3,169,891
FCC authorizations (Note 7 and 8)		3,340,441			1,391,441
Marketable and other investment securities (Note 5)		121,349			112,132
Investment in DBSD North America (Note 8)		—			1,297,614
TerreStar Transaction (Note 8)		—			1,345,000
Other noncurrent assets, net		150,695			273,895
Total noncurrent assets		8,060,035			7,722,408
Total assets		$	12,409,512		$	11,470,231
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Trade accounts payable - other		$	239,358		$	225,556
Trade accounts payable - EchoStar		284,407			229,852
Deferred revenue and other		832,676			832,390
Accrued programming		1,112,696			1,067,625
Litigation accrual (Note 11)		70,999			65,580
Other accrued expenses		995,003			763,863
Current portion of long-term debt and capital lease obligations (Note 9)		35,980			35,645
Total current liabilities		3,571,119			3,220,511
Long-Term Obligations, Net of Current Portion:
Long-term debt and capital lease obligations, net of current portion (Note 9)		7,474,426			7,458,134
Deferred tax liabilities		1,188,206			974,414
Long-term deferred revenue, distribution and carriage payments and other long-term liabilities		231,344			236,175
Total long-term obligations, net of current portion		8,893,976			8,668,723
Total liabilities		12,465,095			11,889,234
Commitments and Contingencies (Note 11)
Stockholders’ Equity (Deficit):
Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 265,123,445 and 264,732,074 shares issued, 209,005,185 and 208,613,814 shares outstanding, respectively		2,651			2,647
Class B common stock, $.01 par value, 800,000,000 shares authorized, 238,435,208 shares issued and outstanding		2,384			2,384
Class C common stock, $.01 par value, 800,000,000 shares authorized, none issued and outstanding		—			—
Additional paid-in capital		2,303,908			2,274,005
Accumulated other comprehensive income (loss)		55,430			82,043
Accumulated earnings (deficit)		(851,680		)	(1,211,990		)
Treasury stock, at cost		(1,569,459		)	(1,569,459		)
Total DISH Network stockholders’ equity (deficit)		(56,766		)	(420,370		)
Noncontrolling interest		1,183			1,367
Total stockholders’ equity (deficit)		(55,583		)	(419,003		)
Total liabilities and stockholders’ equity (deficit)		$	12,409,512		$	11,470,231

 

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

 

1

---

Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

		For the Three Months
		Ended March 31,
		2012			2011
Revenue:
Subscriber-related revenue		$	3,224,465		$	3,199,099
Equipment and merchandise sales, rental and other revenue		350,737			16,001
Equipment sales, services and other revenue - EchoStar		6,667			9,031
Total revenue		3,581,869			3,224,131
Costs and Expenses (exclusive of depreciation shown separately below - Note 7):
Subscriber-related expenses		1,762,753			1,693,695
Satellite and transmission expenses:
EchoStar		109,854			108,913
Other		11,679			10,200
Cost of sales - equipment, merchandise, services, rental and other		142,262			22,267
Subscriber acquisition costs:
Cost of sales - subscriber promotion subsidies - EchoStar		82,274			54,426
Other subscriber promotion subsidies		226,389			226,841
Subscriber acquisition advertising		89,374			73,632
Total subscriber acquisition costs		398,037			354,899
General and administrative expenses - EchoStar		12,082			11,940
General and administrative expenses		364,093			149,844
Litigation expense (Note 11)		—			(340,677		)
Depreciation and amortization (Note 7)		208,698			229,697
Total costs and expenses		3,009,458			2,240,778
Operating income (loss)		572,411			983,353
Other Income (Expense):
Interest income		7,089			6,286
Interest expense, net of amounts capitalized		(138,013		)	(120,179		)
Other, net		110,282			11,633
Total other income (expense)		(20,642		)	(102,260		)
Income (loss) before income taxes		551,769			881,093
Income tax (provision) benefit, net		(191,643		)	(331,767		)
Net income (loss)		360,126			549,326
Less: Net income (loss) attributable to noncontrolling interest		(184		)	(68		)
Net income (loss) attributable to DISH Network		$	360,310		$	549,394
Weighted-average common shares outstanding - Class A and B common stock:
Basic		447,289			443,360
Diluted		449,880			448,850
Earnings per share - Class A and B common stock:
Basic net income (loss) per share attributable to DISH Network		$	0.81		$	1.24
Diluted net income (loss) per share attributable to DISH Network		$	0.80		$	1.22
Comprehensive Income (Loss):
Net income (loss)		$	360,126		$	549,326
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		3,253			—
Unrealized holding gains (losses) on available-for-sale securities		51,021			67,800
Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)		(80,887		)	(6,296		)
Deferred income tax (expense) benefit		—			—
Total other comprehensive income (loss), net of tax		(26,613		)	61,504
Comprehensive income (loss)		333,513			610,830
Less: Comprehensive income (loss) attributable to noncontrolling interest		(184		)	(68		)
Comprehensive income (loss) attributable to DISH Network		$	333,697		$	610,898

 

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 Three Months
		Ended March 31,
		2012			2011
Cash Flows From Operating Activities:
Net income (loss)		$	360,126		$	549,326
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		208,698			229,697
Realized and unrealized losses (gains) on investments		(110,062		)	(11,618		)
Non-cash, stock-based compensation		23,182			15,177
Deferred tax expense (benefit)		3,597			221,798
Other, net		6,273			3,826
Change in noncurrent assets		15,567			(4,175		)
Change in long-term deferred revenue, distribution and carriage payments and other long-term liabilities		(6,014		)	(8,738		)
Changes in current assets and current liabilities, net		357,183			(150,998		)
Net cash flows from operating activities		858,550			844,295
Cash Flows From Investing Activities:
Purchases of marketable investment securities		(289,168		)	(1,214,236		)
Sales and maturities of marketable investment securities		428,300			1,284,087
Purchases of property and equipment		(168,928		)	(232,952		)
Change in restricted cash and marketable investment securities		(1,581		)	(42,000		)
DBSD North America Transaction, less of cash acquired of $5,230 (Note 8)		(40,015		)	(85,125		)
TerreStar Transaction (Note 8)		(36,942		)	—
Purchase of other strategic investments		—			(37,675		)
Proceeds from sale of strategic investments		—			11,327
Other		(903		)	(291		)
Net cash flows from investing activities		(109,237		)	(316,865		)
Cash Flows From Financing Activities:
Repayment of long-term debt and capital lease obligations		(8,458		)	(8,498		)
Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan		5,751			3,596
Other		1,045			322
Net cash flows from financing activities		(1,662		)	(4,580		)
Effect of exchange rates on cash and cash equivalents		1,909			—
Net increase (decrease) in cash and cash equivalents		749,560			522,850
Cash and cash equivalents, beginning of period		609,108			640,672
Cash and cash equivalents, end of period		$	1,358,668		$	1,163,522
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest (including capitalized interest)		$	114,226		$	114,752
Cash received for interest		$	10,108		$	7,363
Cash paid for income taxes		$	13,788		$	7,440

 

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 three primary segments.

 

·                   DISH.  The DISH® branded direct broadcast satellite (“DBS”) pay-TV service had 14.071 million subscribers in the United States as of March 31, 2012.  The DISH branded pay-TV service consists of Federal Communications Commission (“FCC”) licenses authorizing us to use DBS and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a third-party leased fiber network, in-home service and call center operations, and certain other assets utilized in our operations.

 

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

 

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

 

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

 

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

 

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

 

4

---

Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 10-K”).  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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

 

Fair Value Measurements

 

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

 

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

 

·       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.

 

5

Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

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

 

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

 

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

 

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

 

		For the Three Months
		Ended March 31,
		2012			2011
		(In thousands, except per share amounts)
Net income (loss) attributable to DISH Network		$	360,310		$	549,394
Weighted-average common shares outstanding - Class A and B common stock:
Basic		447,289			443,360
Dilutive impact of stock awards outstanding		2,591			5,490
Diluted		449,880			448,850
Earnings per share - Class A and B common stock:
Basic net income (loss) per share attributable to DISH Network		$	0.81		$	1.24
Diluted net income (loss) per share attributable to DISH Network		$	0.80		$	1.22

 

As of March 31, 2012 and 2011, there were stock awards to purchase 3.4 million and 7.1 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, some of which are not yet probable of being achieved.  As a consequence, the following are also not included in the diluted EPS calculation.

 

		As of March 31,
		2012		2011
		(In thousands)
Performance-based options		9,619		10,859
Restricted Performance Units and other		1,281		1,101
Total		10,900		11,960

 

6

Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

4.                                       Other Comprehensive Income Related Tax Effects

 

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

 

		For the Three Months
		Ended March 31,
		2012									2011
		Before			Tax			Net			Before			Tax			Net
		Tax			(Expense)			of Tax			Tax			(Expense)			of Tax
		Amount			Benefit			Amount			Amount			Benefit			Amount
		(In thousands)
Foreign currency translation adjustments		$	3,253		$	—		$	3,253		$	—		$	—		$	—
Unrealized holding gains (losses) on available-for-sale securities		51,021			—			51,021			67,800			—			67,800
Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)		(80,887		)	—			(80,887		)	(6,296		)	—			(6,296		)
Other comprehensive income (loss)		$	(26,613	)	$	—		$	(26,613	)	$	61,504		$	—		$	61,504

 

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

 

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

 

		As of
		March 31,			December 31,
		2012			2011
		(In thousands)
Marketable investment securities:
Current marketable investment securities - VRDNs		$	185,005		$	160,555
Current marketable investment securities - strategic		452,082			360,052
Current marketable investment securities - other		697,459			911,138
Total current marketable investment securities		1,334,546			1,431,745
Restricted marketable investment securities (1)		76,700			65,843
Noncurrent marketable investment securities - ARS and MBS (2)		118,470			109,327
Total marketable investment securities		1,529,716			1,606,915
Restricted cash and cash equivalents (1)		57,172			66,592
Other investment securities:
Other investment securities - cost method (2)		2,879			2,805
Investment in DBSD North America (Note 8)		—			1,297,614
Total other investment securities		2,879			1,300,419
Total marketable investment securities, restricted cash and cash equivalents and other investment securities		$	1,589,767		$	2,973,926

 

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

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

 

7

Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Marketable Investment Securities

 

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

 

Current Marketable Investment Securities - VRDNs

 

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

 

Current Marketable Investment Securities - Strategic

 

Our current strategic marketable investment securities include strategic and financial investments in public companies that are highly speculative and have experienced and continue to experience volatility.  As of March 31, 2012, 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 c urrent marketable investment securities portfolio includes investments in various debt instruments including corporate and government bonds.

 

Restricted Cash and Marketable Investment Securities

 

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

 

Noncurrent Marketable Investment Securities — ARS and MBS

 

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

 

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

 

Fair Value Election.  As of March 31, 2012, our ARS and MBS noncurrent marketable investment securities portfolio of $118 million includes $69 million of securities accounted for under the fair value method.

 

8

Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Other Investment Securities

 

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

 

Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital 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 March 31, 2012 and December 31, 2011, we had accumulated net unrealized gains of $61 million and $91 million, both net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  A full valuation allowance has been established against any deferred taxes that are capital in nature.  The components of our available-for-sale investments are summarized in the table below.

 

		As of March 31, 2012												As of December 31, 2011
		Marketable												Marketable
		Investment			Unrealized									Investment			Unrealized
		Securities			Gains			Losses			Net			Securities			Gains			Losses			Net
		(In thousands)
Debt securities:
VRDNs		$	185,005		$	—		$	—		$	—		$	160,555		$	—		$	—		$	—
ARS and MBS		49,940			1,056			(10,630		)	(9,574		)	46,657			848			(14,486		)	(13,638		)
ARS fair value election		68,530			—			—			—			62,670			—			—			—
Other (including restricted)		858,719			10,066			(1,250		)	8,816			994,021			5,525			(6,565		)	(1,040		)
Equity securities:
Other		367,522			113,886			(51,813		)	62,073			343,012			89,044			(61,934		)	27,110
Subtotal		1,529,716			125,008			(63,693		)	61,315			1,606,915			95,417			(82,985		)	12,432
Investment in DBSD North America (1)		—			—			—			—			839,009			78,749			—			78,749
Total		$	1,529,716		$	125,008		$	(63,693	)	$	61,315		$	2,445,924		$	174,166		$	(82,985	)	$	91,181

 

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

 

As of March 31, 2012, restricted and non-restricted marketable investment securities include debt securities of $881 million with contractual maturities of one year or less and $281 million with contractual maturities greater than one year.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

9

Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have been in an unrealized loss position, aggregated by investment category.  As of March 31, 2012, the unrealized losses on our investments in equity securities represent investments in 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 March 31, 2012 and December 31, 2011, the unrealized losses on our investments in debt securities primarily represent investments in auction rate and mortgage backed securities.  We 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
		March 31, 2012						December 31, 2011
		Fair			Unrealized			Fair			Unrealized
		Value			Loss			Value			Loss
		(In thousands)
Debt Securities:
Less than 12 months		$	439,812		$	(796	)	$	694,199		$	(4,793	)
12 months or more		61,872			(11,084		)	98,240			(16,258		)
Equity Securities:
Less than 12 months		218,885			(51,813		)	247,683			(61,934		)
12 months or more		—			—						—
Total		$	720,569		$	(63,693	)	$	1,040,122		$	(82,985	)

 

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

 

		As of
		March 31, 2012												December 31, 2011
		Total			Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3
		(In thousands)
Cash equivalents (including restricted)		$	1,146,565		$	46,748		$	1,099,817		$	—		$	397,777		$	46,371		$	351,406		$	—
Debt securities:
VRDNs		$	185,005		$	—		$	185,005		$	—		$	160,555		$	—		$	160,555		$	—
ARS and MBS		118,470			—			3,409			115,061			109,327			—			3,412			105,915
Other (including restricted)		858,719			—			858,719			—			994,021			—			994,021			—
Equity securities		367,522			367,522			—			—			343,012			343,012			—			—
Subtotal		1,529,716			367,522			1,047,133			115,061			1,606,915			343,012			1,157,988			105,915
Investment in DBSD North America (1)		—			—			—			—			839,009			—			—			839,009
Total		$	1,529,716		$	367,522		$	1,047,133		$	115,061		$	2,445,924		$	343,012		$	1,157,988		$	944,924

 

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

 

As of March 31, 2012, our Level 3 investments consist predominately of ARS and MBS.  On a quarterly basis we evaluate the reasonableness of significant unobservable inputs used in those measurements.  The valuation models used for some of our ARS investments require an evaluation of the underlying instruments held by the trusts that issue these securities.  For our other ARS and MBS securities, our evaluation uses, among other

 

10