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 MARCH 31, 2014.

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM                               TO                                .

 

Commission File Number:  0-26176

 

DISH Network Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

88-0336997

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

9601 South Meridian Boulevard

 

 

Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip code)

 

(303) 723-1000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 £
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of May 1, 2014, the registrant’s outstanding common stock consisted of 220,575,229 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, 2014 and December 31, 2013 (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the Three Months Ended March 31, 2014 and 2013 (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2014 and 2013 (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

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

43

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

57

 

 

 

Item 4.

Controls and Procedures

59

 

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

59

 

 

 

Item 1A.

Risk Factors

59

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

Mine Safety Disclosures

None

 

 

 

Item 5.

Other Information

None

 

 

 

Item 6.

Exhibits

60

 

 

 

 

Signatures

61

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our plans, objectives and strategies, growth opportunities in our industries and businesses, our expectations regarding future results, financial condition, liquidity and capital requirements, our estimates regarding the impact of regulatory developments and legal proceedings, and other trends and projections.  Forward-looking statements are not historical facts and may be identified by words such as “future,” “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “will,” “would,” “could,” “can,” “may,” and similar terms.  These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions.  Forward-looking statements are not guarantees of future performance, events or results and involve known and unknown risks, uncertainties and other factors, which may be beyond our control.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors, including, but not limited to, the following:

 

Competition and Economic Risks Affecting our Business

 

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

 

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

 

·                  Sustained economic weakness, including continued high unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.

 

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

 

·                  We face increasing competition from other distributors of unique programming services such as foreign language and sports programming that may limit our ability to maintain subscribers that desire these unique programming services.

 

Operational and Service Delivery Risks Affecting our Business

 

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

 

·                  If our gross new subscriber activations decrease, or if our 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 our subscriber churn may increase.

 

·                  We may not be able to obtain necessary retransmission consent agreements at acceptable rates, or at all, from local network stations.

 

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

 

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

 

·                  We currently depend on EchoStar Corporation and its subsidiaries, or EchoStar, to design, develop and manufacture all of our new set-top boxes and certain related components, to provide a majority of our transponder capacity, and to provide digital broadcast operations and other services to us.  Our business

 

i



Table of Contents

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  We generally do not carry commercial insurance for any of the in-orbit satellites that we use, other than certain satellites leased from third parties, and could face significant impairment charges if one of our satellites fails.

 

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

 

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

 

Acquisition and Capital Structure Risks Affecting our Business

 

·                  We made a substantial investment to acquire certain AWS-4 wireless spectrum licenses and other assets from DBSD North America Inc. (“DBSD North America”) and TerreStar Networks, Inc. (“TerreStar”), to acquire certain 700 MHz wireless spectrum licenses and to acquire certain H Block wireless spectrum licenses.  We will need to make significant additional investments or partner with others to commercialize these licenses and assets.

 

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

 

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

 

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

 

·                  A portion of our investment portfolio is invested in securities that have experienced limited or no liquidity and may not be immediately accessible to support our financing needs, including investments in public companies that are highly speculative and have experienced and continue to experience volatility.

 

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

 

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

 

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

 

ii



Table of Contents

 

Legal and Regulatory Risks Affecting our Business

 

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

 

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

 

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

 

·                  Changes in the Cable Act of 1992 (“Cable Act”), and/or the rules of the Federal Communications Commission (“FCC”) that implement the Cable Act, may limit our ability to access programming from cable-affiliated programmers at non-discriminatory rates.

 

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

 

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

 

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

 

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

 

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

 

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

 

Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (the “10-K”) filed with the SEC, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the 10-K and those discussed in other documents we file with the SEC.  All cautionary statements made or referred to herein should be read as being applicable to all forward-looking statements wherever they appear.  Investors should consider the risks and uncertainties described or referred to herein and should not place undue reliance on any forward-looking statements.  The forward-looking statements speak only as of the date made, and we expressly disclaim any obligation to update these forward-looking statements.

 

Unless otherwise required by the context, in this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network Corporation and its subsidiaries, “EchoStar” refers to EchoStar Corporation and its subsidiaries, and “DISH DBS” refers to DISH DBS Corporation and its subsidiaries, a wholly-owned, indirect subsidiary of DISH Network.

 

iii



Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,168,687

 

$

4,700,022

 

Marketable investment securities

 

4,792,792

 

5,039,382

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $12,025 and $15,981, respectively

 

856,426

 

902,416

 

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

 

83,387

 

55,102

 

Inventory

 

522,890

 

512,707

 

Deferred tax assets

 

135,952

 

129,864

 

Prepaid income taxes

 

42,546

 

118,021

 

Current assets - discontinued operations (Note 2)

 

 

68,239

 

Derivative financial instruments

 

287,202

 

292,507

 

H Block FCC license deposit (Note 10)

 

1,564,000

 

328,134

 

Other current assets

 

134,897

 

167,052

 

Total current assets

 

12,588,779

 

12,313,446

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

94,096

 

94,861

 

Property and equipment, net (Note 8)

 

3,703,846

 

4,097,711

 

FCC authorizations

 

3,296,665

 

3,296,665

 

Marketable and other investment securities (Note 6)

 

471,103

 

151,273

 

Noncurrent assets - discontinued operations (Note 2)

 

 

9,965

 

Other noncurrent assets, net

 

396,297

 

411,707

 

Total noncurrent assets

 

7,962,007

 

8,062,182

 

Total assets

 

$

20,550,786

 

$

20,375,628

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

164,346

 

$

281,932

 

Trade accounts payable - EchoStar

 

379,467

 

355,023

 

Deferred revenue and other

 

876,026

 

843,386

 

Accrued programming

 

1,369,847

 

1,242,129

 

Accrued interest

 

210,565

 

232,734

 

Other accrued expenses

 

606,117

 

512,081

 

Current liabilities - discontinued operations (Note 2)

 

 

49,471

 

Current portion of long-term debt and capital lease obligations

 

1,030,253

 

1,034,893

 

Total current liabilities

 

4,636,621

 

4,551,649

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

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

 

12,570,232

 

12,615,991

 

Deferred tax liabilities

 

1,951,987

 

1,945,690

 

Long-term liabilities - discontinued operations (Note 2)

 

 

19,804

 

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

 

247,263

 

245,489

 

Total long-term obligations, net of current portion

 

14,769,482

 

14,826,974

 

Total liabilities

 

19,406,103

 

19,378,623

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 276,222,287 and 275,950,537 shares issued, 220,104,027 and 219,832,277 shares outstanding, respectively

 

2,762

 

2,760

 

Class B common stock, $.01 par value, 800,000,000 shares authorized, 238,435,208 shares issued and outstanding

 

2,384

 

2,384

 

Additional paid-in capital

 

2,554,526

 

2,588,224

 

Accumulated other comprehensive income (loss)

 

184,397

 

173,872

 

Accumulated earnings (deficit)

 

(44,770

)

(220,701

)

Treasury stock, at cost

 

(1,569,459

)

(1,569,459

)

Total DISH Network stockholders’ equity (deficit)

 

1,129,840

 

977,080

 

Noncontrolling interest

 

14,843

 

19,925

 

Total stockholders’ equity (deficit)

 

1,144,683

 

997,005

 

Total liabilities and stockholders’ equity (deficit)

 

$

20,550,786

 

$

20,375,628

 

 

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

 

1



Table of Contents

 

DISH NETWORK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

Revenue:

 

 

 

 

 

Subscriber-related revenue

 

$

3,556,187

 

$

3,348,167

 

Equipment sales and other revenue

 

22,239

 

25,223

 

Equipment sales, services and other revenue - EchoStar

 

15,772

 

2,140

 

Total revenue

 

3,594,198

 

3,375,530

 

 

 

 

 

 

 

Costs and Expenses (exclusive of depreciation shown separately below - Note 8):

 

 

 

 

 

Subscriber-related expenses

 

2,069,132

 

1,911,593

 

Satellite and transmission expenses:

 

 

 

 

 

EchoStar

 

138,891

 

112,933

 

Other

 

10,605

 

10,248

 

Cost of sales - equipment, services and other

 

27,793

 

21,800

 

Subscriber acquisition costs:

 

 

 

 

 

Cost of sales - subscriber promotion subsidies

 

62,875

 

77,487

 

Other subscriber acquisition costs

 

252,464

 

267,482

 

Subscriber acquisition advertising

 

133,807

 

118,931

 

Total subscriber acquisition costs

 

449,146

 

463,900

 

General and administrative expenses - EchoStar

 

24,800

 

18,422

 

General and administrative expenses

 

178,313

 

154,847

 

Depreciation and amortization (Note 8)

 

249,220

 

230,170

 

Total costs and expenses

 

3,147,900

 

2,923,913

 

 

 

 

 

 

 

Operating income (loss)

 

446,298

 

451,617

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

Interest income

 

14,164

 

37,152

 

Interest expense, net of amounts capitalized

 

(175,994

)

(161,516

)

Other, net

 

(5,189

)

11,400

 

Total other income (expense)

 

(167,019

)

(112,964

)

 

 

 

 

 

 

Income (loss) before income taxes

 

279,279

 

338,653

 

Income tax (provision) benefit, net

 

(108,462

)

(126,419

)

Income (loss) from continuing operations

 

170,817

 

212,234

 

Income (loss) from discontinued operations, net of tax

 

 

(1,558

)

Net income (loss)

 

170,817

 

210,676

 

Less: Net income (loss) attributable to noncontrolling interest

 

(5,114

)

(4,922

)

Net income (loss) attributable to DISH Network

 

$

175,931

 

$

215,598

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

458,422

 

453,242

 

Diluted

 

461,361

 

456,192

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

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

 

$

0.38

 

$

0.48

 

Basic net income (loss) per share from discontinued operations

 

 

 

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

 

$

0.38

 

$

0.48

 

 

 

 

 

 

 

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

 

$

0.38

 

$

0.48

 

Diluted net income (loss) per share from discontinued operations

 

 

(0.01

)

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

 

$

0.38

 

$

0.47

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

Net income (loss)

 

$

170,817

 

$

210,676

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustments

 

3,878

 

2,737

 

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

 

9,983

 

17,783

 

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

 

493

 

1,362

 

Deferred income tax (expense) benefit, net

 

(3,829

)

(6,996

)

Total other comprehensive income (loss), net of tax

 

10,525

 

14,886

 

Comprehensive income (loss)

 

181,342

 

225,562

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(5,114

)

(4,922

)

Comprehensive income (loss) attributable to DISH Network

 

$

186,456

 

$

230,484

 

 

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,

 

 

 

2014

 

2013

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

170,817

 

$

210,676

 

Less: Income (loss) from discontinued operations, net of tax

 

 

(1,558

)

Income (loss) from continuing operations

 

$

170,817

 

$

212,234

 

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

 

 

 

 

 

Depreciation and amortization

 

249,220

 

230,170

 

Realized and unrealized losses (gains) on investments

 

1,521

 

(11,262

)

Non-cash, stock-based compensation

 

9,863

 

10,758

 

Deferred tax expense (benefit)

 

25,088

 

46,568

 

Other, net

 

39,709

 

60,783

 

Changes in current assets and current liabilities

 

174,487

 

159,130

 

Net cash flows from operating activities from continuing operations

 

670,705

 

708,381

 

Net cash flows from operating activities from discontinued operations, net

 

(30,007

)

(21,919

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(1,290,940

)

(1,316,229

)

Sales and maturities of marketable investment securities

 

1,575,374

 

817,230

 

Purchases of derivative financial instruments (Note 2)

 

 

(550,000

)

Purchases of property and equipment

 

(287,645

)

(310,933

)

Change in restricted cash and marketable investment securities

 

765

 

42,956

 

H Block FCC license deposit (Note 10)

 

(1,235,866

)

 

Other, net

 

36,067

 

(41,688

)

Net cash flows from investing activities from continuing operations

 

(1,202,245

)

(1,358,664

)

Net cash flows from investing activities from discontinued operations, net, including $0 and $594 of purchases of property and equipment, respectively

 

20,847

 

(6,072

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Repayment of long-term debt and capital lease obligations

 

(7,724

)

(8,479

)

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

 

6,014

 

10,887

 

Other

 

1,915

 

388

 

Net cash flows from financing activities from continuing operations

 

205

 

2,796

 

Net cash flows from financing activities from discontinued operations, net

 

 

(48

)

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents from discontinued operations

 

 

228

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents from continuing operations

 

(531,335

)

(647,487

)

Cash and cash equivalents, beginning of period from continuing operations

 

4,700,022

 

3,573,742

 

Cash and cash equivalents, end of period from continuing operations

 

$

4,168,687

 

$

2,926,255

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents from discontinued operations

 

(9,160

)

(27,811

)

Cash and cash equivalents, beginning of period from discontinued operations

 

9,160

 

32,398

 

Cash and cash equivalents, end of period from discontinued operations

 

$

 

$

4,587

 

 

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

 

3



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Organization and Business Activities

 

Principal Business

 

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

 

·            DISH.  The DISH® branded pay-TV service (“DISH”) had 14.097 million subscribers in the United States as of March 31, 2014.  The DISH branded pay-TV service consists of, among other things, Federal Communications Commission (“FCC”) licenses authorizing us to use direct broadcast satellite (“DBS”) and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a leased fiber network, in-home service and call center operations, and certain other assets utilized in our operations.  In addition, we market broadband services under the dishNET™ brand.  This service utilizes advanced technology and high-powered satellites launched by Hughes Communications, Inc. (“Hughes”) and ViaSat, Inc. (“ViaSat”) to provide broadband coverage nationwide.  This service primarily targets approximately 15 million rural residents that are underserved, or unserved, by wireline broadband.  In addition to the dishNET branded satellite broadband service, we also offer wireline voice and broadband services under the dishNET brand as a competitive local exchange carrier to consumers living in a 14-state region in the western United States.  We primarily bundle our dishNET branded services with our DISH branded pay-TV service.

 

·            Wireless.  In 2008, we paid $712 million to acquire certain 700 MHz wireless spectrum licenses, which were granted to us by the FCC in February 2009 subject to certain interim and final build-out requirements.  On March 9, 2012, we completed the acquisitions of 100% of the equity of reorganized DBSD North America, Inc. (“DBSD North America”) and substantially all of the assets of TerreStar Networks, Inc. (“TerreStar”), pursuant to which we acquired, among other things, 40 MHz of AWS-4 wireless spectrum licenses held by DBSD North America (the “DBSD Transaction”) and TerreStar (the “TerreStar Transaction”).  The total consideration to acquire the DBSD North America and TerreStar assets was approximately $2.860 billion.  In addition, we were the winning bidder for all 176 wireless spectrum licenses in the recent H Block auction with an aggregate bid of $1.564 billion.  On April 29, 2014, the FCC issued an order granting our application to acquire these H Block spectrum licenses.  As we review our options for the commercialization of our wireless spectrum, we may incur significant additional expenses and may have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure, as well as the acquisition of additional wireless spectrum.  See Note 10 for further discussion.

 

Recent Developments

 

Satellite and Tracking Stock Transaction with EchoStarTo improve our position in the growing consumer satellite broadband market, among other reasons, on February 20, 2014, we entered into agreements with EchoStar Corporation (“EchoStar”) to implement a transaction pursuant to which, among other things: (i) on March 1, 2014, we transferred to EchoStar and Hughes Satellite Systems Corporation (“HSSC”), a wholly-owned subsidiary of EchoStar, five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV (collectively the “Transferred Satellites”), including related in-orbit incentive obligations and cash interest payments of approximately $59 million), and approximately $11 million in cash in exchange for an aggregate of 6,290,499 shares of a series of preferred tracking stock issued by EchoStar and an aggregate of 81.128 shares of a series of preferred tracking stock issued by HSSC (collectively, the “Tracking Stock”); and (ii) beginning on March 1, 2014, we lease back certain satellite capacity on the Transferred Satellites (collectively, the “Satellite and Tracking Stock Transaction”).  The Tracking Stock generally tracks the residential retail satellite broadband business of Hughes Network Systems, LLC (“HNS”), a wholly-owned subsidiary of HSSC, including without limitation the operations, assets and liabilities attributed to the Hughes residential retail satellite broadband business (collectively, the “Hughes

 

4



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Retail Group”).  The shares of the Tracking Stock issued to us represent an aggregate 80% economic interest in the Hughes Retail Group.  Although our investment in the Tracking Stock represents an aggregate 80% economic interest in the Hughes Retail Group, we have no operational control or significant influence over the Hughes Retail Group business, and currently there is no public market for the Tracking Stock.

 

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, 2013.  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.  Minority interests are recorded as noncontrolling interest.  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.

 

Discontinued Operations

 

As of December 31, 2013, Blockbuster had ceased material operations.  Accordingly, our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and Condensed Consolidated Statements of Cash Flows have been recast to present the operations of Blockbuster as discontinued for all periods presented and the amounts presented in the Notes to our Condensed Consolidated Financial Statements relate only to our continuing operations, unless otherwise noted.  On January 14, 2014, we completed the sale of our Blockbuster operations in Mexico.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period.  Estimates are used in accounting for, among other things, allowances for doubtful accounts, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, fair value of multi-element arrangements, capital leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, 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 our Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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, including U.S. treasury notes;

 

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

 

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

 

As of March 31, 2014 and December 31, 2013, the carrying value for cash and cash equivalents, 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 6 for the fair value of our marketable investment securities and see below for the fair value of our derivative financial instruments.

 

Fair values for our publicly traded debt securities are based on quoted market prices, when available.  The fair values of private debt are estimated based on an analysis in which we evaluate market conditions, related securities, various public and private offerings, and other publicly available information.  In performing this analysis, we make various assumptions regarding, among other things, credit spreads, and the impact of these factors on the value of the debt securities.  See Note 9 for the fair value of our long-term debt.

 

Derivative Financial Instruments

 

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

 

As of March 31, 2014 and December 31, 2013, we held derivative financial instruments indexed to the trading price of common equity securities with a fair value of $287 million and $293 million, respectively.  The fair value of the derivative financial instruments is dependent on the trading price of the indexed common equity which may be volatile and vary depending on, among other things, the issuer’s financial and operational performance and market conditions.

 

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” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if stock awards were exercised.  The potential dilution from stock awards was computed using the treasury stock method based on the average market value of our Class A common stock.  The following table presents EPS amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

 

 

(In thousands, except per share amounts)

 

Income (loss) from continuing operations

 

$

170,817

 

$

212,234

 

Less: Net income (loss) attributable to noncontrolling interest

 

(5,114

)

(4,922

)

Income (loss) from continuing operations attributable to DISH Network

 

175,931

 

217,156

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

 

(1,558

)

 

 

 

 

 

 

Net income (loss) attributable to DISH Network

 

$

175,931

 

$

215,598

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

458,422

 

453,242

 

Dilutive impact of stock awards outstanding

 

2,939

 

2,950

 

Diluted

 

461,361

 

456,192

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

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

 

$

0.38

 

$

0.48

 

Basic net income (loss) per share from discontinued operations

 

 

 

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

 

$

0.38

 

$

0.48

 

 

 

 

 

 

 

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

 

$

0.38

 

$

0.48

 

Diluted net income (loss) per share from discontinued operations

 

 

(0.01

)

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

 

$

0.38

 

$

0.47

 

 

As of March 31, 2014 and 2013, there were stock awards to purchase 0.1 million and 1.9 million shares, respectively, of Class A common stock outstanding, not included in the weighted-average common shares outstanding above, as their effect is anti-dilutive.

 

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

 

 

 

As of March 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Performance based options

 

7,766

 

9,791

 

Restricted Performance Units

 

1,866

 

2,118

 

Total

 

9,632

 

11,909

 

 

7



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

4.                                      Supplemental Data — Statements of Cash Flows

 

The following table presents our supplemental cash flow and other non-cash data.

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Cash paid for interest (including capitalized interest)

 

$

230,312

 

$

219,959

 

Cash received for interest

 

33,273

 

15,292

 

Cash paid for income taxes

 

9,427

 

2,025

 

Capitalized interest

 

36,281

 

35,290

 

Satellite and Tracking Stock Transaction with EchoStar:

 

 

 

 

 

Transfer of property and equipment, net

 

432,080

 

 

Investment in EchoStar and HSSC preferred tracking stock - cost method

 

316,204

 

 

Transfer of liabilities and other

 

44,540

 

 

Capital distribution to EchoStar, net of deferred taxes of $31,274

 

51,466

 

 

 

5.                                      Other Comprehensive Income (Loss)

 

The following table presents the tax effects on each component of “Other comprehensive income (loss).”

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

 

 

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

 

$

3,878

 

$

 

$

3,878

 

$

2,737

 

$

 

$

2,737

 

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

 

9,983

 

(3,649

)

6,334

 

17,783

 

(6,498

)

11,285

 

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

 

493

 

(180

)

313

 

1,362

 

(498

)

864

 

Other comprehensive income (loss)

 

$

14,354

 

$

(3,829

)

$

10,525

 

$

21,882

 

$

(6,996

)

$

14,886

 

 

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

 

 

 

Foreign

 

Unrealized /

 

 

 

 

 

Currency

 

Recognized

 

 

 

 

 

Translation

 

Gains

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

Adjustment

 

(Losses) (1)

 

Total

 

 

 

(In thousands)

 

Balance as of December 31, 2013

 

$

(3,878

)

$

177,750

 

$

173,872

 

Other comprehensive income (loss) before reclassification

 

 

6,334

 

6,334

 

Amounts reclassified from accumulated other comprehensive income(loss)

 

3,878

 

313

 

4,191

 

Balance as of March 31, 2014

 

$

 

$

184,397

 

$

184,397

 

 


(1)         All amounts are net of tax.

 

8



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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

 

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

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

113,970

 

$

116,570

 

Current marketable investment securities - strategic

 

531,614

 

534,449

 

Current marketable investment securities - other

 

4,147,208

 

4,388,363

 

Total current marketable investment securities

 

4,792,792

 

5,039,382

 

Restricted marketable investment securities (1)

 

73,446

 

81,371

 

Noncurrent marketable investment securities - ARS and other (2)

 

137,278

 

133,652

 

Total marketable investment securities

 

5,003,516

 

5,254,405

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

20,650

 

13,490

 

 

 

 

 

 

 

Other investment securities:

 

 

 

 

 

Investment in EchoStar preferred tracking stock - cost method (2)

 

228,795

 

 

Investment in HSSC preferred tracking stock - cost method (2)

 

87,409

 

 

Other investment securities - cost method (2)

 

17,621

 

17,621

 

Total other investment securities

 

333,825

 

17,621

 

 

 

 

 

 

 

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

 

$

5,357,991

 

$

5,285,516

 

 


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

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

 

Marketable Investment Securities

 

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

 

Current Marketable Investment Securities - VRDNs

 

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

 

9



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 debt and equity investments in public companies that are highly speculative and have experienced and continue to experience volatility.  As of March 31, 2014, our strategic investment portfolio consisted of securities of a small number of issuers, and as a result the value of that portfolio depends, among other things, on the performance of those issuers.  The fair value of certain of the debt and equity securities in our investment portfolio can be adversely impacted by, among other things, the issuers’ respective performance and ability to obtain any necessary additional financing on acceptable terms, or at all.

 

Current Marketable Investment Securities - Other

 

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

 

Restricted Cash and Marketable Investment Securities

 

As of March 31, 2014 and December 31, 2013, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds and for litigation.  During the first quarter 2013, we released $42 million of restricted cash related to litigation.  See Note 10 for further information.

 

Noncurrent Marketable Investment Securities — ARS and Other Investment Securities

 

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

 

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

 

Fair Value Election.  As of March 31, 2014, our ARS and other noncurrent marketable investment securities portfolio of $137 million included $93 million of securities accounted for under the fair value method.

 

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 securities that are not publicly traded depends on the success of the issuers’ businesses and their ability to obtain sufficient capital, on acceptable terms or at all, and 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.

 

10



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Investment in Tracking Stock

 

During the first quarter 2014, as part of the Satellite and Tracking Stock Transaction with EchoStar, we received an aggregate of 6,290,499 shares of preferred tracking stock issued by EchoStar and an aggregate of 81.128 shares of preferred tracking stock issued by HSSC (collectively, the “Tracking Stock”).  The Tracking Stock generally tracks the Hughes Retail Group.  The shares of the Tracking Stock issued to us represent an aggregate 80% economic interest in the Hughes Retail Group.  Since the Satellite and Tracking Stock Transaction is among entities under common control, we recorded the Tracking Stock at EchoStar and HSSC’s historical cost basis for these instruments of $229 million and $87 million, respectively.  The difference between the historical cost basis of the Tracking Stock received and the net carrying value of the Transferred Satellites of $356 million (including debt obligations, net of deferred taxes), plus the $11 million in cash, resulted in a $51 million capital transaction recorded in “Additional paid-in capital” on our Condensed Consolidated Balance Sheet.  Although our investment in the Tracking Stock represents an aggregate 80% economic interest in the Hughes Retail Group, we have no operational control or significant influence over the Hughes Retail Group business, and currently there is no public market for the Tracking Stock.  As such, the Tracking Stock is accounted for on a cost basis.

 

On February 20, 2014, DISH Operating L.L.C. (“DOLLC”) and DISH Network L.L.C. (“DNLLC”), each indirect wholly-owned subsidiaries of us, entered into an Investor Rights Agreement with EchoStar and HSSC with respect to the Tracking Stock (the “Investor Rights Agreement”).  The Investor Rights Agreement provides, among other things, certain information and consultation rights for us; certain transfer restrictions on the Tracking Stock and certain rights and obligations to offer and sell under certain circumstances (including a prohibition on transfers of the Tracking Stock for one year, with continuing transfer restrictions (including a right of first offer in favor of EchoStar) thereafter, an obligation to sell the Tracking Stock to EchoStar in connection with a change of control of us and a right to require EchoStar to repurchase the Tracking Stock in connection with a change of control of EchoStar, in each case subject to certain terms and conditions); certain registration rights; certain obligations to provide conversion and exchange rights of the Tracking Stock under certain circumstances; and certain protective covenants afforded to holders of the Tracking Stock.  The Investor Rights Agreement generally will terminate with respect to our interest should we no longer hold any shares of the HSSC-issued Tracking Stock and any registrable securities under the Investor Rights Agreement.

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

As of March 31, 2014 and December 31, 2013, we had accumulated net unrealized gains of $192 million and $181 million, respectively.  These amounts, net of related tax effect, were $184 million and $178 million, respectively.  All of these amounts are included in “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  The components of our available-for-sale investments are summarized in the table below.

 

 

 

As of March 31, 2014

 

As of December 31, 2013

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

113,970

 

$

 

$

 

$

 

$

116,570

 

$

 

$

 

$

 

ARS and other

 

44,379

 

1,859

 

(3,189

)

(1,330

)

45,030

 

1,188

 

(5,138

)

(3,950

)

ARS fair value election

 

92,899

 

 

 

 

88,622

 

 

 

 

Other (including restricted)

 

4,416,343

 

86,522

 

(901

)

85,621

 

4,668,532

 

83,363

 

(4,741

)

78,622

 

Equity securities

 

335,925

 

107,542

 

 

107,542

 

335,651

 

106,684

 

 

106,684

 

Total

 

$

5,003,516

 

$

195,923

 

$

(4,090

)

$

191,833

 

$

5,254,405

 

$

191,235

 

$

(9,879

)

$

181,356

 

 

11



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

As of March 31, 2014, restricted and non-restricted marketable investment securities include debt securities of $3.822 billion with contractual maturities within one year, $625 million with contractual maturities extending longer than one year through and including five years, $1 million with contractual maturities extending longer than five years through and including ten years and $220 million with contractual maturities longer than ten years.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

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, 2014, the unrealized losses on our investments in debt securities primarily represent investments in ARS and corporate bonds.  We have the ability to hold and do not intend to sell our investments in these debt securities before they recover or mature, and it is more likely than not that we will hold these investments until that time.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these marketable investment securities are related to temporary market fluctuations.

 

 

 

As of

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

Debt Securities:

 

 

 

 

 

 

 

 

 

Less than 12 months

 

$

1,382,273

 

$

(834

)

$

2,208,930

 

$

(3,106

)

12 months or more

 

68,563

 

(3,256

)

84,915

 

(6,773

)

Total

 

$

1,450,836

 

$

(4,090

)

$

2,293,845

 

$

(9,879

)

 

Fair Value Measurements

 

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

 

 

 

As of

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Cash Equivalents (including restricted)

 

$

3,997,451

 

$

51,718

 

$

3,945,733

 

$

 

$

4,387,252

 

$

323,638

 

$

4,063,614

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

113,970

 

$

 

$

113,970

 

$

 

$

116,570

 

$

 

$

116,570

 

$

 

ARS and other

 

137,278

 

 

459

 

136,819

 

133,652

 

 

678

 

132,974

 

Other (including restricted)

 

4,416,343

 

11,465

 

4,396,968

 

7,910

 

4,668,532

 

11,015

 

4,644,471

 

13,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

335,925

 

335,925

 

 

 

335,651

 

335,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

$

5,003,516

 

$

347,390

 

$

4,511,397

 

$

144,729

 

$

5,254,405

 

$

346,666

 

$

4,761,719

 

$

146,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

287,202

 

 

287,202

 

 

292,507

 

 

292,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,290,718

 

$

347,390

 

$

4,798,599

 

$

144,729

 

$

5,546,912

 

$

346,666

 

$

5,054,226

 

$

146,020

 

 

As of March 31, 2014 and December 31, 2013, our Level 3 investments consisted predominately of ARS and other investment securities.  On a quarterly basis we evaluate the reasonableness of significant unobservable inputs used in those measurements.  The valuation models used for some of our ARS investments require an evaluation of the

 

12



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

underlying instruments held by the trusts that issue these securities.  For our other ARS and other investment securities, our evaluation uses, among other things, the terms of the underlying instruments, the credit ratings of the issuers, current market conditions, and other relevant factors.  Based on these factors, we assess the risk of realizing expected cash flows and we apply an observable discount rate that reflects this risk.  We may also reduce our valuations to reflect a liquidity discount based on the lack of an active market for these securities.

 

Changes in Level 3 instruments were as follows:

 

 

 

Level 3
Investment
Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2013

 

$

146,020

 

Net realized and unrealized gains (losses) included in earnings

 

(1,815

)

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

 

3,681

 

Purchases

 

 

Settlements

 

(3,157

)

Issuances

 

 

Transfers into or out of Level 3

 

 

Balance as of March 31, 2014

 

$

144,729

 

 

During the three months ended March 31, 2014, we had no transfers in or out of Level 1 and Level 2 fair value measurements.

 

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

 

“Other, net” within “Other Income (Expense)” included on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

Other Income (Expense):

 

2014

 

2013

 

 

 

(In thousands)

 

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

 

$

5,637

 

$

557

 

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

 

4,276

 

4,266

 

Derivative financial instruments - net unrealized gains (losses)

 

(5,304

)

8,358

 

Marketable investment securities - other-than-temporary impairments

 

(6,130

)

(1,919

)

Other

 

(3,668

)

138

 

Total

 

$

(5,189

)

$

11,400

 

 

13



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

7.             Inventory

 

Inventory consisted of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Finished goods

 

$

282,678

 

$

299,975

 

Raw materials

 

130,113

 

102,563

 

Work-in-process

 

110,099

 

110,169

 

Total

 

$

522,890

 

$

512,707

 

 

8.             Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

Depreciable

 

As of

 

 

 

Life

 

March 31,

 

December 31,

 

 

 

(In Years)

 

2014

 

2013

 

 

 

 

 

(In thousands)

 

Equipment leased to customers

 

2-5

 

$

3,634,781

 

$

3,596,310

 

EchoStar I (1)

 

12

 

 

201,607

 

EchoStar VII (1)

 

15

 

 

177,000

 

EchoStar X (1)

 

15

 

 

177,192

 

EchoStar XI (1)

 

15

 

 

200,198

 

EchoStar XIV (1)

 

15

 

 

316,541

 

EchoStar XV

 

15

 

277,658

 

277,658

 

D1

 

15

 

150,000

 

150,000

 

T1

 

15

 

401,721

 

401,721

 

Satellites acquired under capital lease agreements

 

10-15

 

499,819

 

499,819

 

Furniture, fixtures, equipment and other

 

1-10

 

726,380

 

720,570

 

Buildings and improvements

 

1-40

 

84,125

 

83,531

 

Land

 

 

5,504

 

5,692

 

Construction in progress

 

 

580,357

 

515,447

 

Total property and equipment

 

 

 

6,360,345

 

7,323,286

 

Accumulated depreciation (1)

 

 

 

(2,656,499

)

(3,225,575

)

Property and equipment, net

 

 

 

$

3,703,846

 

$

4,097,711

 

 


(1)         The decrease in property and equipment and accumulated depreciation resulted from the Satellite and Tracking Stock Transaction.  See Note 1 and Note 12 for further discussion.

 

14



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Construction in progress consisted of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Pay-TV Satellites

 

$

165,369

 

$

143,839

 

T2

 

40,000

 

40,000

 

Wireless ground equipment, including capitalized interest

 

328,609

 

290,642

 

Software related projects

 

16,690

 

15,049

 

Other

 

29,689

 

25,917

 

Construction in progress

 

$

580,357

 

$

515,447

 

 

As we prepare for commercialization of our AWS-4 wireless spectrum licenses which are recorded in FCC Authorizations, interest expense related to their carrying value is being capitalized within “Property and equipment, net” on our Condensed Consolidated Balance Sheets based on our average borrowing rate for our debt.  During the three months ended March 31, 2014 and 2013, we recorded capitalized interest of $36 million and $35 million, respectively, primarily related to the build-out of our AWS-4 wireless spectrum licenses.

 

Depreciation and amortization expense consisted of the following:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Equipment leased to customers

 

$

195,214

 

$

167,212

 

Satellites

 

29,896

 

33,866

 

Buildings, furniture, fixtures, equipment and other

 

24,110

 

29,092

 

Total depreciation and amortization

 

$

249,220

 

$

230,170

 

 

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.

 

Pay-TV Satellites.  We currently utilize 14 owned and leased satellites in geostationary orbit approximately 22,300 miles above the equator, one of which we own and depreciate over the useful life of the satellite.  We currently utilize capacity on 11 satellites that we lease from EchoStar, which are accounted for as operating leases.  We also lease two satellites from third parties, which are accounted for as capital leases and are depreciated over the shorter of the economic life of the satellite or the term of the satellite agreement.

 

15



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

As of March 31, 2014, our pay-TV satellite fleet consisted of the following:

 

 

 

 

 

Degree

 

Estimated

 

 

 

Launch

 

Orbital

 

Useful Life

 

Satellites

 

Date

 

Location

 

(Years)

 

Owned:

 

 

 

 

 

 

 

EchoStar XV (1)

 

July 2010

 

45

 

15

 

 

 

 

 

 

 

 

 

Leased from EchoStar:

 

 

 

 

 

 

 

EchoStar I (1)(2)(3)(4)

 

December 1995

 

77

 

NA

 

EchoStar VII (1)(2)(3)(4)

 

February 2002

 

119

 

NA

 

EchoStar VIII (1)(2)

 

August 2002

 

77

 

NA

 

EchoStar IX (1)(2)

 

August 2003

 

121

 

NA

 

EchoStar X (1)(2)(3)(4)

 

February 2006

 

110

 

NA

 

EchoStar XI (1)(2)(3)(4)

 

July 2008

 

110

 

NA

 

EchoStar XII (1)(2)(3)

 

July 2003

 

61.5

 

NA

 

EchoStar XIV (1)(2)(3)(4)

 

March 2010

 

119

 

NA

 

EchoStar XVI (1)

 

November 2012

 

61.5

 

NA

 

Nimiq 5 (1)(2)

 

September 2009

 

72.7

 

NA

 

QuetzSat-1 (1)(2)

 

September 2011

 

77

 

NA

 

 

 

 

 

 

 

 

 

Leased from Other Third Party:

 

 

 

 

 

 

 

Anik F3

 

April 2007

 

118.7

 

NA

 

Ciel II

 

December 2008

 

129

 

NA

 

 

 

 

 

 

 

 

 

Under Construction:

 

 

 

 

 

 

 

EchoStar XVIII

 

2015

 

110

 

15

 

 


(1)         See Note 12 for further discussion of our Related Party Transactions with EchoStar.

(2)         We lease a portion of the capacity on these satellites.

(3)         We generally have the option to renew each lease on a year-to-year basis through the end of the respective satellite’s useful life.

(4)         On February 20, 2014, we entered into the Satellite and Tracking Stock Transaction with EchoStar pursuant to which, among other things, we transferred these satellites to EchoStar and lease back certain satellite capacity on these satellites.  See Note 1 for further discussion.

 

16



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

9.                                      Long-Term Debt

 

Fair Value of our Long-Term Debt

 

The following table summarizes the carrying and fair values of our debt facilities as of March 31, 2014 and December 31, 2013:

 

 

 

As of

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

 

 

(In thousands)

 

6 5/8% Senior Notes due 2014 (1)

 

$

1,000,000

 

$

1,026,880

 

$

1,000,000

 

$

1,040,200

 

7 3/4% Senior Notes due 2015

 

750,000

 

804,563

 

750,000

 

813,750

 

7 1/8% Senior Notes due 2016

 

1,500,000

 

1,642,500

 

1,500,000

 

1,657,500

 

4 5/8% Senior Notes due 2017

 

900,000

 

957,600

 

900,000

 

946,962

 

4 1/4% Senior Notes due 2018

 

1,200,000

 

1,253,400

 

1,200,000

 

1,221,792

 

7 7/8% Senior Notes due 2019

 

1,400,000

 

1,659,700

 

1,400,000

 

1,603,000

 

5 1/8% Senior Notes due 2020

 

1,100,000

 

1,144,121

 

1,100,000

 

1,104,950

 

6 3/4% Senior Notes due 2021

 

2,000,000

 

2,249,500

 

2,000,000

 

2,122,500

 

5 7/8% Senior Notes due 2022

 

2,000,000

 

2,143,400

 

2,000,000

 

1,997,500

 

5 % Senior Notes due 2023

 

1,500,000

 

1,507,200

 

1,500,000

 

1,458,090

 

Mortgages and other notes payable (2)

 

36,545

 

36,545

 

80,769

 

80,769

 

Subtotal

 

13,386,545

 

$

14,425,409

 

13,430,769

 

$

14,047,013

 

Capital lease obligations (3)

 

213,940

 

NA

 

220,115

 

NA

 

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

 

$

13,600,485

 

 

 

$

13,650,884

 

 

 

 


(1)         Our 6 5/8% Senior Notes with an aggregate principal balance of $1.0 billion mature on October 1, 2014.

(2)         On February 20, 2014, we entered into the Satellite and Tracking Stock Transaction, which resulted in a decrease in “Mortgages and other notes payable” of $44 million related to the in-orbit incentive obligations associated with the Transferred Satellites.  See Note 1 and Note 12 for further discussion.

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

 

We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).

 

10.                               Commitments and Contingencies

 

Commitments

 

Wireless Spectrum

 

700 MHz Licenses.  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.  At the time they were granted, these licenses were subject to certain interim and final build-out requirements.  By June 2013, we were required to provide signal coverage and offer service to at least 35% of the geographic area in each area covered by each individual license (the “700 MHz Interim Build-Out Requirement”).  By June 2019, we were required to provide signal coverage and offer service to at least 70% of the geographic area in each area covered by each individual license (the “700 MHz Final Build-Out Requirement”).  As discussed below, these requirements have since been modified by the FCC.

 

17



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

On September 9, 2013, we filed a letter with the FCC in support of a voluntary industry solution to resolve certain interoperability issues affecting the lower 700 MHz spectrum band (the “Interoperability Solution”).  On October 29, 2013, the FCC issued an order approving the Interoperability Solution (the “Interoperability Solution Order”), which requires us to reduce power emissions on our 700 MHz licenses.  As part of the Interoperability Solution Order, the FCC, among other things, approved our request to modify the 700 MHz Interim Build-Out Requirement so that by March 2017 (rather than the previous deadline of June 2013), we must provide signal coverage and offer service to at least 40% of our total E Block population (the “Modified 700 MHz Interim Build-Out Requirement”).  The FCC also approved our request to modify the 700 MHz Final Build-Out Requirement so that by March 2021 (rather than the previous deadline of June 2019), we must provide signal coverage and offer service to at least 70% of the population in each of our E Block license areas (the “Modified 700 MHz Final Build-Out Requirement”).  These requirements replaced the previous build-out requirements associated with our 700 MHz licenses.  While the modifications to our 700 MHz licenses would provide us additional time to complete the build-out requirements, the reduction in power emissions could have an adverse impact on our ability to fully utilize our 700 MHz licenses.  If we fail to meet the Modified 700 MHz Interim Build-Out Requirement, the Modified 700 MHz Final Build-Out Requirement may be accelerated by one year, from March 2021 to March 2020, and we could face the reduction of license area(s).  If we fail to meet the Modified 700 MHz Final Build-Out Requirement, our authorization may terminate for the geographic portion of each license in which we are not providing service.

 

AWS-4 Licenses.  On March 2, 2012, the FCC approved the transfer of 40 MHz of AWS-4 wireless spectrum licenses held by DBSD North America and TerreStar to us.  On March 9, 2012, we completed the DBSD Transaction and the TerreStar Transaction, pursuant to which we acquired, among other things, certain satellite assets and wireless spectrum licenses held by DBSD North America and TerreStar.  The total consideration to acquire the DBSD North America and TerreStar assets was approximately $2.860 billion.

 

Our consolidated FCC applications for approval of the license transfers from DBSD North America and TerreStar were accompanied by requests for waiver of the FCC’s Mobile Satellite Service (“MSS”) “integrated service” and spare satellite requirements and various technical provisions.  On March 21, 2012, the FCC released a Notice of Proposed Rule Making proposing the elimination of the integrated service, spare satellite and various technical requirements associated with the AWS-4 licenses.  On December 11, 2012, the FCC approved rules that eliminated these requirements and gave notice of its proposed modification of our AWS-4 authorizations to, among other things, allow us to offer single-mode terrestrial terminals to customers who do not desire satellite functionality.  On February 15, 2013, the FCC issued an order, which became effective on March 7, 2013, modifying our AWS-4 licenses to expand our terrestrial operating authority.  That order imposed certain limitations on the use of a portion of this spectrum, including interference protections for other spectrum users and power and emission limits that we presently believe could render 5 MHz of our uplink spectrum (2000-2005 MHz) effectively unusable for terrestrial services and limit our ability to fully utilize the remaining 15 MHz of our uplink spectrum (2005-2020 MHz) for terrestrial services.  These limitations could, among other things, impact the ongoing development of technical standards associated with our wireless business, and may have a material adverse effect on our ability to commercialize these licenses.  That order also mandated certain interim and final build-out requirements for the licenses.  By March 2017, we must provide terrestrial signal coverage and offer terrestrial service to at least 40% of the aggregate population represented by all of the areas covered by the licenses (the “AWS-4 Interim Build-Out Requirement”).  By March 2020, we were required to provide terrestrial signal coverage and offer terrestrial service to at least 70% of the population in each area covered by an individual license (the “AWS-4 Final Build-Out Requirement”).

 

On December 20, 2013, the FCC issued a further order that, among other things, extended the AWS-4 Final Build-Out Requirement by one year to March 2021 (the “Modified AWS-4 Final Build-Out Requirement”).  If we fail to meet the AWS-4 Interim Build-Out Requirement, the Modified AWS-4 Final Build-Out Requirement may be accelerated by one year, from March 2021 to March 2020.  If we fail to meet the Modified AWS-4 Final Build-Out Requirement, our terrestrial authorization for each license area in which we fail to meet the requirement may

 

18



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

terminate.  The FCC’s December 20, 2013 order also conditionally waived certain FCC rules for our AWS-4 spectrum licenses to allow us to repurpose all 20 MHz of our uplink spectrum (2000-2020 MHz) for downlink (the “AWS-4 Downlink Waiver”).  The AWS-4 Downlink Waiver and the Modified AWS-4 Final Build-Out Requirement were conditioned upon us bidding at least a net clearing price equal to the aggregate reserve price of $1.564 billion in the auction of wireless spectrum known as the “H Block.”  We have satisfied that condition.  If we fail to notify the FCC whether we intend to use our uplink spectrum for downlink by June 20, 2016, the AWS-4 Downlink Waiver will terminate, and the Modified AWS-4 Final Build-Out Requirement will revert back to the AWS-4 Final Build-Out Requirement.

 

H Block Licenses.  The H Block auction commenced on January 22, 2014 and concluded on February 27, 2014.  We were the winning bidder for all 176 wireless spectrum licenses in the H Block auction with an aggregate bid of $1.564 billion.  On December 17, 2013, we paid approximately $328 million to the FCC as a deposit for the H Block auction.  We paid the remaining balance of our winning bid of approximately $1.236 billion for the H Block spectrum licenses on March 28, 2014.  On April 29, 2014, the FCC issued an order granting our application to acquire these H Block spectrum licenses.  As a result, we are also required to pay approximately $13 million to UTAM, Inc. for clearance costs associated with the lower H Block spectrum and approximately $95 million to Sprint for clearance costs associated with the upper H Block spectrum by May 29, 2014 in connection with the issuance of the H Block licenses.  The H Block spectrum licenses are subject to certain interim and final build-out requirements.  By April 2018, we must provide reliable signal coverage and offer service to at least 40% of the population in each area covered by an individual H Block spectrum license (the “H Block Interim Build-Out Requirement”).  By April 2024, we must provide reliable signal coverage and offer service to at least 75% of the population in each area covered by an individual H Block spectrum license (the “H Block Final Build-Out Requirement”).  If we fail to meet the H Block Interim Build-Out Requirement, the H Block license term and the H Block Final Build-Out Requirement may be accelerated by two years (from April 2024 to April 2022) for each H Block license area in which we fail to meet the requirement.  If we fail to meet the H Block Final Build-Out Requirement, our authorization for each H Block spectrum license area in which we fail to meet the requirement may terminate.  The FCC has adopted rules for the H Block spectrum band that is adjacent to our AWS-4 spectrum licenses.  Depending on the outcome of the standard-setting process for the H Block and our ultimate decision regarding the AWS-4 Downlink Waiver, the rules that the FCC adopted for the H Block could further impact the remaining 15 MHz of our AWS-4 uplink spectrum (2005-2020 MHz), which may have a material adverse effect on our ability to commercialize the AWS-4 licenses.

 

We may also determine that additional spectrum licenses may be required to commercialize our wireless business and to compete with other wireless service providers.  We will need to make significant additional investments or partner with others to, among other things, finance the commercialization and build-out requirements of our licenses and any additional acquired licenses and our integration efforts, including compliance with regulations applicable to acquired licenses.  Depending on the nature and scope of such commercialization, build-out, and integration efforts, any such investment or partnership could vary significantly.  There can be no assurance that we will be able to develop and implement a business model that will realize a return on these spectrum licenses or that we will be able to profitably deploy the assets represented by these spectrum licenses, which may affect the carrying value of these assets and our future financial condition or results of operations.

 

Guarantees

 

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.

 

In connection with the Spin-off, we distributed certain satellite lease agreements to EchoStar and remained the guarantor under those capital leases for payments totaling approximately $36 million over approximately the next 11 months.

 

19



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

During the third quarter 2009, EchoStar entered into a new satellite transponder service agreement for Nimiq 5 through 2024.  We sublease this capacity from EchoStar and also guarantee a certain portion of EchoStar’s obligation under its satellite transponder service agreement through 2019.  As of March 31, 2014, the remaining obligation of our guarantee was $359 million.

 

As of March 31, 2014, we have not recorded a liability on the balance sheet for any of these guarantees.

 

Contingencies

 

Separation Agreement

 

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

 

Litigation

 

We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities.  Many of these proceedings are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages.  We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate.  If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.

 

For certain cases described on the following pages, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties (as with many patent-related cases).  For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

 

California Institute of Technology

 

On October 1, 2013, the California Institute of Technology (“Caltech”) filed complaints against us and our wholly-owned subsidiaries DISH Network L.L.C. and dishNET Satellite Broadband L.L.C., as well as Hughes Communications, Inc. and Hughes Network Systems, LLC, which are wholly-owned subsidiaries of EchoStar, in the United States District Court for the Central District of California.  The complaint alleges infringement of United States Patent Nos. 7,116,710 (the “710 patent”); 7,421,032 (the “032 patent”); 7,916,781 (the “781 patent”) and 8,284,833 (the “833 patent”), each of which is entitled “Serial Concatenation of Interleaved Convolutional Codes forming Turbo-Like Codes.”  Caltech alleges that encoding data as specified by the DVB-S2 standard infringes each of the asserted patents.  In the operative Amended Complaint, served on March 6, 2014, Caltech claims that our Hopper set-top box, as well as the Hughes defendants’ satellite broadband products and services, infringe the asserted patents by implementing the DVB-S2 standard.

 

20



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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

 

ClearPlay, Inc.

 

On March 13, 2014, ClearPlay, Inc. (“ClearPlay”) filed a complaint against us, our wholly-owned subsidiary DISH Network L.L.C., EchoStar, and its wholly-owned subsidiary EchoStar Technologies L.L.C., in the United States District Court for the District of Utah.  The complaint alleges infringement of United States Patent Nos. 6,898,799, entitled “Multimedia Content Navigation and Playback” (the “799 patent”); 7,526,784, entitled “Delivery of Navigation Data for Playback of Audio and Video Content” (the “784 patent”); 7,543,318, entitled “Delivery of Navigation Data for Playback of Audio and Video Content” (the “318 patent”); 7,577,970, entitled “Multimedia Content Navigation and Playback” (the “970 patent”); and 8,117,282, entitled “Media Player Configured to Receive Playback Filters From Alternative Storage Mediums” (the “282 patent”).  ClearPlay alleges that the AutoHop feature in our Hopper set-top box infringes the asserted patents.

 

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

 

CRFD Research, Inc. (a subsidiary of Marathon Patent Group, Inc.)

 

On January 17, 2014, CRFD Research, Inc. (“CRFD”) filed a complaint against us, our wholly-owned subsidiaries DISH DBS and DISH Network L.L.C., EchoStar, and its wholly-owned subsidiary EchoStar Technologies L.L.C., in the United States District Court for the District of Delaware, alleging infringement of United States Patent No. 7,191,233 (the “233 patent”).  The 233 patent is entitled “System for Automated, Mid-Session, User-Directed, Device-to-Device Session Transfer System,” and relates to transferring an ongoing software session from one device to another.  CRFD alleges that our Hopper and Joey set-top boxes infringe the 233 patent.  On the same day, CRFD filed similar complaints against AT&T Inc.; Comcast Corp.; DirecTV; Time Warner Cable Inc.; Cox Communications, Inc.; Level 3 Communications, Inc.; Akamai Technologies, Inc.; Cablevision Systems Corp. and Limelight Networks, Inc.  CRFD is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

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

 

Custom Media Technologies LLC

 

On August 15, 2013, Custom Media Technologies LLC (“Custom Media”) filed complaints against us; AT&T Inc.; Charter Communications, Inc.; Comcast Corp.; Cox Communications, Inc.; DirecTV; Time Warner Cable Inc. and Verizon Communications, Inc., in the United States District Court for the District of Delaware, alleging infringement of United States Patent No. 6,269,275 (the “275 patent”).  The 275 patent, which is entitled “Method and System for Customizing and Distributing Presentations for User Sites,” relates to the provision of customized presentations to viewers over a network, such as “a cable television network, an Internet or other computer network, a broadcast television network, and/or a satellite system.”  Custom Media is an entity that seeks to license an

 

21



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

acquired patent portfolio without itself practicing any of the claims recited therein.  Pursuant to a stipulation between the parties, on November 6, 2013, the Court entered an order substituting DISH Network L.L.C., our wholly-owned subsidiary, as the defendant in our place.

 

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

 

Do Not Call Litigation

 

On March 25, 2009, our wholly-owned subsidiary DISH Network L.L.C. was sued in a civil action by the United States Attorney General and several states in the United States District Court for the Central District of Illinois, alleging violations of the Telephone Consumer Protection Act and Telephone Sales Rules, as well as analogous state statutes and state consumer protection laws.  The plaintiffs allege that we, directly and through certain independent third-party retailers and their affiliates, committed certain telemarketing violations.  On December 23, 2013, the plaintiffs filed a motion for summary judgment, which indicated for the first time that the state plaintiffs are seeking civil penalties and damages of approximately $270 million and that the federal plaintiff is seeking an unspecified amount of civil penalties (which could substantially exceed the civil penalties and damages being sought by the state plaintiffs).  The plaintiffs are also seeking injunctive relief that if granted would, among other things, enjoin DISH Network L.L.C., whether acting directly or indirectly through authorized telemarketers or independent third-party retailers, from placing any outbound telemarketing calls to market or promote its goods or services for five years, and enjoin DISH Network L.L.C. from accepting activations or sales from certain existing independent third-party retailers and from certain new independent third-party retailers, except under certain circumstances.  We have also filed a motion for summary judgment, seeking dismissal of all claims.

 

We intend to vigorously defend this case.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Dragon Intellectual Property, LLC

 

On December 20, 2013, Dragon Intellectual Property, LLC (“Dragon IP”) filed complaints against our wholly-owned subsidiary DISH Network L.L.C., as well as Apple Inc.; AT&T, Inc.; Charter Communications, Inc.; Comcast Corp.; Cox Communications, Inc.; DirecTV; Sirius XM Radio Inc.; Time Warner Cable Inc. and Verizon Communications, Inc., in the United States District Court for the District of Delaware, alleging infringement of United States Patent No. 5,930,444 (the “444 patent”), which is entitled “Simultaneous Recording and Playback Apparatus.”  Dragon IP alleges that various of our DVR receivers infringe the 444 patent.  Dragon IP is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

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

 

22



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

ESPN

 

During 2008, our wholly-owned subsidiary DISH Network L.L.C. filed a lawsuit against ESPN, Inc.; ESPN Classic, Inc.; ABC Cable Networks Group; Soapnet L.L.C. and International Family Entertainment (collectively, “ESPN”) for breach of contract in New York State Supreme Court.  Our complaint alleged that ESPN failed to provide us with certain HD feeds of the Disney Channel, ESPN News, Toon and ABC Family.  In October 2011, the jury returned a verdict in favor of the defendants, which the New York State Supreme Court, Appellate Division, First Department (the “First Department”) affirmed on April 2, 2013.  We sought leave to further appeal, which the New York Court of Appeals denied on August 27, 2013 on jurisdictional grounds.  On September 19, 2013, we appealed the trial court’s final judgment to the First Department.  On March 6, 2014, pursuant to a settlement and release agreement between the parties, we dismissed our appeal.

 

ESPN had asserted a counterclaim alleging that we owed approximately $35 million under the applicable affiliation agreements.  On April 15, 2009, the New York State Supreme Court granted, in part, ESPN’s motion for summary judgment on the counterclaim, finding that we were liable for some of the amount alleged to be owing but that the actual amount owing was disputed.  On December 29, 2010, the First Department affirmed the partial grant of ESPN’s motion for summary judgment on the counterclaim.  After the partial grant of ESPN’s motion for summary judgment, ESPN sought an additional $30 million under the applicable affiliation agreements.  On March 15, 2010, the New York State Supreme Court ruled that we owed the full amount of approximately $66 million under the applicable affiliation agreements.  As of December 31, 2010, we had $42 million recorded as a “Litigation accrual” on our Consolidated Balance Sheets.

 

On June 21, 2011, the First Department affirmed the New York State Supreme Court’s ruling that we owed approximately $66 million under the applicable affiliation agreements and, on October 18, 2011, denied our motion for leave to appeal that decision to New York’s highest court, the New York Court of Appeals.  We sought leave to appeal directly to the New York Court of Appeals and, on January 10, 2012, the New York Court of Appeals dismissed our motion for leave on the ground that the ruling upon which we appealed did not fully resolve all claims in the action.  As a result of the First Department’s June 2011 ruling, we recorded $24 million of “Litigation Expense” on our Consolidated Statements of Operations and Comprehensive Income (Loss) during 2011.  On October 11, 2012, the New York State Supreme Court awarded ESPN $5 million in attorneys’ fees as the prevailing party on both our claim and ESPN’s counterclaim.  As a result, we recorded $5 million of “General and administrative expenses” and increased our “Litigation accrual” to a total of $71 million related to this case as of December 31, 2012.  During the first quarter 2013, we paid $71 million to ESPN related to the counterclaim and attorneys’ fees and $12 million for accrued interest.  As a result of the parties’ settlement and release, no further appeals are possible, and this matter is now concluded.

 

Garnet Digital, LLC

 

On September 9, 2013, Garnet Digital, LLC (“Garnet Digital”) filed a complaint against us and our wholly-owned subsidiary DISH Network L.L.C., in the United States District Court for the Eastern District of Texas, alleging infringement of United States Patent No. 5,379,421 (the “421 patent”), which is entitled “Interactive Terminal for the Access of Remote Database Information.”  The 421 patent relates to methods for accessing information from a remote computerized database and related devices.  On the same day, Garnet Digital filed similar complaints in the same court against 15 other defendants, including AT&T Inc.; Comcast Corp.; DirecTV; TiVo, Inc. and Verizon Communications, Inc.  Garnet Digital is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  A trial date has been set for May 9, 2016.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction

 

23



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

that could require us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

The Hopper Litigation

 

On May 24, 2012, our wholly-owned subsidiary, DISH Network L.L.C., filed a lawsuit in the United States District Court for the Southern District of New York against American Broadcasting Companies, Inc.; CBS Corporation; Fox Entertainment Group, Inc.; Fox Television Holdings, Inc.; Fox Cable Network Services, L.L.C. and NBCUniversal, LLC.  In the lawsuit, we are seeking a declaratory judgment that we are not infringing any defendant’s copyright, or breaching any defendant’s retransmission consent agreement, by virtue of the PrimeTime Anytime™ and AutoHop features of our Hopper set-top box.  A consumer can use the PrimeTime Anytime feature, at his or her option, to record certain primetime programs airing on ABC, CBS, Fox, and/or NBC up to every night, and to store those recordings for up to eight days.  A consumer can use the AutoHop feature, at his or her option, to watch certain recordings the subscriber made with our PrimeTime Anytime feature, commercial-free, if played back at a certain point after the show’s original airing.

 

Later on May 24, 2012, (i) Fox Broadcasting Company; Twentieth Century Fox Film Corp. and Fox Television Holdings, Inc. filed a lawsuit against us and DISH Network L.L.C. in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature, the AutoHop feature, as well as Sling placeshifting functionality infringe their copyrights and breach their retransmission consent agreements, (ii) NBC Studios LLC; Universal Network Television, LLC; Open 4 Business Productions LLC and NBCUniversal, LLC filed a lawsuit against us and DISH Network L.L.C. in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights, and (iii) CBS Broadcasting Inc.; CBS Studios Inc. and Survivor Productions LLC filed a lawsuit against us and DISH Network L.L.C. in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights.

 

As a result of certain parties’ competing venue-related motions brought in both the New York and California actions, and certain networks’ filing various counterclaims and amended complaints, the claims have proceeded in the following venues:  (1) the copyright and contract claims regarding the ABC and CBS parties in New York; and (2) the copyright and contract claims regarding the Fox and NBC parties in California.

 

California Actions.  The NBC plaintiffs and Fox plaintiffs filed amended complaints in their respective California actions adding copyright claims against EchoStar and EchoStar Technologies L.L.C. (“EchoStar Technologies”), a wholly-owned subsidiary of EchoStar.  In addition, the Fox plaintiffs’ amended complaint added claims challenging the Hopper Transfers™ feature of our second-generation Hopper set-top box.

 

On November 7, 2012, the California court denied the Fox plaintiffs’ motion for a preliminary injunction to enjoin the Hopper set-top box’s PrimeTime Anytime and AutoHop features, and the Fox plaintiffs appealed.  On March 27, 2013, at the request of the parties, the Central District of California granted a stay of all proceedings in the action brought by the NBC plaintiffs, pending resolution of the appeal by the Fox plaintiffs.  On July 24, 2013, the United States Court of Appeals for the Ninth Circuit affirmed the denial of the Fox plaintiffs’ motion for a preliminary injunction as to the PrimeTime Anytime and AutoHop features.  On August 7, 2013, the Fox plaintiffs filed a petition for rehearing and rehearing en banc, which was denied on January 24, 2014.  The United States Supreme Court has granted the Fox plaintiffs an extension until May 23, 2014 to file a petition for writ of certiorari.

 

In addition, on February 21, 2013, the Fox plaintiffs filed a second motion for preliminary injunction against: (i) us seeking to enjoin the Hopper Transfers feature in our second-generation Hopper set-top box, alleging breach of their retransmission consent agreement; and (ii) us and EchoStar Technologies seeking to enjoin the Sling placeshifting functionality in our second-generation Hopper set-top box, alleging copyright infringement and breach of their retransmission consent agreement.  On September 23, 2013, the California court denied the Fox plaintiffs’ motion.

 

24



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

The Fox plaintiffs appealed, and the United States Court of Appeals for the Ninth Circuit will hear oral argument on July 7, 2014.  The Fox claims are set for trial on January 13, 2015.

 

New York Actions.  Both the ABC and CBS parties filed counterclaims in the New York action adding copyright claims against EchoStar Technologies, and the CBS parties have filed a counterclaim alleging that we fraudulently concealed the AutoHop feature when negotiating renewal of our CBS retransmission consent agreement.  On November 23, 2012, the ABC plaintiffs filed a motion for a preliminary injunction to enjoin the Hopper set-top box’s PrimeTime Anytime and AutoHop features.  On September 18, 2013, the New York court denied that motion.  The ABC plaintiffs appealed, and oral argument on the appeal was heard on February 20, 2014 before the United States Court of Appeals for the Second Circuit.  Pursuant to a settlement between us and the ABC parties, on March 4, 2014, the ABC parties withdrew their appeal to the United States Court of Appeals for the Second Circuit, and, on March 6, 2014, we and the ABC parties dismissed without prejudice all of our respective claims pending in the United States District Court for the Southern District of New York.  The CBS claims in the New York action are set to be trial-ready on April 17, 2015.

 

We intend to vigorously prosecute and defend our position in these cases.  In the event that a court ultimately determines that we infringe the asserted copyrights, or are in breach of any of the retransmission consent agreements, we may be subject to substantial damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  In addition, as a result of this litigation, we may not be able to renew certain of our retransmission consent agreements and other programming agreements on favorable terms or at all.  If we are unable to renew these agreements, there can be no assurance that we would be able to obtain substitute programming, or that such substitute programming would be comparable in quality or cost to our existing programming.  Loss of access to existing programming could have a material adverse effect on our business, financial condition and results of operations, including, among other things, our gross new subscriber activations and subscriber churn rate.  We cannot predict with any degree of certainty the outcome of these suits or determine the extent of any potential liability or damages.

 

Joao Control & Monitoring Systems LLC

 

On April 23, 2014, Joao Control & Monitoring Systems, LLC (“Joao Control”) filed a complaint against us in the United States District Court for the District of Delaware, alleging infringement of United States Patent No. 6,549,130 (the “130 patent”), which is entitled “Control Apparatus and Method for Vehicles and/or for Premises.”  Joao alleges that we infringe the 130 patent by making, using, providing and/or importing remotely-accessed DVRs.  On the same day, Joao Control also filed actions against DirecTV; Verizon Communications, Inc.; Time Warner Cable Inc.; Cox Communications, Inc.; and Cablevision Systems Corporation, among others.  Joao Control is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

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

 

LightSquared/Harbinger Capital Partners LLC (LightSquared Bankruptcy)

 

As previously disclosed in our public filings, L-Band Acquisition, LLC (“LBAC”), our wholly-owned subsidiary, entered into a Plan Support Agreement (the “PSA”) with certain senior secured lenders to LightSquared LP (the “LightSquared LP Lenders”) on July 23, 2013, which contemplated the purchase by LBAC of substantially all of the assets of LightSquared LP and certain of its subsidiaries (the “LBAC Bid”) that are debtors and debtors in possession in the LightSquared bankruptcy cases pending in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”), which cases are jointly administered under the caption In re LightSquared Inc., et. al., Case No. 12 12080 (SCC).

 

25



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Pursuant to the PSA, LBAC was entitled to terminate the PSA in certain circumstances, certain of which required three business days’ written notice, including, without limitation, in the event that certain milestones specified in the PSA were not met.  On January 7, 2014, LBAC delivered written notice of termination of the PSA to the LightSquared LP Lenders.  As a result, the PSA terminated effective on January 10, 2014, and the LBAC Bid was withdrawn.

 

On August 6, 2013, Harbinger Capital Partners LLC and other affiliates of Harbinger (collectively, “Harbinger”), a shareholder of LightSquared Inc., filed an adversary proceeding against us, LBAC, EchoStar, Charles W. Ergen (our Chairman), SP Special Opportunities, LLC (“SPSO”) (an entity controlled by Mr. Ergen), and certain other parties, in the Bankruptcy Court.  Harbinger alleged, among other things, claims based on fraud, unfair competition, civil conspiracy and tortious interference with prospective economic advantage related to certain purchases of LightSquared secured debt by SPSO.  Subsequently, LightSquared intervened to join in certain claims alleged against certain defendants other than us, LBAC and EchoStar.

 

On October 29, 2013, the Bankruptcy Court dismissed all of the claims in Harbinger’s complaint in their entirety, but granted leave for LightSquared to file its own complaint in intervention.  On November 15, 2013, LightSquared filed its complaint, which included various claims against us, EchoStar, Mr. Ergen and SPSO.  On December 2, 2013, Harbinger filed an amended complaint, asserting various claims against SPSO.  On December 12, 2013, the Bankruptcy Court dismissed several of the claims asserted by LightSquared and Harbinger.  The surviving claims include, among others, LightSquared’s claims against SPSO for declaratory relief, breach of contract and statutory disallowance; LightSquared’s tortious interference claim against us, EchoStar and Mr. Ergen; and Harbinger’s claim against SPSO for equitable disallowance.  These claims proceeded to a non-jury trial on January 9, 2014, which concluded on January 17, 2014.  The parties submitted post-trial briefs and a hearing for closing arguments occurred on March 17, 2014.

 

We intend to vigorously defend this proceeding and cannot predict with any degree of certainty the outcome of this proceeding or determine the extent of any potential liability or damages.

 

LightSquared Transaction Shareholder Derivative Actions

 

On August 9, 2013, a purported shareholder of the Company, Jacksonville Police and Fire Pension Fund (“Jacksonville PFPF”), filed a putative shareholder derivative action in the District Court for Clark County, Nevada alleging, among other things, breach of fiduciary duty claims against the members of the Company’s Board of Directors as of that date:  Charles W. Ergen; Joseph P. Clayton; James DeFranco; Cantey M. Ergen; Steven R. Goodbarn; David K. Moskowitz; Tom A. Ortolf; and Carl E. Vogel (collectively, the “Director Defendants”).  In its operative amended complaint, Jacksonville PFPF claims that Mr. Ergen breached his fiduciary duty to the Company in connection with certain purchases of LightSquared debt by SPSO, an entity controlled by Mr. Ergen, and that the other Director Defendants aided and abetted that alleged breach of duty.  The Jacksonville PFPF claims allege that (1) the debt purchases created an impermissible conflict of interest and (2) put at risk the LBAC Bid, which as noted above has been withdrawn.  Jacksonville PFPF further claims that most members of the Company’s Board of Directors are beholden to Mr. Ergen to an extent that prevents them from discharging their duties in connection with the Company’s participation in the LightSquared bankruptcy auction process.  Jacksonville PFPF is seeking an unspecified amount of damages.  Jacksonville PFPF dismissed its claims against Mr. Goodbarn on October 8, 2013.

 

Jacksonville PFPF sought a preliminary injunction that would enjoin Mr. Ergen and all of the Director Defendants other than Mr. Goodbarn from influencing the Company’s efforts to acquire certain assets of LightSquared in the bankruptcy proceeding.  On November 27, 2013, the Court denied that request but granted narrower relief enjoining Mr. Ergen and anyone acting on his behalf from participating in negotiations related to one aspect of the LBAC Bid, which, as noted above, has been withdrawn.

 

26



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Five alleged shareholders have filed substantially similar putative derivative complaints in state and federal courts alleging the same or substantially similar claims.  On September 18, 2013, DCM Multi-Manager Fund, LLC filed a duplicative putative derivative complaint in the District Court for Clark County, Nevada, which was consolidated with the Jacksonville PFPF action on October 9, 2013.  Between September 25, 2013 and October 2, 2013, City of Daytona Beach Police Officers and Firefighters Retirement System, Louisiana Municipal Police Employees’ Retirement System and Iron Worker Mid-South Pension Fund filed duplicative putative derivative complaints in the United States District Court for the District of Colorado.  Also on October 2, 2013, Iron Workers District Council (Philadelphia and Vicinity) Retirement and Pension Plan filed its complaint in the United States District Court for the District of Nevada.  None of the plaintiffs in these actions is seeking a preliminary injunction.

 

On October 11, 2013, Iron Worker Mid-South Pension Fund dismissed its claims without prejudice.  On October 30, 2013, Louisiana Municipal Police Employees’ Retirement System dismissed its claims without prejudice and, on January 2, 2014, filed a new complaint in the District Court for Clark County, Nevada.  On December 13, 2013, City of Daytona Beach Police Officers and Firefighters Retirement System voluntarily dismissed its claims without prejudice.  On March 28, 2014, Iron Workers District Council (Philadelphia and Vicinity) Retirement and Pension Plan voluntarily dismissed its claims without prejudice.

 

Our Board of Directors has established a Special Litigation Committee to review the factual allegations and legal claims in these actions.  We cannot predict with any degree of certainty the outcome of these suits or determine the extent of any potential liability or damages.

 

Norman IP Holdings, LLC

 

On September 15, 2011, Norman IP Holdings, LLC (“Norman”) filed a patent infringement complaint (the “2011 Action”) against Lexmark International Corporation (“Lexmark”) and Brother International Corporation (“Brother”), in the United States District Court for the Eastern District of Texas, alleging infringement of United States Patent Nos. 5,592,555 (the “555 patent”); 5,530,597 (the “597 patent”) and 5,502,689 (the “689 patent”) by Lexmark, and infringement of the 555 patent and the 689 patent by Brother.  On January 27, 2012, Norman filed a second amended complaint in the 2011 Action that added us as a defendant, among others, in which it asserted the 555 patent and the 689 patent against us.  On September 21, 2012, Norman served us with preliminary infringement contentions related to the 555 patent and the 689 patent, as well as the 597 patent, which outlined Norman’s claims with respect to certain DISH products.  On February 8, 2013, Norman filed a third amended complaint in the 2011 Action, in which it added claims against us alleging infringement of the 597 patent.  On April 8, 2013, Norman filed a fourth amended complaint in the 2011 Action, in which it added new claims against us alleging infringement of additional DISH products.  On May 1, 2013, Norman filed a fifth amended complaint in the 2011 Action, in which it named Mercedes-Benz USA, LLC; Volkswagen Group of America, Inc.; Xerox Corporation; ZTE (USA) Inc. and ZTE Solutions, Inc. as defendants, in addition to us.  On July 9, 2013, the Court ordered Norman to file a new sixth amended complaint limiting Norman’s claims against us to those specifically referenced in its September 21, 2012 preliminary infringement contentions.  As a result, on July 10, 2013, Norman filed a sixth amended complaint in the 2011 Action, in which it asserted claims against our wholly-owned subsidiary DISH Network L.L.C. replacing us as defendant, alleging that the use of certain Broadcom chipsets in DISH DVR systems infringes the 689 patent.  In addition, Norman withdrew all infringement claims against us regarding the 555 patent and the 597 patent.  On July 12, 2013, we filed a motion to dismiss the 2011 Action, because Norman failed to comply with the Court’s July 9, 2013 order.

 

In addition, on May 10, 2013, Norman filed a separate patent infringement complaint (the “2013 Action”) against us in the United States District Court for the Eastern District of Texas, asserting infringement of the 555, 597 and 689 patents, as well as United States Patent Nos. 5,608,873 (the “873 patent”) and 5,771,394 (the “394 patent”).  The infringement claims asserted in the 2013 Action relate to different DISH products than Norman identified in the 2011 Action.

 

27



Table of Contents

 

DISH NETWORK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

On October 18, 2013, the parties stipulated that Norman will dismiss all of its claims against DISH Network L.L.C. in the 2011 Action, and re-assert them in the 2013 Action.

 

The 689 patent relates to a clock generator capable of shut-down mode and clock generation method, the 555 patent relates to a wireless communications privacy method and system, the 597 patent relates to an interrupt enable circuit that allows devices to exit processes without using a hardware reset, the 873 patent relates to a device and method for providing inter-processor communication in a multi-processor architecture, and the 394 patent relates to a servo loop control apparatus having a master microprocessor and at least one autonomous streamlined signal processor.  Norman is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

Pursuant to a settlement on April 15, 2014, we will pay an immaterial amount to Norman in exchange for a release and dismissal of the 2013 Action and a license for EchoStar and us to certain patents and patent applications.

 

Personalized Media Communications, Inc.

 

During 2008, Personalized Media Communications, Inc. (“PMC”) filed suit against us; EchoStar and Motorola Inc., in the United States District Court for the Eastern District of Texas, alleging infringement of United States Patent Nos. 5,109,414; 4,965,825; 5,233,654; 5,335,277 and 5,887,243, which relate to satellite signal processing.  PMC is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  Subsequently, Motorola Inc. settled with PMC, leaving us and EchoStar as defendants.  On July 18, 2012, pursuant to a Court order, PMC filed a Second Amended Complaint that added Rovi Guides, Inc. (f/k/a/ Gemstar-TV Guide International, Inc.) and TVG-PMC, Inc. (collectively, “Gemstar”) as a party, and added a new claim against all defendants seeking a declaratory judgment as to the scope of Gemstar’s license to the patents in suit, under which we and EchoStar are sublicensees.  No trial date is currently set.

 

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

 

Preservation Technologies, LLC

 

In December 2011, Preservation Technologies, LLC (“Preservation Technologies”) filed suit against us in the United States District Court for the Central District of California.  In the Operative Seventh Amended Complaint, filed on March 22, 2013, Preservation Technologies also names Netflix, Inc.; Hulu, LLC; AT&T Services, Inc.; Cox Communications, Inc.; Disney Online; American Broadcasting Companies, Inc.; Yahoo! Inc.; Wal-Mart Stores, Inc.; Vudu, Inc. and ESPN Internet Ventures as defendants.  Preservation Technologies alleges that our BLOCKBUSTER On Demand, DISH branded pay-TV and DISH Online services and our Hopper and Joey® set-top boxes infringe United States Patent Nos. 5,813,014; 5,832,499; 6,092,080; 6,353,831; 6,574,638; 6,199,060; 5,832,495; 6,549,911; 6,212,527 and 6,477,537.  The patents relate to digital libraries, the management of multimedia assets and the cataloging of multimedia data.  Preservation Technologies is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

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