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ANNUAL REPORT 2006
The Art of Perfection DIRECTV

Table of contents

  • Page 1
    The Art of Perfection DIRECTV ANNUAL REPORT 2006

  • Page 2
    Indulge in compelling content

  • Page 3
    Discover innovative services

  • Page 4
    Demand the best HD programming

  • Page 5

  • Page 6
    ... operations, net of taxes Cumulative effect of accounting changes, net of taxes Basic income (loss) per common share Weighted average number of common shares outstanding (in millions) Cash paid for property, equipment and satellites As of December 31, Cash and cash equivalents Total current...

  • Page 7
    ... cost to acquire new subscribers, commonly known as SAC, at $641 per subscriber despite adding nearly twice as many HD and DVR (digital video recorder) customers compared to the prior year. Reï¬,ecting our unparalleled programming, DIRECTV U.S. average monthly subscriber revenue, or ARPU, increased...

  • Page 8
    ... times as many as we employed in 2003. Introducing Compelling Products and Services Delivering the best television experience is the key to our success. The recent launch of three new set-top receivers - a DVR, an HD receiver and an HD DVR - provides DIRECTV with a solid technology platform to build...

  • Page 9
    ... a broadband connection. Customers with this receiver will also be able to access pictures, music and home videos on their TVs directly from Intel® Viiv™ technology-based PCs in their home. This spring, we will launch DIRECTV® Sat-Go, the world's first fully integrated, portable satellite TV...

  • Page 10
    ... team will bring to our company. We have a seasoned Board of Directors to help guide our efforts, a strong management team to steer DIRECTV toward excellence and a committed group of employees to execute efficiently on our goals. DIRECTV has the right assets, the right people and the right products...

  • Page 11
    ... is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes អ No ፤ As of June 30, 2006, the aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates was $12,507,967,907. This amount excludes Fox Entertainment Group, Inc.'s approximately...

  • Page 12
    ... 7A. Quantitative and Qualitative Disclosures About Market Risk ...Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm ...Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004 ...Consolidated Balance Sheets...

  • Page 13
    ... our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties including, without limitation, risk factors discussed in more detail in Item 1A of this Annual Report, which could cause actual results to...

  • Page 14
    ..., selling and/or distributing digital entertainment programming via satellite to residential and commercial subscribers. • DIRECTV U.S. DIRECTV Holdings LLC and its subsidiaries, which we refer to as DIRECTV U.S., is the largest provider of direct-to-home, or DTH, digital television services and...

  • Page 15
    ...as ten national HD television channels. With the expected launch of two additional satellites, we expect to have the most HD capacity in the industry. We also provide premium professional and collegiate sports programming such as the NFL SUNDAY TICKET↩ package, which allows subscribers to view the...

  • Page 16
    ... new subscribers. • Valuable Orbital Slots and Satellite-Based Technology. We believe our regulatory authorization to use desirable orbital slots and broadcast spectrum helps sustain our position as one of the leading companies in the MVPD industry. The Federal Communications Commission, or FCC...

  • Page 17
    ... DVR and DIRECTV Plus↦ HD-DVR. We expect the service, named DIRECTV On-Demand, to have over 1,000 offerings of top programming from the major broadcast and cable networks, as well as movies that can be accessed from a customer's receiver, and programming that will be downloaded through a broadband...

  • Page 18
    ... use set-top receivers that incorporate DVR and HD technology. In 2005, we introduced our own DVR, the DIRECTV Plus DVR, that provides subscribers with advanced features including interactive services and increased storage capacity. In late 2005, we introduced a new HD receiver and dish antenna and...

  • Page 19
    ... satellites will provide us with increased capability for local and national HD channels, as well as capacity for new interactive and enhanced services and standard-definition programming. Once launched, these satellites will operate from the Ka-Band orbital locations. The third satellite, DIRECTV...

  • Page 20
    ... as digital cable, HD local channels, broadband Internet access and telephony services. Cable companies bundle these services with their basic services, offering discounts and providing one bill to the consumer. • Other Direct Broadcast Satellite and Direct-To-Home Satellite System Operators. We...

  • Page 21
    ... both free and pay-per-view content, and Starz Entertainment Group LLC, a provider of movie services to MVPD providers, launched an Internet-based movie subscription service. In addition, Google recently purchased YouTube, a popular video sharing website. In the summer of 2006, it was reported that...

  • Page 22
    ... DLA LLC's Plan of Reorganization was approved and became effective. As a result of the restructuring and related transactions, DLA LLC eliminated indebtedness, acquired full ownership of the principal local operating companies that provided DIRECTV branded services in Latin America and Puerto Rico...

  • Page 23
    ... to launch DVRs in its territories of operation, and Sky Brazil is also launching a new DVR that will improve on a prior model that was previously distributed in limited numbers. • Enhanced Programming Features. We believe that we can differentiate our service from our competitors through the use...

  • Page 24
    ... Brazil and has announced plans to launch in Colombia in 2007. To date it has offered DTH programming services only to users of voice telephony and broadband services provided by Telefonica's affiliates in Latin America. Telefonica has entered these markets by offering packages of a limited number...

  • Page 25
    ... industry or our business. FCC Regulation Under the Communications Act. The Communications Act gives the FCC broad authority to regulate the operations of our company. The ownership and operation of our DBS/DTH system is regulated by the FCC primarily for: • the licensing of DBS and DTH satellites...

  • Page 26
    ... FCC's sport blackout requirements, which apply to all distant network signals, may require costly upgrades to our system. Further, an FCC order interpreting the requirement that satellite carriers retransmit local digital signals with ''equivalent bandwidth'' of significantly viewed digital signals...

  • Page 27
    ... used for new or additional local or national programming services. • Public Interest Requirement. Under a requirement of the Communications Act, the FCC has imposed certain public interest obligations on DBS operators, including a requirement that such providers set aside four percent of channel...

  • Page 28
    ... Co-Existence With Other Satellite and Terrestrial Services and Service Providers in the MVPD Industry. The FCC has adopted rules to allow non-geostationary orbit fixed satellite services to operate on a co-primary basis in the same frequency band as the one used by direct broadcast satellite and...

  • Page 29
    ... also apply to the FCC for a waiver of FCC rules if there are other local concerns of a special or unusual nature. In addition, a number of state and local governments have attempted to impose consumer protection, customer service and other types of regulation on DBS operators. Also, while Congress...

  • Page 30
    ...-free to third parties for use in support of DIRECTV U.S.' business. We actively protect our important patents and trademarks against unauthorized or improper use by third parties. ENVIRONMENTAL REGULATION We are subject to the requirements of federal, state, local and foreign environmental laws...

  • Page 31
    ... jeopardize a satellite authorization that is conditioned on timely construction and launch of the satellite. The satellite that DTVLA leases to provide the Sky Brazil service has a shortened useful life due to a failure of its primary propulsion system. If the operator of this satellite is unable...

  • Page 32
    ...the power systems or control systems of the satellites and general failures resulting from operating satellites in the harsh space environment. We work closely with our satellite manufacturers to determine and eliminate the potential causes of anomalies in new satellites and provide for redundancies...

  • Page 33
    ... are increasing. We compete in the MVPD industry against cable television, RBOCs, wireless companies and other land-based and satellite-based system operators with service offerings including video, audio and interactive programming, data and other entertainment services and telephony service. Some...

  • Page 34
    ...able to increase our satellite capacity, offer a significant level of new services in existing markets in which we compete or expand to additional markets as may be necessary to compete effectively. Some of these RBOCs also sell the DIRECTV service as a bundle with their voice and data services. The...

  • Page 35
    ... programming, including sports programming, from the signals of certain distant stations. Compliance with those FCC requirements, may require costly upgrades to our broadcast system. Further, a recent FCC order interpreting the requirement that satellite carriers retransmit local digital signals...

  • Page 36
    ...in turn cause subscribers to terminate their subscriptions or potential new subscribers to refrain from subscribing to our service. Furthermore, we may be unable to pass programming cost increases on to our subscribers, which could have a material adverse effect on our earnings or cash flow. The FCC...

  • Page 37
    ... with new entrants in the market for video services. Satellite programming signals have been stolen and may be stolen in the future, which could result in lost revenues and would cause us to incur incremental operating costs that do not result in subscriber acquisition. The delivery of subscription...

  • Page 38
    ... access technology, our revenue and our ability to contract for video and audio services provided by programmers could be materially adversely affected. In addition, our operating costs could increase if we attempt to implement additional measures to combat signal theft. Our business relies...

  • Page 39
    ... require a satellite system operator to reduce power, avoid operating on certain frequencies, relocate its satellite to another orbital location and/or otherwise modify planned or existing operations. For example, the FCC has conditionally granted Spectrum Five authority to provide DBS service using...

  • Page 40
    ...with doing business internationally, which include political instability, economic instability, and foreign currency exchange rate volatility. All of DTVLA's operating companies are located outside the continental United States. DTVLA operates and has subscribers located throughout Latin America and...

  • Page 41
    ... may differ from ours. As of December 31, 2006, News Corporation held approximately 38.3% of the issued and outstanding shares of our common stock. K. Rupert Murdoch, Chairman and Chief Executive of News Corporation, is the Chairman of our Board of Directors, and Chase Carey, who is currently...

  • Page 42
    ... locations operating in 17 cities in eight countries outside the United States. At such date, we owned 2.3 million square feet of space and leased an additional 1.7 million square feet of space. The major locations of the DIRECTV U.S. segment include six administrative offices, two broadcast centers...

  • Page 43
    ...to such actions is not expected to materially affect our financial position, results of operations or liquidity. (b) No previous reported legal proceedings were terminated during the fourth quarter ended December 31, 2006. *** ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. *** 32

  • Page 44
    ... outstanding at December 31, 2006. Except for a $275 million special cash dividend paid to General Motors, or GM, in connection with our split-off from GM in 2003, no dividends on our common stock have been declared by our Board of Directors for more than five years. We have no current plans to pay...

  • Page 45
    ... for the three months ended December 31, 2006 is as follows: Maximum Total Number of Dollar Shares Purchased Value that May as Part of Yet Be Total Number Publicly Purchased of Shares Average Price Announced Plans Under the Plans Purchased Paid Per Share or Programs or Programs (Amounts in Millions...

  • Page 46
    ... (Loss) Per Common Share: Income (loss) from continuing operations before cumulative effect of accounting changes ...Weighted average number of common shares outstanding (in millions): Basic ...Diluted ...Consolidated Balance Sheet Data: Total Assets ...Long-Term Debt ...Preferred Stock ...Total...

  • Page 47
    THE DIRECTV GROUP , INC. America entities. See the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the accounting change in 2004 and other significant transactions during ...

  • Page 48
    ... effect of accounting changes, net of taxes ...Net Income (Loss) ...Weighted average number of common shares outstanding (in millions) Basic ...Diluted ... $ $ $ $ $ $ $ $ $ December 31, 2006 2005 (Dollars in Millions) Consolidated Balance Sheet Data: Cash and cash equivalents ...Total...

  • Page 49
    ... Our management and our Board of Directors use free cash flow to evaluate the cash generated by our current subscriber base, net of capital expenditures, for the purpose of allocating resources to activities such as adding new subscribers, retaining and upgrading existing subscribers, for additional...

  • Page 50
    ... $ (142.0) 160.2 187.9 141.5 $ 45.9 Operating Profit Margin ...Operating Profit Before Depreciation and Amortization-Margin . Segment Assets ...Capital Expenditures (1) ...DIRECTV Latin America Revenues ...% of Total Revenues ...Operating Profit (Loss) ...Add: Depreciation and amortization expense...

  • Page 51
    ... Brazil's results from the date of acquisition. We also accounted for the reduction of our interest in GLB resulting from the merger as a partial sale, which resulted in our recording of a one-time pre-tax gain during the year ended December 31, 2006 of approximately $60.7 million in ''(Gain) loss...

  • Page 52
    ... years. Divestitures HNS-SkyTerra. On April 22, 2005, we completed the sale of a 50% interest in Hughes Network Systems LLC, or HNS LLC, which owned substantially all of the net assets formerly held by HNS, to SkyTerra Communications, Inc. We received total proceeds of $257.4 million, including cash...

  • Page 53
    ... 2006, DIRECTV U.S. introduced a new set-top receiver lease program. Under this program, set-top receivers leased to new and existing subscribers are capitalized and depreciated over their estimated useful lives of three years. DIRECTV U.S. subscribers who lease their set-top receivers pay a monthly...

  • Page 54
    ... fees we charge subscribers for subscriptions to basic and premium channel programming, pay-per-view programming, seasonal and live sporting events, DVR and HD programming fees. We also earn revenues from monthly fees that we charge subscribers with multiple non-leased set-top receivers (which we...

  • Page 55
    ... costs for legal, administrative services, finance, marketing and information technology. These costs also include expenses for bad debt and other operating expenses, such as legal settlements, and gains or losses from the sale or disposal of fixed assets. Average Monthly Revenue Per Subscriber...

  • Page 56
    ... of upgrade and retention and subscriber acquisition costs capitalized for new subscribers under the lease program is also expected to be higher due to the full year effect of the lease program and an increase in the penetration of advanced set-top boxes. Free Cash Flow. In 2006, The DIRECTV Group...

  • Page 57
    ... decrease in our total operating costs and expenses was primarily due to the $272.2 million decrease in operating costs and expenses at the Network Systems segment resulting from the divestiture of the HNS business partially offset by a $173.2 million increase at DIRECTV Latin America. We discuss...

  • Page 58
    ... offset by equity losses from other unconsolidated affiliates. The $14.4 million net pre-tax gain from the sale of investments for 2006 included a $13.5 million gain recorded on the sale of our remaining 50% interest in HNS LLC to SkyTerra and a $0.9 million gain related to the sale of other equity...

  • Page 59
    ... larger subscriber base. The 5.9% increase in ARPU to $73.74 resulted primarily from price increases on programming packages and an increase in the number of subscribers paying mirroring, lease, DVR and HD programming fees. Total Operating Costs and Expenses. DIRECTV U.S.' total operating costs and...

  • Page 60
    ... subscriber base and an increase in service calls and costs incurred at our call centers to support the increase in the number of subscribers with advanced products. Broadcast operations expenses increased as a result of the costs to support new HD local channel markets and launch of new advanced...

  • Page 61
    ... provides operating results and a summary of key subscriber data for the DIRECTV Latin America segment: Change 2006 2005 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues ...Operating Profit Before Depreciation & Amortization ...Operating Profit (Loss) ...Other Data: Total number...

  • Page 62
    ... our segments in more detail below. Total Operating Costs and Expenses. by segment: Operating Costs and Expenses By Segment: The following table presents our operating costs and expenses Change 2005 2004 $ (Dollars in Millions) % DIRECTV U.S...DIRECTV Latin America Network Systems ...Corporate and...

  • Page 63
    ...of accrued foreign withholding taxes resulting from a favorable tax ruling in Mexico. Income (Loss) from Discontinued Operations. Income (loss) from discontinued operations, net of taxes, which includes the results of operations of discontinued businesses and the loss recorded for the disposition of...

  • Page 64
    THE DIRECTV GROUP , INC. The $50.8 million in income from discontinued operations relates to the PanAmSat and HSS businesses sold in 2004. Loss on sale of discontinued operations of $633.1 million in 2004 includes the loss recorded for the sale of PanAmSat, net of taxes, of $723.7 million, partially...

  • Page 65
    ... we purchased in the second half of 2004. The 4.0% increase in ARPU to $69.61 resulted primarily from price increases on programming packages and higher mirroring fees from an increase in the average number of set-top receivers per subscriber. Total Operating Costs and Expenses. DIRECTV U.S. total...

  • Page 66
    ... related costs. The improvement in operating loss was due to the increase in operating profit before depreciation and amortization and reduced depreciation principally reflecting the effect of a fourth quarter 2004 write-down of assets in Mexico. Network Systems Segment The following table provides...

  • Page 67
    ... by a significant increase in cash paid for income taxes due mostly to the utilization of our net operating loss carrforwards in 2006 and an increase in capital expenditures for leased subscriber equipment and broadcast equipment to support the launch of new local HD channels. Through December 31...

  • Page 68
    ... with the assignment of the Sky Brazil bank loan to a wholly-owned subsidiary of The DIRECTV Group by the lending banks. We expect to fund our cash requirements and our existing business plan using our available cash balances, and cash provided by operations. Additional borrowings, which may include...

  • Page 69
    ... minimum payment requirements if the actual number of subscribers subscribing to the related programming exceeds the minimum amounts. Satellite construction contracts typically exclude the cost to insure and launch satellites. Service contract commitments include minimum commitments for the purchase...

  • Page 70
    ... over the contract period. Management evaluates estimated total contract revenues at least annually. Estimates of forecasted revenues rely on assumptions regarding the number of subscribers to a given sporting events package and the estimated package price throughout the contract. While we base our...

  • Page 71
    ... change over time. As a result, changes in estimated future cash flows and/or changes in discount rates could result in a write-down of goodwill or intangible assets with indefinite lives in a future period which could be material to our consolidated results of operations and financial position. 60

  • Page 72
    ...in higher borrowing costs. A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. The Company Effective January 24, 2005, Moody's no longer provides a security rating for us, consistent...

  • Page 73
    ... 8 of this Annual Report. On September 22, 2006, Moody's changed DIRECTV U.S.' senior secured rating from Ba1 to Baa3 and DIRECTV U.S.' senior unsecured rating from Ba2 to Ba3 in connection with the implementation of its new rating methodology. The DIRECTV U.S.' Corporate Family Rating was unchanged...

  • Page 74
    ...of future events or losses. General Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and changes in the market value of our equity investments. We manage our exposure to these market risks through internally established...

  • Page 75
    ... DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of The DIRECTV Group, Inc. El Segundo, California We have audited the accompanying consolidated balance sheets of The DIRECTV Group, Inc. (the ''Company'') as of December 31, 2006 and...

  • Page 76
    ... (loss) from continuing operations before cumulative effect of accounting changes ...Income (loss) from discontinued operations, net of taxes ...Cumulative effect of accounting changes, net of taxes ...Net Income (Loss) ...Weighted average number of common shares outstanding (in millions): Basic...

  • Page 77
    ... 31, 2006 2005 (Dollars in Millions, Except Share Data) ASSETS Current Assets Cash and cash equivalents ...Short-term investments ...Accounts and notes receivable, net of allowances of $66.4 and Inventories ...Deferred income taxes ...Prepaid expenses and other ...Total Current Assets . Satellites...

  • Page 78
    ...Stock options exercised and restricted stock units vested and distributed ...5,217,530 Share-based compensation expense ...Other ...Minimum pension liability adjustment, net of tax ...Foreign currency translation adjustments . Unrealized gains (losses) on securities, net of tax: Unrealized holding...

  • Page 79
    ... affiliates ...Net (gain) loss from sale of investments ...Loss on disposal of fixed assets ...Share-based compensation expense ...Write-off of debt issuance costs ...Deferred income taxes and other ...Accounts receivable credited against Pegasus purchase price ...Change in other operating...

  • Page 80
    ... in Sky Brazil and Sky Mexico during 2006 and Note 20 regarding the January 2007 acquisition of the 14% minority interest in DLA LLC for $325.0 million in cash. Through April 22, 2005 we also operated the Network Systems segment, which was a provider of satellite-based private business networks and...

  • Page 81
    ... the 12 month service period, we are reimbursed for the unearned portion of the commission by the retailer or dealer and record a decrease to subscriber acquisition costs. DIRECTV U.S. implemented a lease program on March 1, 2006, after which most set-top receivers provided to new subscribers are...

  • Page 82
    ... a new residence), multiple set-top receiver offers, digital video recorder, or DVR, high-definition, or HD, local channel upgrade programs and other similar initiatives, and third party commissions we incur for the sale of additional set-top receivers to existing subscribers. We expense these costs...

  • Page 83
    ... companies. We carry non-marketable equity securities at cost. We consider marketable equity securities available-for-sale and they are carried at current fair value based on quoted market prices with unrealized gains or losses (excluding other-than-temporary losses), net of taxes, reported...

  • Page 84
    ... received from programming content providers for marketing support, were $232.7 million in 2006, $199.0 million in 2005 and $170.1 million in 2004. Market Concentrations and Credit Risk We sell programming services and extend credit, in amounts generally not exceeding $100 each, to a large number...

  • Page 85
    ... loss ... $ - $ 0.3 $(0.7) (0.1) $(0.8) $ 0.5 $ 0.3 $ (3.3) (24.7) $(28.0) $ 0.5 $ (2.6) (24.6) $(27.2) $ - Share-Based Payment. On January 1, 2006, we adopted SFAS No. 123R which replaces SFAS No. 123, ''Accounting for Stock-Based Compensation,'' and supersedes Accounting Principles Board...

  • Page 86
    ... companies within similar industries and the added clarity and ease of understanding our reported results for investors. We continue to capitalize set-top receivers provided under our lease programs. As a result of the change, on January 1, 2004, we expensed our deferred subscriber acquisition cost...

  • Page 87
    ...to-home satellite platforms of DIRECTV and SKY in Latin America into a single platform in each of the major territories in the region. Brazil. On August 23, 2006, we completed the merger of our Brazil business, Galaxy Brasil Ltda., or GLB, with and into Sky Brazil, and completed the purchase of News...

  • Page 88
    ....2 624.1 492.3 343.3 0.25 0.25 Mexico. In Mexico, also as part of the Sky Transactions, DTVLA's local operating company, DIRECTV Mexico, sold its subscriber list to Sky Mexico and, after completing the transfer of its subscribers to Sky Mexico, ceased providing services in the third quarter of 2005...

  • Page 89
    ...At completion of the transaction in February 2006, we recorded an additional gain of $57.0 million in ''(Gain) loss from disposition of businesses and impairment charges, net'' in our Consolidated Statements of Operations when DLA LLC received an equity interest in Sky Mexico resulting from the sale...

  • Page 90
    ... capital adjustment from the prior transaction, in exchange for $110.0 million in cash, which resulted in our recording in the first quarter of 2006 a gain of $13.5 million related to the sale in ''Other, net'' in the Consolidated Statements of Operations. Hughes Network Systems-Set-Top Receiver...

  • Page 91
    ... Profit (Loss) ...PanAmSat $12,956.7 693.4 $10,437.9 (340.9) In 2004, we sold our approximately 80.4% interest in PanAmSat for approximately $2.64 billion in cash. The total loss on the sale of PanAmSat of $723.7 million, net of taxes, for the year ended December 31, 2004 includes direct costs...

  • Page 92
    ... discontinued operations, net of taxes ...Basic and Diluted Earnings (Loss) Per Common Share: Income from discontinued operations, net of taxes ...Gain (loss) on sale of discontinued operations, net of taxes ...Income (loss) from discontinued operations, net of taxes ...Severance and Related Costs...

  • Page 93
    ...of our SPACEWAY assets for DIRECTV U.S. HD programming, which included two satellites, SPACEWAY 1 and SPACEWAY 2, that were nearing completion, and related ground segment equipment and systems. Our decision to no longer use these assets for the SPACEWAY broadband service triggered an impairment test...

  • Page 94
    ...upgrade and retention cost in the Consolidated Statements of Operations. Now, with the introduction of the lease program, most set-top receivers provided to new and existing subscribers are leased. During the year ended December 31, 2006, DIRECTV U.S. capitalized $598.6 million for set-top receivers...

  • Page 95
    ... carrying amounts of goodwill by reporting unit for the years ended December 31, 2006 and 2005 were as follows: DIRECTV DIRECTV U.S. Latin America (Dollars in Millions) Total Balance as of January 1, 2005 ...Additions and other ...Balance as of December 31, 2005 ...Sky Transactions ...Balance as of...

  • Page 96
    ... goodwill of $273.8 million. During the year ended December 31, 2006, we recorded equity in earnings of $18.1 million from our investment in Sky Mexico, which is net of amortization of $22.3 million. Other Investments We had investments in marketable equity securities of $36.7 million as of December...

  • Page 97
    ... FINANCIAL STATEMENTS -(continued) Note 9: Debt The following table sets forth our outstanding debt: Interest Rates at December 31, 2006 December 31, 2006 2005 (Dollars in Millions) 8.375% senior notes due in 2013 6.375% senior notes due in 2015 Credit facility ...Sky Brazil bank loan ...Other debt...

  • Page 98
    ... June 15, 2005, DIRECTV Holdings and DIRECTV Financing issued $1,000.0 million of 6.375% senior notes. We used a portion of the proceeds from the transaction to repay $500.0 million of the Term Loan B portion of our senior secured credit facility and to pay related financing costs. The repayment of...

  • Page 99
    ... secure our letter of credit obligations. Restrictions on the cash will be removed as the letters of credit expire. Note 10: Income Taxes We base our income tax expense or benefit on reported ''Income (Loss) From Continuing Operations Before Income Taxes, Minority Interests and Cumulative Effect...

  • Page 100
    ... using the U.S. federal statutory income tax rate for the reasons set forth in the following table for the years ended December 31: 2006 2005 2004 (Dollars in Millions) Expected (expense) benefit at U.S. federal statutory income tax rate U.S. state and local income tax (expense) benefit ...Tax...

  • Page 101
    ... case of net operating losses and similar tax attributes, the amount of compensation payable to GM is based on a 24% rate. Our U.S. federal income tax returns have been examined and all disputes between us and the Internal Revenue Service have been fully resolved for all tax years through 2000. The...

  • Page 102
    ...Benefits Benefits 2006 2005 2006 2005 (Dollars in Millions) Change in Net Benefit Obligation Net benefit obligation at beginning Service cost ...Interest cost ...Plan participants' contributions ...Special termination benefits ...Actuarial loss (gain) ...Plan amendments ...Benefits paid ... of year...

  • Page 103
    THE DIRECTV GROUP , INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) We estimate that the following amounts will be amortized from accumulated other comprehensive income into net periodic benefit cost during the year ending December 31, 2007: Other Postretirement Pension Benefits ...

  • Page 104
    ... used to determine net periodic benefit cost for the years ended December 31: Pension Benefits 2006 2005 2004 Other Postretirement Benefits 2006 2005 2004 Discount rate-Qualified Plan ...Discount rate-Non-Qualified Plan ...Expected long-term return on plan assets Rate of compensation increase...

  • Page 105
    ...expected return on plan assets would have had the effect of increasing our 2006 pension expense by $1.0 million. The following table provides assumed health care costs trend rates: 2006 2005 Health care cost trend rate assumed for next year ...Rate to which the cost trend rate is assumed to decline...

  • Page 106
    ... Paid-In Capital We are a publicly-traded company with our common stock listed as ''DTV'' on the New York Stock Exchange. Our certificate of incorporation provides for the following capital stock: common stock, par value $0.01 per share, 3,000,000,000 shares authorized; Class B common stock...

  • Page 107
    ... Directors authorized the repurchase of an additional $1.0 billion of our common stock. This program may be suspended or discontinued at any time. The source of funds for the purchases is our existing cash on hand and cash from operations. Purchases are made in the open market, through block trades...

  • Page 108
    ...Share We compute Basic Earnings (Loss) Per Common Share, or EPS, by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS considers the effect of common equivalent shares, which consist entirely of common stock options and restricted stock...

  • Page 109
    ... our Board of Directors. We issue new shares of our common stock when restricted stock units are earned and when stock options are exercised. Restricted Stock Units The Compensation Committee has granted restricted stock units under our stock plans to certain of our employees and executives. Annual...

  • Page 110
    .... Stock Options The Compensation Committee has also granted stock options to acquire our common stock under our stock plans to certain of our employees and executives. The exercise price of options granted is equal to at least 100% of the fair market value of the common stock on the date the options...

  • Page 111
    ...-free interest rate ...Expected option life (in years) ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... $ 5.82 18.80 30.0% 3.7% 5.6 The following table presents amounts recorded related to share-based compensation...

  • Page 112
    ...; purchase of system access products, set-top receiver software and support services; sale of advertising space; purchase of employee services; and use of facilities. The majority of payments under contractual arrangements with News Corporation entities relate to multi-year programming contracts...

  • Page 113
    ...instruments outstanding. Note 19: Segment Reporting Our two continuing business segments, DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location, are engaged in acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to...

  • Page 114
    ...) Network Systems segment. Corporate and Other includes the corporate office, eliminations and other entities. Selected information for our operating segments is reported as follows: DIRECTV U. S. DIRECTV Latin Network Corporate America Systems and Other (Dollars in Millions) Total 2006 External...

  • Page 115
    THE DIRECTV GROUP , INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) as determined in accordance with GAAP. Our management and Board of Directors use Operating Profit (Loss) Before Depreciation and Amortization to evaluate the operating performance of our company and our business ...

  • Page 116
    ... is grouped by its physical location. Years Ended and As of December 31, 2006 2005 2004 Net Property Net Property Net Property Revenues & Satellites Revenues & Satellites Revenues & Satellites (Dollars in Millions) North America United States ...$13,907.2 Canada and Mexico ...- Total North America...

  • Page 117
    ...December 31, 2006, our minimum payments under agreements to purchase broadcast programming, and the purchase of services that we have outsourced to third parties, such as billing services, and satellite telemetry, tracking and control and satellite construction and launch contracts aggregated $4,613...

  • Page 118
    ... will not have a material effect on our consolidated results of operations or financial position. Satellites We may purchase in-orbit and launch insurance to mitigate the potential financial impact of satellite launch and in-orbit failures if the premium costs are considered economic relative to...

  • Page 119
    ... $11.3 million at December 31, 2006. In connection with the Sky Brazil transaction, Globo was granted the right, until January 2014, to exchange shares in Sky Brazil for cash or common shares of the company. Upon exercising the exchange rights, the value of Sky Brazil shares will be determined by an...

  • Page 120
    ... (loss) from continuing operations before income taxes, minority interests and cumulative effect of accounting changes'' are the following: for the third quarter of 2006 is a $60.7 million gain related to the partial sale of our interest in GLB as part of the Sky Transactions; for 2005 we recorded...

  • Page 121
    ... the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on the evaluation, our principal executive officers and our financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2006. There has been no change in our internal control...

  • Page 122
    ...audit report on management's assessment of internal control over financial reporting, which appears below. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting To the Board of Directors and Stockholders of The DIRECTV Group, Inc. El Segundo, California...

  • Page 123
    THE DIRECTV GROUP , INC. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by ...

  • Page 124
    ... No. 8 to Schedule 13D of PanAmSat Corporation filed by The DIRECTV Group, Inc. on April 22, 2004) Stock Purchase Agreement, dated as of April 9, 2003, by and among The News Corporation Limited, Hughes Electronics Corporation and General Motors Corporation (incorporated by reference to Exhibit 99...

  • Page 125
    ... 28, 2003, by and among DIRECTV Holdings LLC and DIRECTV Financing Co., Inc., as Issuers, DIRECTV, Inc., USSB II, Inc., DIRECTV Customer Services, Inc., DIRECTV Merchandising, Inc., DIRECTV Enterprises, LLC, DIRECTV Operations, LLC, as Guarantors, and The Bank of New York as Trustee (incorporated by...

  • Page 126
    ... Cash Bonus Plan (incorporated by reference to Annex C to the Definitive Proxy Statement on Schedule 14A of The DIRECTV Group, Inc. filed April 16, 2004) Brazil Business Combination Agreement, dated as October 8, 2004, by and among Globo ˜es e Participa¸ ˜es S.A., The News Corporation Limited...

  • Page 127
    ...by and between The News Corporation Limited and The DIRECTV Group, Inc. (incorporated by reference to Exhibit 10.3 to the October 15, 2004 8-K) Latin America Purchase Agreement, dated as of October 8, 2004, by and between Liberty Media International, Inc. and The DIRECTV Group, Inc. (incorporated by...

  • Page 128
    ... stock unit awards to applicable executive officers (incorporated by reference to Exhibit 10.2 to the Form 8-K of The DIRECTV Group, Inc. filed February 15, 2005) Employee Matters Agreement, dated as of April 9, 2003, by and between Hughes Electronics Corporation and The News Corporation Limited...

  • Page 129
    ... of 2007 Equity program to applicable executive officers (incorporated by reference to Exhibit 10.1 of the February 12, 2007 8-K) Second Amendment to the Hughes Electronics Corporation Executive Deferred Compensation Plan dated as of December 31, 2006 First Amendment to Services Agreement by and...

  • Page 130
    ... to Exhibit 99.2 to the March 2, 2004 8-K) Finding of Facts, Conclusions of Law and Order Confirming First Amended Plan of Reorganization of DIRECTV Latin America, LLC, Under Chapter 11 of the Bankruptcy Code Dated January 7, 2004: Docket No. 529 (incorporated by reference to Exhibit 99.1 to...

  • Page 131
    ... OF THE REGISTRANT CONDENSED STATEMENTS OF OPERATIONS (Parent Company Only) Years Ended December 31, 2006 2005 2004 (Dollars in Millions) Operating Costs and Expenses General and administrative expenses ...Total Operating Costs and Expenses ...Operating Loss ...Interest income ...Interest expense...

  • Page 132
    ... Common shares repurchased and retired ...Stock options exercised ...Excess tax benefit from share-based compensation ...Net Cash Provided by (Used in) Financing Activities ...Net increase in cash and cash equivalents ...Cash and cash equivalents at beginning of the year ...Cash and cash equivalents...

  • Page 133
    ...Holdings LLC credit facility limit DIRECTV Holdings LLC and its respective subsidiaries from transferring funds to us in the form of cash dividends, loans or advances. In the parent company only financial statements, we state our investments in subsidiaries at cost, net of equity in earnings (losses...

  • Page 134
    ...to costs and expenses Additions charged to other accounts Deductions (Dollars in Millions) Description Balance at beginning of year Balance at end of year For the Year Ended December 31, 2006 Allowances Deducted from Assets Accounts and notes receivable (for doubtful receivables) ...For the Year...

  • Page 135
    ...of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. THE DIRECTV GROUP, INC. (Registrant) Date: February 28, 2007 By: /s/ MICHAEL W. PALKOVIC Michael W. Palkovic (Executive Vice President and Chief...

  • Page 136
    THE DIRECTV GROUP , INC. Signature Title /s/ CHARLES R. LEE (Charles R. Lee) /s/ PETER A. LUND (Peter A. Lund) /s/ HAIM SABAN (Haim Saban) Director Director Director *** 125

  • Page 137
    ... and The Bank of New York, as trustee Second Amendment to the Hughes Electronics Corporation Executive Deferred Compensation Plan dated as of December 31, 2006 First Amendment to Services Agreement by and between News Corporation and The DIRECTV Group, Inc. dated December 22, 2006 Subsidiaries of...

  • Page 138
    ...information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 28, 2007 3. 4. /s/ CHASE CAREY Chase Carey Director, President and Chief Executive Officer

  • Page 139
    ...Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 28, 2007 3. 4. /s/ MICHAEL W. PALKOVIC Michael W. Palkovic Executive Vice President and Chief Financial Officer

  • Page 140
    ...connection with the Annual Report of The DIRECTV Group, Inc. (the ''Corporation'') on Form 10-K for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the ''Report''), I, Chase Carey, Director, President and Chief Executive Officer of the...

  • Page 141
    ... with the Annual Report of The DIRECTV Group, Inc. (the ''Corporation'') on Form 10-K for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the ''Report''), I, Michael W. Palkovic, Executive Vice President and Chief Financial Officer of...

  • Page 142
    ... companies within the S&P 500 Broadcasting and Cable TV Index are included in the industry peer group identified for evaluation of executive compensation by our Compensation Committee. It is our intent to use the S&P 500 Broadcasting and Cable TV Index for comparison purposes in future disclosures...

  • Page 143
    ... activities), to compare DIRECTV U.S.' operating performance to other communications, entertainment and media companies. We believe that investors also use current and projected cash flow before interest and taxes to determine the ability of our current and projected subscriber base to fund required...

  • Page 144
    ... and Chief Technology Officer Patrick T. Doyle Senior Vice President, Treasurer, Controller and Chief Accounting Officer Corporate Information Corporate Office 2230 East Imperial Highway El Segundo, CA 90245-0956 (310) 964-5000 Executive Offices 6th Floor 1211 Avenue of the Americas New York...

  • Page 145
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