DIRECTV 2006 Annual Report Download - page 53

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THE DIRECTV GROUP, INC.
HNS—Set-Top Receiver Manufacturing Operations. On June 22, 2004, we completed the sale of
HNS’ set-top receiver manufacturing operations to Thomson for $250.0 million in cash. In connection
with the sale, DIRECTV U.S. entered into a long-term purchase agreement with Thomson for the
supply of set-top receivers. The proceeds in excess of the book value of the HNS assets sold of
approximately $200 million were deferred and are being recognized as set-top receivers purchased from
Thomson under the contract are activated. In addition, DIRECTV U.S. can earn additional rebates
from Thomson based on aggregate purchases of set-top receivers.
Other Investments. During the year ended December 31, 2005, we sold an equity investment for
$113.1 million in cash, which resulted in us recognizing a net pre-tax loss of $0.6 million in ‘‘Other,
net’’ in our Consolidated Statements of Operations in 2005. During the year ended December 31, 2004,
we sold various equity investments for $510.5 million in cash and recorded a pre-tax gain of
$396.5 million in ‘‘Other, net’’ in our Consolidated Statements of Operations.
We present the financial results for PanAmSat, which formerly comprised our Satellite Services
segment, and HSS, which was formerly a component of our Network Systems segment, in our
Consolidated Statements of Operations as discontinued operations. As a result of the SkyTerra
transaction, subsequent to April 22, 2005, we accounted for our investment in HNS under the equity
method of accounting, and accordingly, recorded our interest in HNS’ net income in ‘‘Other, net’’ in
our Consolidated Statements of Operations until the sale of the remaining interest in January 2006.
For additional information regarding the actions described above, see Note 3 and Note 4 of the
Notes to the Consolidated Financial Statements in Part II, Item 8, of this Annual Report.
Other Developments
In addition to the items described above, the following items had a significant effect on the
comparability of our operating results for the years ended December 31, 2006, 2005 and 2004:
Lease Program. On March 1, 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 lease fee for each set-top receiver leased in lieu of a monthly
mirroring fee. Prior to March 1, 2006, we expensed most set-top receivers provided to new and existing
DIRECTV U.S. subscribers upon activation as a subscriber acquisition or upgrade and retention cost in
the Consolidated Statements of Operations. Subsequent to the introduction of our lease program most
of the set-top receivers provided to new and existing subscribers are leased. DIRECTV U.S. capitalized
$598.6 million of set-top receivers leased to new subscribers and $472.9 million of set-top receivers
leased to existing subscribers during the year ended December 31, 2006 under the new lease program.
Depreciation expense on these capitalized receivers was $147.3 million for the year ended
December 31, 2006.
Accounting Change. Effective January 1, 2004, DIRECTV U.S. changed its method of accounting
for subscriber acquisition, upgrade and retention costs. Previously, we deferred a portion of these costs,
equal to the amount of profit to be earned from the subscriber, typically over the 12 month subscriber
contract, and amortized the deferred amounts to expense over the contract period. We now expense
subscriber acquisition, upgrade and retention costs as incurred as subscribers activate the DIRECTV
service. We determined that expensing such costs was preferable to our prior accounting method after
considering the accounting practices of our competitors and 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. See ‘‘Accounting Changes’’ in Note 2 of the Notes
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