DIRECTV 2006 Annual Report Download - page 72

THE DIRECTV GROUP, INC.
Recognition of Rebate Related to Long-Term Purchase Agreement. As part of our sale of HNS’
set-top receiver manufacturing operations to Thomson in June 2004, DIRECTV U.S. entered into a
long-term purchase agreement with Thomson for the supply of set-top receivers. As part of this
agreement, as amended, DIRECTV U.S. can earn a $57.0 million rebate from Thomson if Thomson’s
aggregate sales of DIRECTV U.S.’ set-top receivers equal at least $4 billion over the initial five-year
contract term plus an additional one-year optional extension period, or the Contract Term. DIRECTV
U.S. has determined that, based upon projected set-top receiver requirements, it is probable and
reasonably estimable that the minimum purchase requirement will be met for the $57.0 million rebate
during the Contract Term. DIRECTV U.S. bases its probability assessment for meeting the minimum
purchase requirement on its current and future business projections, including its belief that existing
and new subscribers will likely acquire new set-top receivers due to certain technological advances. Any
negative trends in the purchase of set-top receivers for existing and new subscribers may materially
impact its ability to earn the rebate. On a quarterly basis, DIRECTV U.S. assesses whether the rebate
is probable over the Contract Term. If DIRECTV U.S. subsequently determines that it is no longer
probable that it will earn the rebate, DIRECTV U.S. would be required to reverse the amount of the
credit recognized to date as a charge to the Consolidated Statements of Operations and an increase in
the capitalized value of leased set-top receivers at the time such determination is made. See Note 3 of
the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for further
discussion.
ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of accounting changes and new accounting pronouncements see Note 2 of the
Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report, which we
incorporate herein by reference.
SECURITY RATINGS
Debt ratings by the various rating agencies reflect each agency’s opinion of the ability of issuers to
repay debt obligations as they come due. Ratings in the Baa range for Moody’s Investors Service and
the BBB range for Standard & Poor’s Ratings Services, or S&P, generally indicate adequate current
protection of interest payments and principal security, with certain protective elements lacking. Ratings
in the Ba range for Moody’s and the BB range for S&P, generally indicate moderate protection of
interest and principal payments, potentially outweighed by exposure to uncertainties or adverse
conditions. In general, lower ratings result 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 with its
normal practice of providing a rating for only the primary debt issuer. Accordingly, Moody’s provides
security ratings only for DIRECTV U.S., as described below.
On February 2, 2005, S&P affirmed our long-term corporate rating of BB and revised the outlook
to stable from positive.
DIRECTV U.S.
On April 4, 2005, in connection with our April 2005 refinancing transactions, Moody’s assigned a
Ba1 rating to DIRECTV U.S.’ senior secured credit facility. In addition, it affirmed DIRECTV U.S.’
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