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DIRECTV - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following management's discussion and analysis should be read in conjunction with our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2013 filed with the SEC on June 30, 2014, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 12, 2014, and all of our other filings, including Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report. This Quarterly Report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by the use of statements that include phrases such as we "believe", "expect", "anticipate", "intend", "plan", "foresee", "project" or other similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make regarding our outlook for 2014 financial results, liquidity and capital resources. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include economic, business, competitive, national or global political, market and regulatory conditions and the following, each of which is described in more detail in our Annual Report on Form 10-K/A for the year ended December 31, 2013: º • º Levels of competition are increasing. º • º We depend on others to produce programming and programming costs are increasing. º • º Increased subscriber churn or subscriber upgrade and retention costs could materially adversely affect our financial performance. º • º Our subscriber acquisition costs could materially increase. º • º DIRECTV Latin America is subject to various additional risks associated with doing business internationally, which include political and economic instability and foreign currency exchange rate volatility and controls. º • º Our ability to keep pace with technological developments is uncertain. º • º Our business relies on intellectual property, some of which is owned by third parties, and we may inadvertently infringe patents and proprietary rights of others. º • º Construction or launch delays on satellites could materially adversely affect our revenues and earnings. º • º Our satellites are subject to significant launch and operational risks. º • º The loss of one or more satellites, none of which is currently insured, could materially adversely affect our business and earnings. 47-------------------------------------------------------------------------------- Table of Contents DIRECTV º • º 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. º • º The ability to maintain FCC licenses and other regulatory approvals is critical to our business. º • º We may have an indemnity obligation to Liberty Media, which is not limited in amount or subject to any cap, that could be triggered if parts of the 2009 transaction between us and Liberty Media or Liberty Media's 2008 transaction with News Corporation are treated as a taxable transaction. º • º We rely on network and information systems and other technology and a disruption or failure of such networks, systems or technology as a result of misappropriation of data or other malfeasance, as well as outages, natural disasters, accidental releases of information or similar events, may disrupt our business. º • º We face risks arising from the outcome of various legal proceedings. º • º Our strategic initiatives may not be successfully implemented, may not elicit the expected customer response in the market and may result in competitive reactions. º • º Those and the other factors that are described in more detail in our Annual Report on Form 10-K/A for the year ended December 31, 2013. In addition, below are risk factors relating to the proposed AT&T merger transaction: º • º The value of the stock portion of the merger consideration is subject to changes based on fluctuations in the value of AT&T common stock, and DIRECTV stockholders may receive stock consideration with a value that, at the time received, is less than $66.50 per share of DIRECTV common stock. º • º AT&T and DIRECTV may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger. º • º Completion of the merger is subject to conditions and if these conditions are not satisfied or waived, the merger will not be completed. º • º In order to complete the merger, AT&T and DIRECTV must make certain governmental filings and obtain certain governmental authorizations, and if such filings and authorizations are not made or granted or are granted with conditions, completion of the merger may be jeopardized or the anticipated benefits of the merger could be reduced. º • º AT&T's and DIRECTV's business relationships may be subject to disruption due to uncertainty associated with the merger. º • º The merger agreement limits DIRECTV's ability to pursue alternatives to the merger and may discourage other companies from trying to acquire DIRECTV for greater consideration than what AT&T has agreed to pay. º • º Failure to complete the merger could negatively impact the stock price and the future business and financial results of AT&T and DIRECTV. º • º The shares of AT&T common stock to be received by DIRECTV stockholders as a result of the merger will have rights different from the shares of DIRECTV common stock. 48 -------------------------------------------------------------------------------- Table of Contents DIRECTV º • º After the merger, DIRECTV stockholders will have a significantly lower ownership and voting interest in AT&T than they currently have in DIRECTV and will exercise less influence over management. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may occur and it is not possible for us to predict them all. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future development or otherwise, except as required by law. CONTENTS The following is a discussion of our results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report. Information in this section is organized as follows: º • º Summary Data º • º Business Overview º • º Significant Events Affecting the Comparability of the Results of Operations º • º Key Terminology º • º Results of Operations º • º Liquidity and Capital Resources º • º Contractual Obligations º • º Contingencies º • º Certain Relationships and Related-Party Transactions º • º Critical Accounting Estimates 49 -------------------------------------------------------------------------------- Table of Contents DIRECTV SUMMARY DATA (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 (Dollars in Millions, Except Per Share Amounts) Consolidated Statements of Operations Data: Revenues $ 8,109 $ 7,700 $ 15,964 $ 15,280 Total operating costs and expenses 6,685 6,350 13,313 12,688 Operating profit 1,424 1,350 2,651 2,592 Interest income 12 19 25 41 Interest expense (230 ) (219 ) (462 ) (436 ) Other, net 35 (75 ) 92 (37 ) Income before income taxes 1,241 1,075 2,306 2,160 Income tax expense (431 ) (414 ) (927 ) (801 ) Net income 810 661 1,379 1,359 Less: Net income attributable to noncontrolling interest (4 ) (1 ) (12 ) (9 ) Net income attributable to DIRECTV $ 806 $ 660 $ 1,367 $ 1,350 Basic earnings attributable to DIRECTV per common share $ 1.60 $ 1.19 $ 2.70 $ 2.39 Diluted earnings attributable to DIRECTV per common share $ 1.59 $ 1.18 $ 2.67 $ 2.37 Weighted average number of total common shares outstanding (in millions): Basic 504 556 507 565 Diluted 508 561 512 569 June 30, December 31, 2014 2013 (Dollars in Millions) Consolidated Balance Sheets Data: Cash and cash equivalents $ 2,290 $ 2,180 Total current assets 5,869 5,953 Total assets 22,126 21,905 Total current liabilities 6,493 6,530 Long-term debt 18,439 18,284 Redeemable noncontrolling interest - 375 Total stockholders' deficit (6,127 ) (6,544 ) -------------------------------------------------------------------------------- º Reference º should be made to the Notes to the Consolidated Financial Statements. 50 -------------------------------------------------------------------------------- Table of Contents DIRECTV SUMMARY DATA-(continued) (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 (Dollars in Millions) Other Data: Operating profit before depreciation and amortization(1) Operating profit $ 1,424 $ 1,350 $ 2,651 $ 2,592 Add: Depreciation and amortization expense 729 731 1,443 1,409 Operating profit before depreciation and amortization $ 2,153 $ 2,081 $ 4,094 $ 4,001 Operating profit before depreciation and amortization margin 26.6 % 27.0 % 25.6 % 26.2 % Cash flow information Net cash provided by operating activities $ 1,474 $ 1,474 $ 3,064 $ 3,010 Net cash used in investing activities (802 ) (861 ) (1,509 ) (1,679 ) Net cash provided by (used in) financing activities (1,396 ) 73 (1,129 ) (681 ) Free cash flow(2) Net cash provided by operating activities 1,474 1,474 3,064 3,010 Less: Cash paid for property and equipment (767 ) (832 ) (1,417 ) (1,580 ) Less: Cash paid for satellites (55 ) (116 ) (109 ) (194 ) Free cash flow $ 652 $ 526 $ 1,538 $ 1,236 51 -------------------------------------------------------------------------------- Table of Contents DIRECTV SUMMARY DATA-(continued) (Unaudited) Selected Segment Data Operating Profit Depreciation and (Loss) Before Percentage of Operating Amortization Depreciation and Revenues Total Revenues Profit (Loss) Expense Amortization(1) (Dollars in Millions) Three Months Ended June 30, 2014 DIRECTV U.S. $ 6,272 77.3 % $ 1,319 $ 429 $ 1,748 Sky Brasil 1,011 12.5 % 114 175 289 PanAmericana and Other 778 9.6 % 28 121 149 DIRECTV Latin America 1,789 22.1 % 142 296 438 Sports Networks, Eliminations and Other 48 0.6 % (37 ) 4 (33 ) Total $ 8,109 100.0 % $ 1,424 $ 729 $ 2,153 June 30, 2013 DIRECTV U.S. $ 5,943 77.2 % $ 1,241 $ 410 $ 1,651 Sky Brasil 942 12.2 % 56 206 262 PanAmericana and Other 744 9.7 % 83 110 193 DIRECTV Latin America 1,686 21.9 % 139 316 455 Sports Networks, Eliminations and Other 71 0.9 % (30 ) 5 (25 ) Total $ 7,700 100.0 % $ 1,350 $ 731 $ 2,081 52 -------------------------------------------------------------------------------- Table of Contents DIRECTV SUMMARY DATA-(continued) (Unaudited) Operating Profit Depreciation and (Loss) Before Percentage of Operating Amortization Depreciation and Revenues Total Revenues Profit (Loss) Expense Amortization(1) (Dollars in Millions) Six Months Ended June 30, 2014 DIRECTV U.S. $ 12,359 77.4 % $ 2,562 $ 855 $ 3,417 Sky Brasil 1,950 12.2 % 262 338 600 PanAmericana and Other 1,560 9.8 % (146 ) 243 97 DIRECTV Latin America 3,510 22.0 % 116 581 697 Sports Networks, Eliminations and Other 95 0.6 % (27 ) 7 (20 ) Total $ 15,964 100.0 % $ 2,651 $ 1,443 $ 4,094 June 30, 2013 DIRECTV U.S. $ 11,733 76.8 % $ 2,356 $ 816 $ 3,172 Sky Brasil 1,907 12.4 % 210 363 573 PanAmericana and Other 1,507 9.9 % 46 216 262 DIRECTV Latin America 3,414 22.3 % 256 579 835 Sports Networks, Eliminations and Other 133 0.9 % (20 ) 14 (6 ) Total $ 15,280 100.0 % $ 2,592 $ 1,409 $ 4,001 -------------------------------------------------------------------------------- º (1) º Operating profit before depreciation and amortization, which is a financial measure that is not determined in accordance with accounting principles generally accepted in the United States of America, or GAAP, can be calculated by adding amounts under the caption "Depreciation and amortization expense" to "Operating profit." This measure should be used in conjunction with GAAP financial measures and is not presented as an alternative measure of operating results, as determined in accordance with GAAP. Our management and our Board of Directors use operating profit before depreciation and amortization to evaluate the operating performance of our company and our business segments and to allocate resources and capital to business segments. This metric is also used as a measure of performance for incentive compensation purposes and to measure income generated from operations that could be used to fund capital expenditures, service debt or pay taxes. Depreciation and amortization expense primarily represents an allocation to current expense of the cost of historical capital expenditures and for acquired intangible assets resulting from prior business acquisitions. To compensate for the exclusion of depreciation and amortization expense from operating profit, our management and our Board of Directors separately measure and budget for capital expenditures and business acquisitions. We believe this measure is useful to investors, along with GAAP measures (such as revenues, operating profit and net income), to compare our operating performance to other communications, entertainment and media service providers. We believe that investors use current and projected operating profit before depreciation and amortization and similar measures to estimate our current or prospective enterprise value and make investment decisions. This metric provides investors with 53-------------------------------------------------------------------------------- Table of Contents DIRECTV SUMMARY DATA-(continued) (Unaudited) a means to compare operating results exclusive of depreciation and amortization expense. Our management believes this is useful given the significant variation in depreciation and amortization expense that can result from the timing of capital expenditures, the capitalization of intangible assets, potential variations in expected useful lives when compared to other companies and periodic changes to estimated useful lives. Operating profit before depreciation and amortization margin is calculated by dividing Operating profit before depreciation and amortization by Revenues. º (2) º Free cash flow, which is a financial measure that is not determined in accordance with GAAP, can be calculated by deducting amounts under the captions "Cash paid for property and equipment" and "Cash paid for satellites" from "Net cash provided by operating activities" from the Consolidated Statements of Cash Flows. This financial measure should be used in conjunction with other GAAP financial measures and is not presented as an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. 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 capital expenditures and other capital investments or transactions and as a measure of performance for incentive compensation purposes. We believe this measure is useful to investors, along with other GAAP measures (such as cash flows from operating and investing activities), to compare our operating performance to other communications, entertainment and media companies. We believe that investors also use current and projected free cash flow to determine the ability of revenues from our current and projected subscriber base to fund required and discretionary spending and to help determine our financial value. 54-------------------------------------------------------------------------------- Table of Contents DIRECTV BUSINESS OVERVIEW DIRECTV, which we sometimes refer to as the Company, we, or us, is a leading provider of digital television entertainment in the United States and Latin America. We operate two direct-to-home, or DTH, business units: DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location and are engaged in acquiring, promoting, selling and distributing digital entertainment programming primarily via satellite to residential and commercial subscribers. In addition, we own and operate two regional sports networks, or RSNs, hold a minority ownership interest in ROOT SPORTS™ Northwest and own a 42% interest in Game Show Network LLC, or GSN, a television network dedicated to game-related programming and Internet interactive game playing. We account for our investments in ROOT SPORTS Northwest and GSN using the equity method of accounting. º • º DIRECTV U.S. DIRECTV Holdings LLC and its subsidiaries, which we refer to as DIRECTV U.S., is the largest provider of DTH digital television services and the second largest provider in the multi-channel video programming distribution, or MVPD, industry in the United States. As of June 30, 2014, DIRECTV U.S. had approximately 20.2 million subscribers. º • º DIRECTV Latin America. DIRECTV Latin America Holdings, Inc. and its subsidiaries, or DIRECTV Latin America, is a leading provider of DTH digital television services throughout Latin America. DIRECTV Latin America is comprised of: PanAmericana, which provides services in Argentina, Chile, Colombia, Ecuador, Peru, Puerto Rico, Venezuela and certain other countries in the region, and Sky Brasil Servicos Ltda., or Sky Brasil, which is a 93% owned subsidiary. DIRECTV Latin America also includes our 41% equity method investment in Innova, S. de R.L. de C.V., or Sky Mexico, which we include in the PanAmericana segment. As of June 30, 2014, PanAmericana had approximately 6.9 million subscribers, Sky Brasil had approximately 5.6 million subscribers and Sky Mexico had approximately 6.4 million subscribers. º • º DIRECTV Sports Networks. DIRECTV Sports Networks LLC and its subsidiaries, or DSN, is comprised primarily of two wholly owned regional sports networks based in Denver, Colorado and Pittsburgh, Pennsylvania, and a regional sports network based in Seattle, Washington in which DSN retains a noncontrolling interest, each of which operates under the brand name ROOT SPORTS. On April 16, 2013, DSN transferred 100% of its interest in a regional sports network based in Seattle, Washington, or DSN Northwest, to NW Sports Net LLC. The Seattle Mariners have a majority interest in NW Sports Net LLC and DSN retains a noncontrolling interest, which we account for using the equity method of accounting. The operating results of DSN are reported as part of the "Sports Networks, Eliminations and Other" reporting segment. Proposed AT&T Merger Transaction On May 18, 2014, DIRECTV and AT&T announced that they have entered into a definitive agreement under which DIRECTV will combine with AT&T in a stock-and-cash transaction. The agreement has been approved unanimously by the Boards of Directors of both companies. Subject to the conditions in the merger agreement, at the effective time of the merger, DIRECTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. The merger is subject to approval by DIRECTV shareholders and review by the U.S. Federal Communications Commission, U.S. Department of Justice, and the Instituto Federal 55-------------------------------------------------------------------------------- Table of Contents DIRECTV de Telecomunicaciones in Mexico. The transaction is expected to close within approximately 12 months of signing. In connection with the proposed combination with AT&T, Inc., DIRECTV has made certain representations, warranties and covenants in the Agreement and Plan of Merger, which was included as Exhibit 2.1 to the Form 8-K filed with the SEC on May 19, 2014 (the "Merger Agreement"), including, among other things, covenants by the Company to conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger and not to take certain actions prior to the closing of the Merger without the prior approval of AT&T. SIGNIFICANT EVENTS AFFECTING THE COMPARABILITY OF THE RESULTS OF OPERATIONS Senior Notes Six Months Ended June 30, 2014 Financing Transactions On March 17, 2014, DIRECTV U.S. issued $1,250 million of senior notes resulting in $1,245 million proceeds, net of original issue discount. On March 20, 2014, we exercised our early redemption right under the indenture of the 4.750% senior notes due in 2014 ("the 2014 Notes") effective April 24, 2014. The redemption price was based on the remaining scheduled payments of principal and interest using a discount rate equal to the Treasury Rate (as defined in the indenture governing the 2014 Notes) plus 40 basis points, together with accrued and unpaid interest as of April 24, 2014. The aggregate principal amount of the 2014 Notes outstanding on March 20, 2014 was $1,000 million and we made a cash payment of $1,022 million in the second quarter of 2014 to redeem such Notes. During the second quarter of 2014, DIRECTV U.S. entered into interest rate swap contracts converting a portion of the total aggregate principal amounts of the 5.000% senior notes due in 2021, the 3.800% senior notes due in 2022 and the 4.450% senior notes due in 2024 from a fixed to floating interest rate in order to manage our interest rate exposure by adjusting our mix of fixed rate and floating rate debt. The total notional amount of these interest rate swaps was $3,000 million as of June 30, 2014. These interest rate swaps are designated and qualify as fair value hedges. The terms of the interest rate swap contracts correspond to the related hedged senior notes and have maturities ranging from March 2021 to April 2024. Six Months Ended June 30, 2013 Financing Transactions In January 2013, DIRECTV U.S. issued $750 million of senior notes resulting in $743 million proceeds, net of discount. In May 2013, DIRECTV U.S. issued €500 million ($650 million) in aggregate principal of 2.750% senior notes due in 2023 resulting in proceeds, net of an original issue discount, of €497 million ($646 million). In connection with the issuance of these senior notes, DIRECTV U.S. entered into cross-currency swaps to effectively convert its fixed-rate euro denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. These cross-currency swaps are designated and qualify as cash flow hedges. The terms of the cross-currency swap agreements correspond to the related senior notes and the cross-currency swaps have maturities extending through May 2023. 56-------------------------------------------------------------------------------- Table of Contents DIRECTV Venezuela Devaluation and Foreign Currency Exchange Controls Companies operating in Venezuela are required to obtain Venezuelan government approval to exchange Venezuelan bolivars into U.S. dollars and such approval has not consistently been granted for several years. Consequently, our ability to pay U.S. dollar denominated obligations and repatriate cash generated in Venezuela in excess of local operating requirements is limited, which has resulted in increases in the cash balance at our Venezuelan subsidiary. In February 2013, the Venezuelan government announced a devaluation of the bolivar from the official exchange rate of 4.3 bolivars per U.S. dollar to an official rate of 6.3 bolivars per U.S. dollar. As a result of the devaluation, we recorded a pre-tax charge in "Venezuelan currency devaluation charge" in the Consolidated Statements of Operations of $166 million ($136 million after tax) in the first quarter of 2013, related to the remeasurement of the bolivar denominated net monetary assets of our Venezuelan subsidiary as of the date of the devaluation. In the first quarter of 2013, the Venezuelan government announced a new currency exchange system, the Sistema Complementario de Administración de Divisas, or SICAD 1, which is intended to function as an auction system for participants to exchange bolivars for U.S. dollars. The volume of amounts exchanged through such SICAD 1 system and the resulting exchange rate are published by the Venezuelan Central Bank. Effective January 24, 2014, the Venezuelan government announced that dividends and royalties would be subject to the SICAD 1 program. The SICAD 1 exchange rate, which was 10.6 bolivars per U.S. dollar as of June 30, 2014, is determined by periodic auctions. Additionally, in February 2014, the Venezuelan government announced SICAD 2, which is an exchange mechanism that became available on March 24, 2014. The exchange rate for SICAD 2 was 49.98 bolivars per U.S. dollar as of June 30, 2014. We currently believe the SICAD 1 rate is the most representative rate to use for remeasurement, as the official rate of 6.3 bolivars per U.S. dollar will likely be reserved only for the settlement of U.S. dollar denominated obligations related to purchases of "essential goods and services," and the equity of our Venezuelan subsidiary would be realized, if at all, through permitted dividends paid at the SICAD 1 rate. Therefore, as of June 30, 2014, we are continuing to remeasure our Venezuelan subsidiary's financial statements in U.S. dollars using the exchange rate determined by periodic auctions under SICAD 1, which was 10.6 bolivars per U.S. dollar. Prior to March 31, 2014, we used the official exchange rate of 6.3 bolivars per U.S. dollar. As a result of the devaluation, we recorded a pre-tax charge in "Venezuelan currency devaluation charge" in the Consolidated Statements of Operations of $281 million in the first quarter of 2014, related to the remeasurement of the bolivar denominated net monetary assets of our Venezuelan subsidiary on March 31, 2014. As of June 30, 2014, our Venezuelan subsidiary had Venezuelan bolivar denominated net monetary assets of $494 million, including cash of $519 million, based on the SICAD 1 exchange rate of 10.6 bolivars per U.S. dollar. The exchange rate used to report net monetary assets and operating results of our Venezuelan subsidiary is currently based on the results of periodic SICAD 1 auctions, which is expected to result in fluctuations in reported amounts that could be material to the results of operations in Venezuela in future periods and could materially affect the comparability of results for our Venezuelan subsidiary between periods. The comparability of our results of operations and financial position in Venezuela will also be affected in the event of additional changes to the exchange rate system and further devaluations of the Venezuelan bolivar. 57 -------------------------------------------------------------------------------- Table of Contents DIRECTV KEY TERMINOLOGY The following key terminology is used in management's discussion and analysis of financial condition and results of operations: Revenues. We earn revenues mostly from monthly fees we charge subscribers for subscriptions to basic and premium channel programming, advanced receiver service fees (which include HD, DVR and multi-room viewing), pay-per-view programming, and seasonal live sporting events. We also earn revenues from monthly fees we charge subscribers for multiple set-top receivers, hardware revenues from subscribers who lease or purchase set-top receivers from us, warranty service fees and advertising services. Revenues are reported net of customer credits and discounted promotions. Broadcast Programming and Other. These costs primarily include license fees for subscription service programming, pay-per-view programming, live sports and other events. Other costs include continuing service fees paid to third parties for active subscribers and warranty service costs. Subscriber Service Expenses. Subscriber service expenses include the costs of customer call centers, billing, remittance processing and service calls. Broadcast Operations Expenses. These expenses include broadcast center operating costs, signal transmission expenses (including costs of collecting signals for our local channel offerings), and costs of monitoring, maintaining and insuring our satellites. Also included are engineering expenses associated with deterring theft of our signal. Subscriber Acquisition Costs. These costs include the cost of set-top receivers and other equipment, commissions we pay to national retailers, independent satellite television retailers, dealers and telcos, and the cost of installation, advertising, marketing and customer call center expenses associated with the acquisition of new subscribers. Set-top receivers leased to new subscribers are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and depreciated over their useful lives. In certain countries in Latin America, where our customer agreements provide for the lease of the entire DIRECTV or SKY System, we also capitalize the costs of the other customer premises equipment and related installation costs. The amount of set-top receivers capitalized each period for subscriber acquisitions is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows. Upgrade and Retention Costs. Upgrade and retention costs are associated with upgrade efforts for existing subscribers that we believe will result in higher average monthly revenue per subscriber, or ARPU, and lower churn. Our upgrade efforts include subscriber equipment upgrade programs for advanced receivers and similar initiatives. Retention costs also include the costs of installing and providing hardware under our movers program for subscribers relocating to a new residence. Set-top receivers leased to existing subscribers under upgrade and retention programs are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and depreciated over their estimated useful lives. The amount of set-top receivers capitalized each period for upgrade and retention programs is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows. General and Administrative Expenses. General and administrative expenses include departmental 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. 58-------------------------------------------------------------------------------- Table of Contents DIRECTV Average Monthly Revenue Per Subscriber. We calculate ARPU by dividing average monthly revenues for the period (total revenues during the period divided by the number of months in the period) by average subscribers for the period. We calculate average subscribers for the period by adding the number of subscribers as of the beginning of the period and for each quarter end in the current year or period and dividing by the sum of the number of quarters in the period plus one. Average Monthly Subscriber Churn. Average monthly subscriber churn represents the number of subscribers whose service is disconnected, expressed as a percentage of the average total number of subscribers. We calculate average monthly subscriber churn by dividing the average monthly number of disconnected subscribers for the period (total subscribers disconnected, net of reconnects, during the period divided by the number of months in the period) by average subscribers for the period. Subscriber Count. The total number of subscribers represents the total number of subscribers actively subscribing to our service, including subscribers who have suspended their account for a particular season of the year because they are temporarily away from their primary residence and subscribers who are in the process of relocating and commercial equivalent viewing units. SAC. We calculate SAC, which represents total subscriber acquisition costs stated on a per subscriber basis, by dividing total subscriber acquisition costs for the period by the number of gross new subscribers acquired during the period. We calculate total subscriber acquisition costs for the period by adding together "Subscriber acquisition costs" expensed during the period and the amount of cash paid for equipment leased to new subscribers during the period. 59-------------------------------------------------------------------------------- Table of Contents DIRECTV RESULTS OF OPERATIONS Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 DIRECTV U.S. Results of Operations The following table provides operating results and a summary of key subscriber data for the DIRECTV U.S. segment: Three Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 6,272 $ 5,943 $ 329 5.5 % Operating costs and expenses Costs of revenues, exclusive of depreciation and amortization expense Broadcast programming and other 2,800 2,642 158 6.0 % Subscriber service expenses 374 360 14 3.9 % Broadcast operations expenses 75 71 4 5.6 % Selling, general and administrative expenses, exclusive of depreciation and amortization expense Subscriber acquisition costs 661 594 67 11.3 % Upgrade and retention costs 314 324 (10 ) (3.1 )% General and administrative expenses 300 301 (1 ) (0.3 )% Depreciation and amortization expense 429 410 19 4.6 % Total operating costs and expenses 4,953 4,702 251 5.3 % Operating profit $ 1,319 $ 1,241 $ 78 6.3 % Operating profit margin 21.0 % 20.9 % - - Other data: Operating profit before depreciation and amortization $ 1,748 $ 1,651 $ 97 5.9 % Operating profit before depreciation and amortization margin 27.9 % 27.8 % - - Total number of subscribers (in thousands) 20,231 20,021 210 1.0 % ARPU $ 103.26 $ 98.73 $ 4.53 4.6 % Average monthly subscriber churn % 1.55 % 1.53 % - 1.3 % Gross subscriber additions (in thousands) 908 839 69 8.2 % Subscriber disconnections (in thousands) 942 923 19 2.1 % Net subscriber disconnections (in thousands) (34 ) (84 ) 50 (59.5 )% Average subscriber acquisition costs-per subscriber (SAC) $ 855 $ 888 $ (33 ) (3.7 )% Capital expenditures: Property and equipment $ 183 $ 154 $ 29 18.8 % Subscriber leased equipment-subscriber acquisitions 115 151 (36 ) (23.8 )% Subscriber leased equipment-upgrade and retention 104 119 (15 ) (12.6 )% Satellites 22 55 (33 ) (60.0 )% Total capital expenditures $ 424 $ 479 $ (55 ) (11.5 )% Subscribers. In the second quarter of 2014, net subscriber disconnections decreased primarily due to higher gross subscriber additions, partially offset by a higher number of subscriber disconnections mainly associated with the higher average monthly subscriber churn as compared to the second quarter 60-------------------------------------------------------------------------------- Table of Contents DIRECTV of 2013. Gross subscriber additions increased as a result of streamlined promotional offers and investments in retail distributors. Average monthly subscriber churn was higher in the second quarter of 2014 as compared to the second quarter of 2013 primarily due to a more competitive environment. Revenues. DIRECTV U.S. revenues increased in the second quarter of 2014 as a result of higher ARPU and a larger subscriber base. The increase in ARPU resulted primarily from price increases on programming packages, higher advanced receiver service fees, higher fees for our new enhanced warranty program, as well as higher ad sales and commercial revenues, partially offset by increased promotional offers for new and existing customers. Operating profit before depreciation and amortization. Operating profit before depreciation and amortization increased in the second quarter of 2014 as compared to the second quarter of 2013 primarily due to higher revenues coupled with lower upgrade and retention costs, partially offset by higher broadcast programming and other costs and higher subscriber acquisition costs. Upgrade and retention costs decreased primarily due to lower equipment costs used for subscriber upgrades to advanced products. Broadcast programming and other costs increased primarily due to annual program supplier rate increases and a larger subscriber base. Subscriber acquisition costs increased as a result of the higher gross subscriber additions. SAC per subscriber, which includes the cost of capitalized set-top receivers, decreased due to lower advanced products equipment costs. Operating profit before depreciation and amortization margin improved primarily due to the higher revenues combined with lower upgrade and retention and relatively unchanged general and administrative expenses, partially offset by higher broadcast programming and other costs, as well as higher subscriber acquisition costs. Operating profit. Operating profit and operating profit margin increased in the second quarter of 2014 as compared to the second quarter of 2013 due to an increase in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin. 61-------------------------------------------------------------------------------- Table of Contents DIRECTV DIRECTV Latin America Results of Operations The following table provides operating results and a summary of key subscriber data for the consolidated DIRECTV Latin America operations, which does not include Sky Mexico: Three Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 1,789 $ 1,686 $ 103 6.1 % Operating profit before depreciation and amortization 438 455 (17 ) (3.7 )% Operating profit before depreciation and amortization margin 24.5 % 27.0 % - - Operating profit $ 142 $ 139 $ 3 2.2 % Operating profit margin 7.9 % 8.2 % - - Other data: ARPU $ 48.88 $ 51.13 $ (2.25 ) (4.4 )% Average monthly total subscriber churn %(2) 2.10 % 3.10 % - (32.3 )% Average monthly post-paid subscriber churn %(2) 1.90 % 2.86 % - % (33.6 )% Total number of subscribers (in thousands)(1)(2) 12,472 11,077 1,395 12.6 % Gross subscriber additions (in thousands)(1) 1,311 1,189 122 10.3 % Net subscriber additions (in thousands)(1)(2) 543 165 378 229.1 % Capital expenditures: Property and equipment $ 70 $ 39 $ 31 79.5 % Subscriber leased equipment-subscriber acquisitions 185 252 (67 ) (26.6 )% Subscriber leased equipment-upgrade and retention 108 117 (9 ) (7.7 )% Satellites 27 58 (31 ) (53.4 )% Total capital expenditures $ 390 $ 466 $ (76 ) (16.3 )% -------------------------------------------------------------------------------- º (1) º DIRECTV Latin America subscriber data excludes subscribers on the Sky Mexico platform. º (2) º Based on the results of an internal investigation, we determined that, beginning in 2012, certain employees of Sky Brasil directed activities which were inconsistent with Sky Brasil's authorized policies for subscriber retention and churn management. These activities had the effect of artificially reducing churn and increasing the Sky Brasil subscriber base during portions of 2013. As a result, subscribers who would have previously ceased receiving Sky Brasil service were terminated as subscribers pursuant to Sky Brasil's authorized policies. We estimate that as of June 30, 2013, our subscriber count would have been approximately 200,000 lower than the number of subscribers previously reported if the identified improper actions had not been taken. See the Current Report on Form 8-K filed with the SEC on June 27, 2013 for further details. 62 -------------------------------------------------------------------------------- Table of Contents DIRECTV Sky Brasil Results of Operations The following table provides operating results and a summary of key subscriber data for the consolidated Sky Brasil operations: Three Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 1,011 $ 942 $ 69 7.3 % Operating profit before depreciation and amortization 289 262 27 10.3 % Operating profit before depreciation and amortization margin 28.6 % 27.8 % - - Operating profit $ 114 $ 56 $ 58 103.6 % Operating profit margin 11.3 % 5.9 % - - Other Data: ARPU $ 60.77 $ 60.32 $ 0.45 0.7 % Total number of subscribers (in thousands)(1) 5,617 5,167 450 8.7 % Total capital expenditures $ 229 $ 263 $ (34 ) (12.9 )% -------------------------------------------------------------------------------- º (1) º See Note (2) on the table showing consolidated DIRECTV Latin America results of operations above. Subscribers. In the second quarter of 2014 net subscriber additions increased due to higher gross subscriber additions and lower average monthly churn. Gross subscriber additions increased driven by demand for the FIFA World Cup. Total average monthly churn decreased primarily due to the improper crediting of certain subscriber accounts and associated corrective actions in the second quarter of 2013. Revenues. Revenues increased in the second quarter of 2014 primarily due to subscriber growth and an increase in ARPU. The increase in ARPU was primarily due to a decrease in promotional offers to subscribers and an increase in advanced services, mostly offset by unfavorable exchange rates. Operating profit before depreciation and amortization. Operating profit before depreciation and amortization and operating profit depreciation and amortization margin increased in the second quarter of 2014 as compared to the second quarter of 2013 primarily due to higher revenues, partially offset by higher broadcast operations expenses associated with our broadband network buildout. Operating profit before depreciation and amortization was also impacted by higher broadcast programming and other costs due to subscriber growth. Operating profit. Operating profit and operating profit margin increased in the second quarter of 2014 as compared to the second quarter of 2013. This increase was due to the increase in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, as well as a decrease in depreciation and amortization expense in the second quarter of 2014 as compared to the second quarter of 2013, resulting from lower subscriber churn partially offset by higher total capitalized subscriber leased equipment. 63 -------------------------------------------------------------------------------- Table of Contents DIRECTV PanAmericana and Other Results of Operations The following table provides operating results and a summary of key subscriber data for the consolidated PanAmericana and Other operations: Three Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 778 $ 744 $ 34 4.6 % Operating profit before depreciation and amortization 149 193 (44 ) (22.8 )% Operating profit before depreciation and amortization margin 19.2 % 25.9 % - - Operating profit $ 28 $ 83 $ (55 ) (66.3 )% Operating profit margin 3.6 % 11.2 % - - Other Data: ARPU $ 38.96 $ 42.96 $ (4.00 ) (9.3 )% Total number of subscribers (in thousands) 6,855 5,910 945 16.0 % Total capital expenditures $ 161 $ 203 $ (42 ) (20.7 )% Subscribers. In the second quarter of 2014 net subscriber additions increased primarily due to higher gross additions and lower average monthly total subscriber churn resulting from demand for the FIFA World Cup as well as higher prepaid subscriber reconnections. Revenues. Revenues increased in the second quarter of 2014 primarily due to subscriber growth, partially offset by a decrease in ARPU. The decrease in ARPU was primarily driven by currency depreciation in Venezuela and Argentina and a higher penetration of lower ARPU mass market subscribers, partially offset by price increases and an increase in the number of subscribers with advanced services. Operating profit before depreciation and amortization. Operating profit before depreciation and amortization and operating profit before depreciation and amortization margin decreased in the second quarter of 2014 as compared to the second quarter of 2013 due to higher broadcast programming costs associated with special events, including the FIFA World Cup and higher subscriber acquisition costs primarily resulting from the increase in gross subscriber additions. Operating profit before depreciation and amortization margin also decreased due to inflation and the timing of price increases in Venezuela. Operating profit. Operating profit and operating profit margin decreased in the second quarter of 2014 as compared to the second quarter of 2013 due to a decrease in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, as well as an increase in depreciation and amortization expense due to higher total capitalized subscriber leased equipment and installations costs. DIRECTV Other Income and Income Taxes Interest income. Interest income was $12 million in the second quarter of 2014 and $19 million in the second quarter of 2013. Interest expense. The increase in interest expense to $230 million in the second quarter of 2014 from $219 million in the second quarter of 2013 was primarily due to the higher average debt balance. 64-------------------------------------------------------------------------------- Table of Contents DIRECTV Other, net. The significant components of "Other, net" were as follows: Three Months Ended June 30, Change 2014 2013 $ (Dollars in Millions)Equity in earnings from unconsolidated affiliates $ 34 $ 24 $ 10 Net gains from sale of investments 15 1 14 Loss on early extinguishment of debt (19 ) - (19 ) Net foreign currency transaction gain (loss) 5 (39 ) 44 Fair-value gain (loss) on non-employee stock options 1 (2 ) 3 DSN Northwest deconsolidation charge - (59 ) 59 Other (1 ) 0 (1 ) Total $ 35 $ (75 ) $ 110 Income Tax Expense. We recognized income tax expense of $431 million for the second quarter of 2014 compared to $414 million for the second quarter of 2013. The effective tax rate for the second quarter of 2014 was 34.7% compared to 38.5% for the second quarter of 2013, primarily due to lower foreign taxes during the second quarter of 2014. Earnings Per Share Earnings per share and weighted average shares outstanding were as follows: Three Months Ended June 30, 2014 2013 (Shares in Millions)Basic earnings attributable to DIRECTV per common share $ 1.60 $ 1.19 Diluted earnings attributable to DIRECTV per common share $ 1.59 $ 1.18 Weighted average number of common shares outstanding: Basic 504 556 Diluted 508 561 The increases in basic and diluted earnings per share were due to higher net income attributable to DIRECTV, partially offset by a reduction in weighted average shares outstanding resulting from our share repurchase program. 65-------------------------------------------------------------------------------- Table of Contents DIRECTV Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 DIRECTV U.S. Results of Operations The following table provides operating results and a summary of key subscriber data for the DIRECTV U.S. segment: Six Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 12,359 $ 11,733 $ 626 5.3 % Operating costs and expenses Costs of revenues, exclusive of depreciation and amortization expense Broadcast programming and other 5,568 5,243 325 6.2 % Subscriber service expenses 733 711 22 3.1 % Broadcast operations expenses 147 152 (5 ) (3.3 )% Selling, general and administrative expenses, exclusive of depreciation and amortization expense Subscriber acquisition costs 1,309 1,223 86 7.0 % Upgrade and retention costs 595 643 (48 ) (7.5 )% General and administrative expenses 590 589 1 0.2 % Depreciation and amortization expense 855 816 39 4.8 % Total operating costs and expenses 9,797 9,377 420 4.5 % Operating profit $ 2,562 $ 2,356 $ 206 8.7 % Operating profit margin 20.7 % 20.1 % - - Other data: Operating profit before depreciation and amortization $ 3,417 $ 3,172 $ 245 7.7 % Operating profit before depreciation and amortization margin 27.6 % 27.0 % - - Total number of subscribers (in thousands) 20,231 20,021 210 1.0 % ARPU $ 101.72 $ 97.43 $ 4.29 4.4 % Average monthly subscriber churn % 1.50 % 1.49 % - 0.7 % Gross subscriber additions (in thousands) 1,799 1,732 67 3.9 % Subscriber disconnections (in thousands) 1,821 1,795 26 1.4 % Net subscriber disconnections (in thousands) (22 ) (63 ) 41 (65.1 )% Average subscriber acquisition costs-per subscriber (SAC) $ 857 $ 894 $ (37 ) (4.1 )% Capital expenditures: Property and equipment $ 327 $ 265 $ 62 23.4 % Subscriber leased equipment-subscriber acquisitions 232 325 (93 ) (28.6 )% Subscriber leased equipment-upgrade and retention 214 230 (16 ) (7.0 )% Satellites 33 108 (75 ) (69.4 )% Total capital expenditures $ 806 $ 928 $ (122 ) (13.1 )% Subscribers. In the six months ended June 30, 2014, net subscriber disconnections decreased due to higher gross subscriber additions, partially offset by a higher number of subscriber disconnections mainly associated with the larger subscriber base compared to the six months ended June 30, 2013. Gross subscriber additions increased as a result of streamlined promotional offers and investments in retail distributors. Average monthly subscriber churn remained relatively unchanged for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. 66-------------------------------------------------------------------------------- Table of Contents DIRECTV Revenues. DIRECTV U.S. revenues increased in the six months ended June 30, 2014 as a result of higher ARPU and a larger subscriber base. The increase in ARPU resulted primarily from higher advanced receiver service fees, price increases on programming packages, higher fees for our new enhanced warranty program, as well as higher ad sales and commercial revenues, partially offset by increased promotional offers for new and existing customers. Operating profit before depreciation and amortization. Operating profit before depreciation and amortization increased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 primarily due to higher revenues coupled with lower upgrade and retention costs, partially offset by higher broadcast programming and other costs and higher subscriber acquisition costs. Upgrade and retention costs decreased primarily due to lower equipment costs used for subscriber upgrades to advanced products. Broadcast programming and other costs increased primarily due to annual program supplier rate increases and a larger subscriber base. Subscriber acquisition costs increased mainly as a result of the higher gross subscriber additions. SAC per subscriber, which includes the cost of capitalized set-top receivers, decreased due to lower equipment costs for advanced products on a per subscriber basis. Operating profit before depreciation and amortization margin increased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 primarily due to the higher revenues coupled with lower upgrade and retention costs and relatively unchanged general and administrative expenses, partially offset by higher broadcast programming and other costs. Operating profit. Operating profit and operating profit margin increased in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 due to an increase in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, partially offset by an increase in depreciation and amortization expense due to higher total capitalized subscriber leased equipment. 67-------------------------------------------------------------------------------- Table of Contents DIRECTV DIRECTV Latin America Results of Operations The following table provides operating results and a summary of key subscriber data for the consolidated DIRECTV Latin America operations: Six Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 3,510 $ 3,414 $ 96 2.8 % Operating profit before depreciation and amortization(1) 697 835 (138 ) (16.5 )% Operating profit before depreciation and amortization margin(1) 19.9 % 24.5 % - - Operating profit(1) $ 116 $ 256 $ (140 ) (54.7 )% Operating profit margin(1) 3.3 % 7.5 % - - Other data: ARPU(2) $ 48.79 $ 52.82 $ (4.03 ) (7.6 )% Average monthly total subscriber churn %(2) 2.11 % 2.51 % - (15.9 )% Average monthly post-paid subscriber churn %(2) 1.88 % 2.31 % - (18.6 )% Total number of subscribers (in thousands)(2)(3) 12,472 11,077 1,395 12.6 % Gross subscriber additions (in thousands)(3)(4) 2,422 2,370 52 2.2 % Net subscriber additions (in thousands)(2)(3)(4) 904 748 156 20.9 % Capital expenditures: Property and equipment $ 126 $ 80 $ 46 57.5 % Subscriber leased equipment-subscriber acquisitions 313 447 (134 ) (30.0 )% Subscriber leased equipment-upgrade and retention 204 233 (29 ) (12.4 )% Satellites 65 80 (15 ) (18.8 )% Total capital expenditures $ 708 $ 840 $ (132 ) (15.7 )% -------------------------------------------------------------------------------- º (1) º Amounts include the impact of the Venezuelan devaluation charge of $281 million recorded in the first quarter of 2014 and $166 million recorded in the first quarter of 2013, as well as the ongoing impact of foreign currency exchange fluctuations. º (2) º Based on the results of an internal investigation, we determined that, beginning in 2012, certain employees of Sky Brasil directed activities which were inconsistent with Sky Brasil's authorized policies for subscriber retention and churn management. These activities had the effect of artificially reducing churn and increasing the Sky Brasil subscriber base during portions of 2013. As a result, subscribers who would have previously ceased receiving Sky Brasil service were terminated as subscribers pursuant to Sky Brasil's authorized policies. We estimate that as of June 30, 2013, our subscriber count would have been approximately 200,000 lower than the number of subscribers previously reported if the identified improper actions had not been taken. See the Current Report on Form 8-K filed with the SEC on June 27, 2013 for further details. º (3) º DIRECTV Latin America subscriber data excludes subscribers on the Sky Mexico platform. º (4) º Gross and net subscriber additions exclude 1,000 subscribers acquired in transactions in Brazil during during the first quarter of 2013. 68 -------------------------------------------------------------------------------- Table of Contents DIRECTV Sky Brasil Results of Operations The following table provides operating results and a summary of key subscriber data for the consolidated Sky Brasil operations: Six Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 1,950 $ 1,907 $ 43 2.3 % Operating profit before depreciation and amortization 600 573 27 4.7 % Operating profit before depreciation and amortization margin 30.8 % 30.0 % - - Operating profit $ 262 $ 210 $ 52 24.8 % Operating profit margin 13.4 % 11.0 % - - Other Data: ARPU $ 59.21 $ 61.72 $ (2.51 ) (4.1 )% Total number of subscribers (in thousands)(1) 5,617 5,167 450 8.7 % Total capital expenditures $ 390 $ 470 $ (80 ) (17.0 )% -------------------------------------------------------------------------------- º (1) º See Note (2) on the table showing consolidated DIRECTV Latin America results of operations above. Subscribers. In the six months ended June 30, 2014, net subscriber additions increased primarily due to higher gross subscriber additions and lower total average monthly churn. Gross subscriber additions increased driven by higher demand for the FIFA World Cup and advanced products. Total average monthly churn decreased primarily due to the improper crediting of certain subscriber accounts and associated corrective actions in the second quarter of 2013. Revenues. Revenues increased in the six months ended June 30, 2014, primarily due to subscriber growth, partially offset by a decrease in ARPU. The decrease in ARPU was primarily due to unfavorable exchange rates, partially offset by higher ARPU in local currency terms, which resulted from a reduction in promotional offers to subscribers and an increase in subscribers with advanced services. Operating profit before depreciation and amortization. Operating profit before depreciation and amortization increased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 primarily due to higher revenues partially offset by higher broadcast programming and other costs mainly related to subscriber growth, higher broadcast operations expenses primarily associated with the buildout of our broadband network. Operating profit before depreciation and amortization margin increased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 primarily driven by a reduction in promotional offers to subscribers coupled with slower relative growth in broadcast programming and other costs. Operating profit. Operating profit and operating profit margin increased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. These increases were due to the increase in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, as well as a decrease in depreciation and amortization expense 69-------------------------------------------------------------------------------- Table of Contents DIRECTV in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, resulting from lower subscriber churn partially offset by higher total capitalized subscriber leased equipment. PanAmericana and Other Results of Operations The following table provides operating results and a summary of key subscriber data for the consolidated PanAmericana and Other operations: Six Months Ended and As of June 30, Change 2014 2013 $ % (Dollars in Millions, Except Per Subscriber Amounts) Revenues $ 1,560 $ 1,507 $ 53 3.5 % Operating profit before depreciation and amortization(1) 97 262 (165 ) (63.0 )% Operating profit before depreciation and amortization margin(1) 6.2 % 17.4 % - - Operating profit (loss)(1) $ (146 ) $ 46 $ (192 ) (417.4 )% Operating profit margin(1) NM * 3.1 % - - Other Data: ARPU $ 39.99 $ 44.79 $ (4.80 ) (10.7 )% Total number of subscribers (in thousands) 6,855 5,910 945 16.0 % Total capital expenditures $ 318 $ 370 $ (52 ) (14.1 )% -------------------------------------------------------------------------------- º * º Not meaningful º (1) º Amounts include the impact of the Venezuelan devaluation charge of $281 million recorded in the first quarter of 2014 and $166 million recorded in the first quarter of 2013, as well as the ongoing impact of foreign currency exchange fluctuations. Subscribers. In the six months ended June 30, 2014, net subscriber additions increased as lower gross subscriber additions were more than offset by lower total average monthly subscriber churn. Gross subscriber additions decreased primarily from certain limitations on importing set-top receivers for new subscribers in Venezuela, partially offset by an increase in gross subscriber additions in Argentina and Chile related to demand for the FIFA World Cup. Total average monthly churn decreased primarily due to the demand for FIFA World Cup and higher prepaid subscriber reconnections. Revenues. Revenues increased in the six months ended June 30, 2014, primarily due to subscriber growth partially offset by a decrease in ARPU. The decrease in ARPU was primarily due to unfavorable exchange rates, partially offset by price increases and an increase in subscribers with advanced services. Operating profit before depreciation and amortization. Operating profit before depreciation and amortization and operating profit before depreciation and amortization margin decreased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily in Venezuela as a result of the $281 million devaluation charge recorded in the first quarter of 2014 as compared to the $166 million charge resulting from the devaluation of the bolivar fuerte recorded in the first quarter of 2013. Also contributing to the decrease were higher broadcast programming costs associated with special events, including the FIFA World Cup. Operating profit before depreciation and amortization margin also decreased due to inflation and the timing of price increases in Venezuela. 70-------------------------------------------------------------------------------- Table of Contents DIRECTV Operating profit. Operating profit and operating profit margin decreased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due to the decrease in operating profit before depreciation and amortization and operating profit before depreciation and amortization margin, as well as an increase in depreciation and amortization expense as a result of higher total capitalized subscriber leased equipment. DIRECTV Other Income and Income Taxes Interest income. Interest income was $25 million in the six months ended June 30, 2014 and $41 million in the six months ended June 30, 2013. Interest expense. The increase in interest expense to $462 million in the six months ended June 30, 2014 from $436 million in the six months ended June 30, 2013 was primarily a result of the higher average debt balance. Other, net. The significant components of "Other, net" were as follows: Six Months Ended June 30, Change 2014 2013 $ (Dollars in Millions)Equity in earnings from unconsolidated affiliates $ 78 $ 56 $ 22 Net gains from sale of investments 24 8 16 Loss on early extinguishment of debt (19 ) - (19 ) Net foreign currency transaction gain (loss) 11 (33 ) 44 Fair-value gain (loss) on non-employee stock options 3 (4 ) 7 DSN Northwest deconsolidation charge - (59 ) 59 Other (5 ) (5 ) 0 Total $ 92 $ (37 ) $ 129 Income Tax Expense. We recognized income tax expense of $927 million for the six months ended June 30, 2014 compared to $801 million for the six months ended June 30, 2013. The effective tax rate for the six months ended June 30, 2014 was 40.2% compared to 37.1% for the six months ended June 30, 2013, primarily due to the unfavorable tax impact of a larger Venezuela currency devaluation in 2014. Earnings Per Share Earnings per share and weighted average shares outstanding were as follows: Six Months Ended June 30, 2014 2013 (Shares in Millions)Basic earnings attributable to DIRECTV per common share $ 2.70 $ 2.39 Diluted earnings attributable to DIRECTV per common share $ 2.67 $ 2.37 Weighted average number of common shares outstanding: Basic 507 565 Diluted 512 569 71 -------------------------------------------------------------------------------- Table of Contents DIRECTV The increases in basic and diluted earnings per share were due to a reduction in weighted average shares outstanding resulting from our share repurchase program and higher net income attributable to DIRECTV. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are our cash, cash equivalents and the cash flow that we generate from our operations. We expect that net cash provided by operating activities will grow and believe that our existing cash balances and cash provided by operations will be sufficient to fund our existing business plan. DIRECTV U.S. has the ability to borrow up to $2.5 billion under its revolving credit facilities. As of June 30, 2014, there were no borrowings outstanding under the revolving credit facilities. DIRECTV U.S. also has a commercial paper program backed by its revolving credit facilities. As of June 30, 2014, we had $260 million of short-term commercial paper outstanding. Aggregate amounts outstanding under the revolving credit facilities described below and the commercial paper program are limited to $2.5 billion. In March 2013, Sky Brasil entered into a Brazilian Real denominated financing facility with Banco Nacional de Desenvolvimento Econômico e Social, or BNDES, a government owned bank in Brazil, under which Sky Brasil may borrow funds for the purchase of set-top receivers. As of June 30, 2014, Sky Brasil had borrowings of R$382 million ($173 million) outstanding under the BNDES facility. In the second quarter of 2014, Sky Brasil entered into a Brazilian Real denominated financing facility with Desenvolve SP, an agency created by Sao Paulo State Government for economic development, under which Sky Brasil may borrow funds for the construction of a satellite and broadcast facility. As of June 30, 2014, Sky Brasil had borrowings of R$48 million ($21 million) under the facility. As of June 30, 2014, our cash and cash equivalents totaled $2,290 million compared to $2,180 million at December 31, 2013. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) was 0.90 at June 30, 2014 and 0.91 at December 31, 2013. Cash Flows Provided by Operating Activities Net cash flows provided by operating activities increased to $3,064 million for the six months ended June 30, 2014 from $3,010 million for the six months ended June 30, 2013. The increase is primarily a result of an increase in operating profit before depreciation and amortization expense and changes in working capital. Cash Flows Used in Investing Activities Net cash flows used in investing activities decreased to $1,509 million for the six months ended June 30, 2014 from $1,679 million for the six months ended June 30, 2013. The decrease resulted primarily from lower capital expenditures for subscriber leased set-top receivers at DIRECTV U.S. and DIRECTV Latin America, as well as a decrease in capital expenditures for satellites. In addition, proceeds from the sale of investments decreased due to the partial sale of our equity method investment in GSN, for which we received proceeds in April 2013. Cash Flows Used in Financing Activities Net cash flows used in financing activities increased to $1,129 million for the six months ended June 30, 2014 from net cash flows used in financing activities of $681 million for the six months ended June 30, 2013. The increase is primarily due to the repayment of our 4.750% senior notes due in 2014, partially offset by a reduction in common shares repurchased and retired. 72-------------------------------------------------------------------------------- Table of Contents DIRECTV Share Repurchase Program Since 2006 our Board of Directors has approved multiple authorizations for the repurchase of our common stock. In February 2014 our Board of Directors approved a new authorization for up to $3.5 billion for repurchases of our common stock. On May 18, 2014, DIRECTV and AT&T entered into a definitive agreement under which AT&T would combine with DIRECTV in a stock-and-cash transaction. As a result, we have suspended the share repurchase program and agreed to not purchase, repurchase, redeem or otherwise acquire any shares of our capital stock during the pendency of the proposed transaction and without AT&T's consent. During the six months ended June 30, 2014, we repurchased and retired 19 million common shares for $1,386 million, at an average price of $73.82. Debt At June 30, 2014, we had $19,981 million in total outstanding borrowings, which consisted of senior notes and commercial paper issued by DIRECTV U.S. and borrowings under the BNDES and Desenvolve SP financing facilities at Sky Brasil. Our outstanding borrowings are more fully described in Note 5 of the Notes to the Consolidated Financial Statements in Item 1, Part I of this Quarterly Report and in Note 10 of the Notes to the Consolidated Financial Statements in Item 8, Part II of our 2013 Form 10-K/A. We may incur additional borrowings in the future in order to refinance or repay maturing indebtedness. We may purchase our outstanding senior notes in the future from time to time in open market transactions or otherwise as part of liability management initiatives. Senior Notes. On March 20, 2014, we exercised our early redemption right under the indenture of the 4.750% senior notes due in 2014 ("the 2014 Notes") effective April 24, 2014. The redemption price was based on the remaining scheduled payments of principal and interest using a discount rate equal to the Treasury Rate (as defined in the indenture governing the 2014 Notes) plus 40 basis points, together with accrued and unpaid interest as of April 24, 2014. The aggregate principal amount of the 2014 Notes outstanding on March 20, 2014 was $1,000 million and we made a cash payment of $1,022 million in the second quarter of 2014 to redeem such Notes. During the second quarter of 2014, DIRECTV U.S. entered into interest rate swap contracts converting a portion of the total aggregate principal amounts of the 5.000% senior notes due in 2021, the 3.800% senior notes due in 2022 and the 4.450% senior notes due in 2024 from a fixed to floating interest rate in order to manage our interest rate exposure by adjusting our mix of fixed rate and floating rate debt. The total notional amount of these interest rate swaps was $3,000 million as of June 30, 2014. These interest rate swaps are designated and qualify as fair value hedges. The terms of the interest rate swap contracts correspond to the related hedged senior notes and have maturities ranging from March 2021 to April 2024. At June 30, 2014, DIRECTV U.S.' senior notes had a carrying value of $19,527 million and a weighted-average coupon of 4.15%. The principal amount of our senior notes mature as follows: $1,200 million in 2015, $2,250 million in 2016, $1,250 million in 2017, $750 million in 2018 and $14,116 million in 2019 and thereafter. Included in the amounts above are DIRECTV U.S.' €500 million in aggregate principal of 2.750% senior notes due in 2023, £750 million in aggregate principal of 4.375% senior notes due in 2029, and £350 million in aggregate principal of 5.200% senior notes due in 2033. In connection with the issuance of these senior notes, DIRECTV U.S. entered into cross-currency swap agreements to manage the related foreign exchange risk by effectively converting all of the fixed-rate British pound sterling and fixed-rate euro denominated debt, including annual interest payments and the payment of principal at 73-------------------------------------------------------------------------------- Table of Contents DIRECTV maturity, to fixed-rate U.S. dollar denominated debt. These cross-currency swaps are designated and qualify as cash flow hedges. The terms of the cross-currency swap agreements correspond to the related hedged senior notes and have maturities ranging from May 2023 to November 2033. All of our senior notes were issued by DIRECTV Holdings LLC and DIRECTV Financing Co., Inc., or the Co-Issuers, and have been registered under the Securities Act of 1933, as amended. Commercial Paper. On November 27, 2012, DIRECTV U.S. established a commercial paper program backed by its revolving credit facilities, which provides for the issuance of short-term commercial paper in the United States up to a maximum aggregate principal of $2.5 billion. As of June 30, 2014, we had $260 million of short-term commercial paper outstanding, with a weighted average maturity of 59 days, at a weighted average yield of 0.41%, which may be refinanced on a periodic basis as borrowings mature. Revolving Credit Facilities On September 28, 2012, DIRECTV U.S.' five year, $2.0 billion revolving credit facility dated February 7, 2011 was terminated and replaced with a three and one-half year, $1.0 billion revolving credit facility and a five year, $1.5 billion revolving credit facility. We pay a commitment fee of 0.15% per year for the unused commitment under the revolving credit facilities. Borrowings currently bear interest at a rate equal to the London Interbank Offer Rate (LIBOR) plus 1.25%. Both the commitment fee and the annual interest rate may increase or decrease under certain conditions due to changes in DIRECTV U.S.' long-term, unsecured debt ratings. Under certain conditions, DIRECTV U.S. may increase the borrowing capacity of the revolving credit facilities by an aggregate amount of up to $500 million. Aggregate amounts outstanding under the revolving credit facilities and the commercial paper program are limited to $2.5 billion. As of June 30, 2014, there were no borrowings outstanding under the revolving credit facilities. Borrowings under the revolving credit facilities are unsecured senior obligations of DIRECTV U.S. and will rank equally in right of payment with all of DIRECTV U.S.' existing and future senior debt and will rank senior in right of payment to all of DIRECTV U.S.' future subordinated debt, if any. Covenants and Restrictions The revolving credit facilities require DIRECTV U.S. to maintain at the end of each fiscal quarter a specified ratio of indebtedness to earnings before interest, taxes and depreciation and amortization. The revolving credit facilities also include covenants that limit DIRECTV U.S.' ability to, among other things, (i) incur additional subsidiary indebtedness, (ii) incur liens, (iii) enter into certain transactions with affiliates, (iv) merge or consolidate with another entity, (v) sell, assign, lease or otherwise dispose of all or substantially all of its assets, and (vi) change its lines of business. Additionally, the senior notes contain restrictive covenants that are similar. If DIRECTV U.S. fails to comply with these covenants, all or a portion of its borrowings under the senior notes could become immediately payable and its revolving credit facilities could be terminated. At June 30, 2014, management believes DIRECTV U.S. was in compliance with all such covenants. The senior notes provide that the borrowings may be required to be prepaid if certain change-in-control events, coupled with a ratings decline, occur. The revolving credit facilities provide that the borrowings may be required to be prepaid if certain change-in-control events occur. DIRECTV Guarantors. DIRECTV guarantees all of the senior notes then outstanding, jointly and severally with DIRECTV Holdings LLC's material domestic subsidiaries. DIRECTV unconditionally guarantees that the principal and interest on the respective senior notes will be paid in full when due 74-------------------------------------------------------------------------------- Table of Contents DIRECTV and that the obligations of the Co-Issuers to the holders of the outstanding senior notes will be performed. The revolving credit facilities and the commercial paper program are also similarly fully guaranteed by DIRECTV. As a result of the guarantees, holders of the senior notes, the revolving credit debt and the commercial paper have the benefit of DIRECTV's interests in the assets and related earnings of our operations that are not held through DIRECTV Holdings LLC and its subsidiaries. Those operations are primarily our DTH digital television services throughout Latin America which are held by DIRECTV Latin America and our regional sports networks which are held by DSN. However, the subsidiaries that own and operate the DIRECTV Latin America business and the regional sports networks have not guaranteed the senior notes, the revolving credit facilities and the commercial paper program. The guarantees are unsecured senior obligations of DIRECTV and rank equally in right of payment with all of DIRECTV's existing and future senior debt and rank senior in right of payment to all of DIRECTV's future subordinated debt, if any. The guarantees are effectively subordinated to all existing and future secured obligations, if any, of DIRECTV to the extent of the value of the assets securing the obligations. DIRECTV is not subject to the covenants contained in each indenture of the senior notes and our guarantees will terminate and be released on the terms set forth in each of the indentures. BNDES Financing Facility In March 2013, Sky Brasil entered into a Brazilian Real denominated financing facility with BNDES, a government owned bank in Brazil, under which Sky Brasil may borrow funds for the purchase of set-top receivers. As of June 30, 2014, Sky Brasil had borrowings of R$382 ($173 million) outstanding under the BNDES facility bearing interest at a weighted-average rate of 3.70% per year. Borrowings under the facility are required to be repaid in 30 monthly installments. The U.S. dollar amounts reflect the conversion of the Brazilian Real denominated amounts into U.S. dollars based on the exchange rate of R$2.20 / $1.00 at June 30, 2014. Borrowings under the BNDES facility mature as follows: R$87 million ($39 million) in 2014, R$183 million ($83 million) in 2015, R$103 million ($47 million) in 2016 and R$9 million ($4 million) in 2017. The financing facility is collateralized by the financed set-top receivers with an original purchase price of approximately R$543 million ($246 million) based on the exchange rate at the time of purchase. Desenvolve SP Financing Facility In the second quarter of 2014, Sky Brasil entered into a Brazilian Real denonimated financing facility with Desenvolve SP, an agency created by the Sao Paulo State Government for economic development, under which Sky Brasil may borrow funds for the construction of a satellite and broadcast facility. Each borrowing under the facility, including accrued interest, will be repaid in a single installment five years from the date of such borrowing. The financing facility is secured by a third party bank guarantee. As of June 30, 2014, Sky Brasil had borrowings of R$48 million ($21 million) under the facility bearing interest of 2.5% per year, with a maturity of 2019. The U.S. dollar amounts reflect the conversion of the Brazilian Real denominated amounts into U.S. dollars based on the exchange rate of R$2.20 / $1.00 at June 30, 2014. 75-------------------------------------------------------------------------------- Table of Contents DIRECTV Contingencies Venezuela Devaluation and Foreign Currency Exchange Controls. Companies operating in Venezuela are required to obtain Venezuelan government approval to exchange Venezuelan bolivars into U.S. dollars and such approval has not consistently been granted for several years. Consequently, our ability to pay U.S. dollar denominated obligations and repatriate cash generated in Venezuela in excess of local operating requirements is limited, which has resulted in increases in the cash balance at our Venezuelan subsidiary. In February 2013, the Venezuelan government announced a devaluation of the bolivar from the official exchange rate of 4.3 bolivars per U.S. dollar to an official rate of 6.3 bolivars per U.S. dollar. As a result of the devaluation, we recorded a pre-tax charge in "Venezuelan currency devaluation charge" in the Consolidated Statements of Operations of $166 million ($136 million after tax) in the first quarter of 2013, related to the remeasurement of the bolivar denominated net monetary assets of our Venezuelan subsidiary as of the date of the devaluation. In the first quarter of 2013, the Venezuelan government announced a new currency exchange system, the Sistema Complementario de Administración de Divisas, or SICAD 1, which is intended to function as an auction system for participants to exchange bolivars for U.S. dollars. The volume of amounts exchanged through such SICAD 1 system and the resulting exchange rate are published by the Venezuelan Central Bank. Effective January 24, 2014, the Venezuelan government announced that dividends and royalties would be subject to the SICAD 1 program. The SICAD 1 exchange rate, which was 10.6 bolivars per U.S. dollar as of June 30, 2014, is determined by periodic auctions. Additionally, in February 2014, the Venezuelan government announced SICAD 2, which is an exchange mechanism that became available on March 24, 2014. The exchange rate for SICAD 2 was 49.98 bolivars per U.S. dollar as of June 30, 2014. We currently believe the SICAD 1 rate is the most representative rate to use for remeasurement, as the official rate of 6.3 bolivars per U.S. dollar will likely be reserved only for the settlement of U.S. dollar denominated obligations related to purchases of "essential goods and services," and the equity of our Venezuelan subsidiary would be realized, if at all, through permitted dividends paid at the SICAD 1 rate. Therefore, as of June 30, 2014, we are continuing to remeasure our Venezuelan subsidiary's financial statements in U.S. dollars using the exchange rate determined by periodic auctions under SICAD 1, which was 10.6 bolivars per U.S. dollar. Prior to March 31, 2014, we used the official exchange rate of 6.3 bolivars per U.S. dollar. As a result of the devaluation, we recorded a pre-tax charge in "Venezuelan currency devaluation charge" in the Consolidated Statements of Operations of $281 million in the first quarter of 2014, related to the remeasurement of the bolivar denominated net monetary assets of our Venezuelan subsidiary on March 31, 2014. As of June 30, 2014, our Venezuelan subsidiary had Venezuelan bolivar denominated net monetary assets of $494 million, including cash of $519 million, based on the SICAD 1 exchange rate of 10.6 bolivars per U.S. dollar. The exchange rate used to report net monetary assets and operating results of our Venezuelan subsidiary is currently based on the results of periodic SICAD 1 auctions, which is expected to result in fluctuations in reported amounts that could be material to the results of operations in Venezuela in future periods and could materially affect the comparability of results for our Venezuelan subsidiary between periods. The comparability of our results of operations and financial position in Venezuela will also be affected in the event of additional changes to the exchange rate system and further devaluations of the Venezuelan bolivar. Other. Several factors may affect our ability to fund our operations and commitments that we discuss in "Contractual Obligations" and "Contingencies" below. In addition, our future cash flows may be reduced if we experience, among other things, significantly higher subscriber additions than planned, increased subscriber churn or upgrade and retention costs, higher than planned capital expenditures for 76 -------------------------------------------------------------------------------- Table of Contents DIRECTV satellites and broadcast equipment, satellite anomalies or signal theft. Additionally, DIRECTV U.S.' ability to borrow under the revolving credit facilities is contingent upon DIRECTV U.S. meeting financial and other covenants associated with its facilities as more fully described above. Dividend Policy Dividends may be paid on our common stock only when, as, and if declared by our Board of Directors in its sole discretion. We have no current plans to pay any dividends on our common stock. We currently expect to use our future earnings for the development of our businesses or other corporate purposes. CONTRACTUAL OBLIGATIONS The following table sets forth our contractual obligations as of June 30, 2014, including the future periods in which payments are expected. Additional details regarding these obligations are provided in the Notes to the Consolidated Financial Statements in Part I, Item 1 referenced in the table below and the Notes to the Consolidated Financial Statements in Part II, Item 8 in our Form 10-K/A for the year ended December 31, 2013. The contractual obligations below do not include payments that could be made related to our net unrecognized tax benefits liability, which amounted to $434 million as of June 30, 2014. The timing and amount of any future payments is not reasonably estimable, as such payments are dependent on the completion and resolution of examinations with tax authorities. We do not expect a significant payment related to these obligations within the next twelve months. Payments Due By Period 2019 and Contractual Obligations Total 2014 2015-2016 2017-2018 thereafter (Dollars in Millions) Long-term debt obligations (Note 5)(a) $ 30,693 $ 514 $ 5,231 $ 3,459 $ 21,489 Purchase obligations(b) 4,374 1,141 1,911 608 714 Operating lease obligations(c) 942 50 196 175 521 Capital lease obligations(d) 1,372 50 285 264 773 Total $ 37,381 $ 1,755 $ 7,623 $ 4,506 $ 23,497 -------------------------------------------------------------------------------- º (a) º The cash payments due for long-term debt include interest payments based on the outstanding principal amounts and the applicable fixed interest rates as of June 30, 2014. The obligations do not reflect potential prepayments required under indentures. º (b) º Purchase obligations consist primarily of broadcast programming commitments, regional professional team rights agreements, service contract commitments and satellite construction and launch contracts. Broadcast programming commitments include guaranteed minimum contractual commitments that are typically based on a flat fee or a minimum number of required subscribers subscribing to the related programming. Actual payments may exceed the minimum payment requirements if the actual number of subscribers subscribing to the related programming exceeds the minimum amounts. Service contract commitments include minimum commitments for the purchase of services that have been outsourced to third parties, such as billing services, telemetry, tracking and control services and broadcast center services. In most cases, actual payments, which are typically based on volume, usually exceed these minimum amounts. º (c) º Certain of the operating leases contain variable escalation clauses and renewal or purchase options, which we do not consider in the amounts disclosed. 77 -------------------------------------------------------------------------------- Table of Contents DIRECTV º (d) º Capital lease obligations include prepayments related to a satellite lease contract which we expect to account for as a capital lease upon commencement. CONTINGENCIES For a discussion of "Contingencies," see Part I, Item 1, and Note 7 of the Notes to the Consolidated Financial Statements of this Quarterly Report, which we incorporate herein by reference. CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS For a discussion of "Certain Relationships and Related-Party Transactions," see Part I, Item 1, Note 8 of the Notes to the Consolidated Financial Statements of this Quarterly Report, which we incorporate herein by reference. CRITICAL ACCOUNTING ESTIMATES For a discussion of our "Critical Accounting Estimates," see Item 7. Critical Accounting Estimates in Part II of our Annual Report on Form 10-K/A for the year ended December 31, 2013. * * * |