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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý

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

For the quarterly period ended March 31, 2005

or

o

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

For the transition period from                             to                              

Commission file number 333-106529

DIRECTV HOLDINGS LLC
DIRECTV FINANCING CO., INC.
(Exact name of registrant as specified in its charter)

2230 East Imperial Highway, El Segundo, California 90245
(Address of principal executive offices, including zip code)

(310) 964-5000
(Registrant's telephone number, including area code)

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). days. Yes o    No ý

        The registrant has met the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Quarterly Report on Form 10-Q with the reduced disclosure format.

TABLE OF CONTENTS

DIRECTV HOLDINGS LLC

PART I—FINANCIAL INFORMATION (UNAUDITED)

ITEM 1.    FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Reference should be made to the Notes to the Consolidated Financial Statements.

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DIRECTV HOLDINGS LLC

CONSOLIDATED BALANCE SHEETS

(Unaudited)

Reference should be made to the Notes to the Consolidated Financial Statements.

2

DIRECTV HOLDINGS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Reference should be made to the Notes to the Consolidated Financial Statements.

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DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

        DIRECTV Holdings LLC is a wholly-owned subsidiary of The DIRECTV Group, Inc. and consists of DIRECTV Enterprises, LLC and its wholly-owned subsidiaries and DIRECTV Financing Co., Inc. We sometimes refer to DIRECTV Holdings LLC as DIRECTV Holdings or DIRECTV and sometimes refer to The DIRECTV Group, Inc. as The DIRECTV Group or Parent.

        We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial reporting. In the opinion of management, all adjustments (consisting only of normal recurring items) which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission, or SEC, on March 1, 2005 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.

        We introduced the DIRECTV® service in the United States in 1994. We currently use a fleet of six satellites to broadcast our service from our 101 degrees west longitude, or WL, 110 WL and 119 WL orbital locations. We also broadcast from 72.5 WL under our arrangement with Telesat Canada, or Telesat, Industry Canada and the Federal Communications Commission, or FCC. Additionally, we broadcast from 95 WL using transponders on a satellite we lease. We transmit entertainment and information programs from our digital broadcast centers located in Castle Rock, Colorado and Los Angeles, California to our in-orbit satellites. Customers receive our programming using a small receiving satellite dish antenna, a digital set-top receiver and a remote control, which we refer to as a DIRECTV System. DIRECTV System equipment is manufactured by Thomson Inc. (RCA), Philips Electronics North America Corporation, Samsung Electronics America, Inc. and other name brand consumer electronics companies. We distribute DIRECTV System equipment to consumers through national retail and consumer electronics stores, satellite television dealers, regional Bell operating companies, our direct customer acquisition program and rural dealer networks. We have a single operating segment with all revenues to date generated from U.S. based subscribers and customers.

        Prior period financial statements have been reclassified to conform to the current period presentation.

Note 2: Accounting Change

Subscriber Acquisition, Upgrade and Retention Costs

        Effective January 1, 2004, we changed our method of accounting for subscriber acquisition, upgrade and retention costs. Previously, we deferred a portion of these costs, equal to the amount of profit to be earned from the subscriber, typically over the 12 month subscriber contract, and amortized the deferred amounts to expense over the contract period. We now expense all subscriber acquisition, upgrade and retention costs as incurred as subscribers activate the DIRECTV service. We determined that expensing such costs was preferable to our prior accounting method after considering the accounting practices of our competitors and companies within similar industries and the added clarity and ease of understanding our reported results for investors. As a result of the change, we expensed the total of the deferred costs, which amounted to $503.9 million ($311.5 million, net of taxes), as a cumulative effect of accounting change on January 1, 2004.

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Note 3: Intangible Assets

        The following table sets forth the amounts recorded for intangible assets as of the periods presented:

        The following table represents the amounts recorded as amortization expense for intangible assets for the periods presented:

        Estimated amortization expense for intangible assets in each of the next five years and thereafter is as follows: $264.7 million for the remainder of 2005, $353.0 million in 2006, $353.0 million in 2007, $342.6 million in 2008, $247.8 million in 2009 and $143.1 million thereafter.

Note 4: Debt

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        Notes Payable.    DIRECTV Holdings and DIRECTV Financing Co., Inc.'s, or DIRECTV Financing, (together with DIRECTV Holdings, the Co-Issuers) $1,400.0 million in registered senior notes are due in 2013 and bear interest at 8.375%. Principal on the senior notes is payable upon maturity, while interest is payable semi-annually. The senior notes have been fully and unconditionally guaranteed, jointly and severally, by each of DIRECTV Holdings' material domestic subsidiaries (other than DIRECTV Financing) (the Guarantor Subsidiaries) on a senior unsecured basis. The amount of interest accrued related to the senior notes was $4.9 million at March 31, 2005 and $34.2 million at December 31, 2004.

        The fair value of our senior notes was approximately $1,514.3 million at March 31, 2005 and $1,569.8 million at December 31, 2004 based on quoted market prices on those dates.

        On August 27, 2004, in connection with the completion of the Pegasus Satellite Television, Inc., or Pegasus, and National Rural Telecommunications Cooperative, or NRTC, transactions described in Note 6, we borrowed $875.0 million from The DIRECTV Group. The $875.0 million unsecured promissory note is payable in full on December 31, 2010. The promissory note bears interest, which is payable quarterly, at the three month London InterBank Offered Rate, or LIBOR. We may prepay the note in whole or in part at any time without penalty.

        Credit Facility.    At March 31, 2005, $1,001.6 million was outstanding under our senior secured credit facility. Borrowings under this facility bore interest at a rate equal to LIBOR plus 1.75%. The amount of interest accrued related to the senior secured credit facility was $2.4 million at March 31, 2005 and $2.3 million at December 31, 2004.

        Financing Transactions.    In April 2005, we entered into a new senior secured credit facility. The new senior secured credit facility is comprised of a $500.0 million six-year Term Loan A, a $1,500.0 million eight-year Term Loan B, both of which are fully funded, and a $500.0 million undrawn six-year revolving credit facility. We used the $2,000.0 million proceeds from the transaction to repay our senior secured credit facility outstanding at March 31, 2005 and our $875.0 million borrowing from Parent, and to pay related financing costs. We will use the excess proceeds for future working capital and other requirements.

        The terms of the new senior secured credit facility resulted in a lower interest rate and contain certain financial and other covenants that are less restrictive than the senior secured credit facility we repaid. The new senior secured credit facility bears interest at a rate equal to LIBOR plus 1.50% and requires us to pay a commitment fee of 0.25% per year for the unused commitment under the revolving credit facility. The interest rate and commitment fee may be increased or decreased under certain conditions. The new senior secured credit facility is secured by substantially all of our assets and is fully and unconditionally guaranteed, jointly and severally, by all of our material domestic subsidiaries.

        We announced that on May 19, 2005 we intend to redeem $490.0 million of our senior notes at a redemption price of 108.375% plus accrued and unpaid interest, for a total of approximately $538 million, which we will fund from a capital contribution from our Parent.

        The repayment of our senior secured credit facility outstanding at March 31, 2005 and partial redemption of the senior notes will result in a second quarter of 2005 pre-tax charge of approximately $56 million associated with the write-off of a portion of our deferred debt issuance costs and the premium paid for the redemption of our senior notes.

        After giving effect to the planned partial redemption of our senior notes in the second quarter of 2005 and the new senior secured credit facility, our notes payable and credit facility mature as

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follows: $497.5 million for the remainder of 2005; $15.0 million in 2006; $15.0 million in 2007; $52.5 million in 2008; $102.5 million in 2009 and $2,717.5 million thereafter. These amounts do not reflect potential prepayments that may be required under our new senior secured credit facility, which could result from a computation of excess cash flows that we are required to make at each year end under the credit agreement.

        Covenants and Restrictions.    The new senior secured credit facility requires us to comply with certain financial covenants. The senior notes and the new senior secured credit facility also include covenants that restrict the Co-Issuers and the Guarantor Subsidiaries' ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions as provided in the credit agreement and senior notes indenture. Should we fail to comply with our covenants, all or a portion of our borrowings under the senior notes and new senior secured credit facility could become immediately payable and the revolving credit facility could be terminated. We are in compliance with all covenants under our new senior secured credit facility and senior notes.

Note 5: Related-Party Transactions

        The DIRECTV Group and affiliates.    We enter into related-party transactions with The DIRECTV Group and certain of its affiliates as part of normal operations.

        We receive an allocation of employee benefit expenses from The DIRECTV Group. We believe that our consolidated financial statements reflect our cost of doing business in accordance with Securities and Exchange Commission Staff Accounting Bulleting No. 55, "Allocation of Expenses and Related Disclosures in Financial Statements of Subsidiaries, Divisions of Lesser Business Components of Another Entity; Cheap Stock."

        During the third quarter of 2004, as part of the NRTC and Pegasus transactions discussed in Note 6, we borrowed $875.0 million from The DIRECTV Group, which resulted in interest expense of $5.6 million for the three months ended March 31, 2005. See Note 4 for further discussion of the $875.0 million debt.

        During the first quarter of 2005, The DIRECTV Group contributed to us SPACEWAY satellite assets at its cost in the amount of $24.0 million, which we recorded as a capital contribution. In addition, see Note 4 for further discussion of the approximately $538 million capital contribution received from The DIRECTV Group.

        News Corporation and affiliates.    News Corporation owns approximately 34% of the outstanding common stock of The DIRECTV Group through its wholly-owned subsidiary, Fox Entertainment Group, Inc. We purchase products and services from various affiliates of News Corporation, including system access cards, rights to distribute television programming, subscription services, broadcast engineering and production services and television advertising.

        Effective March 1, 2004, NDS Limited, or NDS, a subsidiary of News Corporation, became the exclusive provider of our conditional access products and services, including system access cards, a key component of the access security system in our set-top receivers. NDS is responsible for developing and periodically replacing system access cards during the term of our agreement with them.

        Other.    We purchase telemetry, tracking and control services, or TT&C, for certain of our satellites and lease additional satellite capacity from PanAmSat Corporation, or PanAmSat, which was a

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subsidiary of The DIRECTV Group until its sale on August 20, 2004. Prior to the PanAmSat sale, our transactions were considered related-party with the costs included in "Broadcast operations expenses" in the consolidated statements of operations.

        Prior to The DIRECTV Group's sale of Hughes Network System, Inc.'s, or HNS', set-top receiver manufacturing operations to Thomson Inc. on June 22, 2004, we purchased DIRECTV System equipment from and provided system access cards to HNS. We recorded the cost of purchases of DIRECTV System equipment from HNS in inventory and recognized the cost of the equipment in "Subscriber acquisition costs" or "Upgrade and retention costs" in accordance with our accounting policies. We recorded DIRECTV System access cards provided to HNS as "Revenues" in the consolidated statements of operations. We recorded the amounts due to HNS in "Accounts payable and accrued liabilities" in the consolidated balance sheets.

        The following table summarizes related-party transactions:

        The following table sets forth the amount of accounts receivable from and accounts payable to related-parties as well as the amount borrowed from Parent:

Note 6: Acquisitions and Other Transactions

NRTC Contract Rights

        On June 2, 2004, we announced an agreement with the NRTC, effective June 1, 2004, to end the NRTC's exclusive DIRECTV service distribution agreement and all related agreements. As a result of this agreement, we now have the right to sell our services in all territories across the United States. In

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conjunction with the agreement, we recorded $334.1 million as distribution rights in "Intangible Assets, net" in the consolidated balance sheets. We are amortizing the distribution rights intangible asset to expense over seven years, which represents the remaining life of the DIRECTV service distribution agreement.

NRTC Member Subscribers

        In connection with the NRTC transaction described above, during the second and third quarters of 2004, all NRTC members, representing approximately 357,000 subscribers, excluding Pegasus, elected to sell their subscribers to us. As a result, we recorded a subscriber related intangible asset in "Intangible Assets, net" in the consolidated balance sheets amounting to $385.5 million, which we are amortizing over the estimated subscriber lives of approximately six years. We are paying certain NRTC members who elected a long-term payment option over seven years.

        As a result of the above transactions, at March 31, 2005 we owe the NRTC and its members who elected the long-term payment option $472.3 million, excluding interest, which is payable approximately as follows: $47.8 million for the remainder of 2005, $67.1 million in 2006, $71.2 million in 2007, $75.5 million in 2008, $80.2 million in 2009 and $130.5 million thereafter.

Pegasus Subscribers

        On August 27, 2004, we acquired the subscribers and certain assets, consisting primarily of accounts receivable, of Pegasus for a total purchase price of $987.9 million. The total net cash consideration we paid to Pegasus amounted to $773.0 million, which is the total purchase price net of amounts owed by Pegasus for programming and other services and a May 2004 $63 million judgment in our favor. As a result of the transaction, we recorded a subscriber related intangible asset in "Intangible Assets, net" in the consolidated balance sheets amounting to $951.3 million, which we are amortizing over the estimated subscriber lives of approximately five years.

        During the third quarter of 2004, we funded the cash proceeds required for the Pegasus and NRTC transactions described above by $875.0 million of borrowings from Parent and a $200.0 million capital contribution from Parent. See Note 4 for further discussion of debt.

72.5 WL Orbital License

        As part of an arrangement with Telesat, a Canadian telecommunications and broadcast services company, we agreed to provide Telesat the use of the DIRECTV 3 satellite, which was previously used as an in-orbit spare, through the end of its useful life and in return Telesat agreed to allow us the use of its 72.5 WL orbital location through 2008. As additional consideration for our use of 72.5 WL, we also agreed to allow Telesat to use DIRECTV 5 or a similar satellite for a five year period, subject to certain conditions, beginning at the end of 2008. Upon receipt of final approval from the FCC in the third quarter of 2004, we transferred DIRECTV 3 to Telesat and relocated DIRECTV 5, which was also an in-orbit spare, to 72.5 WL to provide additional local channels and other programming in the United States. We recorded these transactions as an exchange of similar productive assets based on the net book values of the assets exchanged. As a result during the third quarter of 2004, we recorded a $172.5 million 72.5 WL orbital license intangible asset, which is equal to the $81.4 million net book value of the DIRECTV 3 satellite transferred from satellites, net, and an accrual for deferred lease revenues of $91.1 million, representing the value of the transferred satellite over the five year lease period. We are amortizing the 72.5 WL orbital license intangible asset over the four year contract period and will recognize the deferred lease revenues as an offset to depreciation expense during the five year lease period beginning at the end of 2008.

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Long-Term Purchase Agreement

        As part of The DIRECTV Group's sale of HNS' set-top receiver manufacturing operations to Thomson in June 2004, we entered into a long-term purchase agreement, or the Agreement, with Thomson for the supply of set-top receivers. As part of this transaction, we received approximately $200 million in cash from Thomson and can earn an additional $50 million rebate from Thomson if Thomson's aggregate sales of our 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. We can also earn, on a pro rata basis, an additional $100 million rebate from Thomson if Thomson's aggregate sales of our set-top receivers are in excess of $4 billion and up to $6 billion during the Contract Term. The approximately $200 million in cash received from Thomson was recorded in "Unearned subscriber revenue and deferred credits" and "Other Liabilities and Deferred Credits" in the consolidated balance sheets and is recorded as an offset to "Subscriber acquisition costs" and/or "Upgrade and retention costs" in the consolidated statements of operations, as appropriate, on a pro rata basis as the set-top receivers purchased from Thomson are activated. We have 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 $50 million rebate during the initial contract period. We record a proportionate amount of the $50 million rebate as a credit to "Subscriber acquisition costs" and/or "Upgrade and retention costs" in the consolidated statements of operations upon set-top receiver activation over the initial contract period with a corresponding entry to "Accounts receivable, net" in the consolidated balance sheets. As a result, during the first quarter of 2005, we recognized $12.3 million of the $200 million deferral and the $50 million rebate in the consolidated statements of operations.

Note 7: Commitments and Contingencies

Litigation

        Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, claims and proceedings are pending against us arising in the ordinary course of business. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or treble damage claims, or demands that, if granted, could require us to pay damages or make other expenditures in amounts that could not be estimated at March 31, 2005. After discussion with counsel representing us in those actions, it is the opinion of management that such litigation is not expected to have a material adverse effect on our consolidated results of operations or financial position.

Other

        We use in-orbit and launch insurance to mitigate the potential financial impact of satellite fleet launch and in-orbit failures unless the premium costs are considered uneconomic relative to the risk of satellite failure. The insurance generally covers the unamortized book value of covered satellites. We do not insure against lost revenues in the event of a total or partial loss of the capacity of a satellite. We generally rely on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the impact that a satellite failure could have on our ability to provide service. At March 31, 2005, the net book value of uninsured satellites amounted to $409.3 million.

Commitments

        At March 31, 2005, our minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $128.8 million,

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payable as follows: $20.3 million for the remainder of 2005, $26.7 million in 2006, $25.3 million in 2007, $24.0 million in 2008, $11.2 million in 2009 and $21.3 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options, which we have not considered in the amounts disclosed. Our rental expense under operating leases was $12.6 million for the three months ended March 31, 2005 and $8.7 million for the three months ended March 31, 2004.

        At March 31, 2005, we anticipate minimum payments under our current contractual commitments, which include agreements for broadcast programming, the purchase of services that we have outsourced to third parties, such as call center operations, billing services and TT&C, and the cost of planned satellite construction and launch contracts to be approximately $586.7 million for the remainder of 2005, $839.8 million in 2006, $926.1 million in 2007, $918.2 million in 2008, $873.1 million in 2009 and $1,335.6 million thereafter. Due to the uncertainty of the timing of payments, we exclude from the minimum payments above our remaining commitment to purchase in excess of $200.0 million of set-top receivers from Thomson by June 2007.

Note 8: Condensed Consolidating Financial Statements

        The following presents the condensed consolidating statements of operations and the condensed consolidating statements of cash flows for the three months ended March 31, 2005 and 2004 and the condensed consolidating balance sheets as of March 31, 2005 and December 31, 2004 of the Co-Issuers, Guarantor Subsidiaries, and the eliminations necessary to present DIRECTV Holdings' financial statements on a consolidated basis. We have included RSG Resource Supply GmbH, a foreign subsidiary, which is not a guarantor of the senior notes or the senior secured credit facility and has no material operations, assets or liabilities, in the "Guarantor Subsidiaries" column in the presentation below. These condensed consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements of DIRECTV Holdings.

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Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2005

Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2004

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Condensed Consolidating Balance Sheet
As of March 31, 2005

Condensed Consolidating Balance Sheet
As of December 31, 2004

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Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2005

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2004

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following is a discussion of our financial condition and results of operations for the periods described below. This discussion should be read in conjunction with our management's discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 1, 2005 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 use of statements that include phrases such as we "believe," "estimate," "expect," "anticipate," "intend," "plan," "foresee," "project" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical results or from those expressed or implied by the relevant forward-looking statement. Risk factors which could cause actual performance and future actions to differ materially from forward-looking statements made herein include, among others, the following:

•

we compete with other multi-channel video programming distributors some of whom have greater resources and increasing levels of competition could materially adversely affect our ability to grow and increase earnings;



•

we depend on the Communications Act for access to cable-affiliated programming and changes impacting that access could materially adversely affect us;



•

regulatory carriage requirements may negatively affect our ability to deliver local broadcast stations, as well as other aspects of our business;



•

loss of FCC licenses and other regulatory approvals critical to our business could materially adversely affect us;



•

we depend on others to produce programming and if the costs of such programming increase more than anticipated, it could materially adversely affect our financial performance;



•

higher than anticipated subscriber acquisition costs could materially adversely affect our financial performance;



•

higher than anticipated subscriber churn or subscriber upgrade or retention costs could materially adversely affect our financial performance;



•

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;



•

construction or launch delays on satellites could materially adversely affect our revenues and earnings;



•

our satellites are subject to significant launch and operational risks which could materially adversely impact our ability to provide our service;



•

if the cost of commercial insurance coverage on our satellites is too high, we may forego insurance coverage and the loss of a satellite that is not insured could materially adversely affect our earnings;



•

to remain competitive, we must keep pace with technological developments and our ability to do so is uncertain;

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•

failure to protect necessary intellectual property we own, dependence on third party intellectual property or inadvertent infringement of patents and proprietary rights of others could materially adversely affect our ability to provide service or result in significant liability;



•

we are subject to numerous contractual constraints on our ability to raise additional debt;



•

weaknesses in the U.S. economy may harm our business;



•

future acquisitions, strategic partnerships and divestitures may involve additional uncertainties;



•

we are party to various lawsuits, which are subject to uncertainties and for which the outcome cannot be predicted with assurance; and



•

we may face other risks described from time to time in periodic reports filed by us with the SEC.

        We urge you to consider these factors carefully in evaluating forward-looking statements. The forward looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

Key Terminology Used in Management's Discussion and Analysis of Financial Condition and Results of Operations

        Revenues.    We earn revenues mostly from subscriber subscriptions to basic and premium channel programming, pay-per-view programming and seasonal and live sporting events. We also earn revenues from fees from subscribers with multiple set-top receivers (which we refer to as mirroring fees), hardware revenues from subscribers who purchase receivers under our direct sales and upgrade and retention programs, our published programming guide, warranty service fees and advertising services. Prior to the completion of the transactions with the NRTC and Pegasus in the third quarter of 2004, revenues also included fees earned from the NRTC and Pegasus, which were equal to a percentage of the subscriber revenues earned from the subscribers located in certain areas (mainly rural). See "Discussion of Significant Events" below for further discussion.

        Programming and Other Costs.    These costs primarily include license fees for subscription service programming, pay-per-view programming, live sports and other events. Other costs include expenses associated with the publication and distribution of our programming guide, continuing service fees paid to third parties for active DIRECTV subscribers, warranty service premiums we pay to a third party and production costs for on-air advertisements we sell to third parties.

        Subscriber Service Expenses.    Subscriber service expenses include the costs of customer call centers, billing, remittance processing and certain home services expenses, such as in-home repair costs.

        Subscriber Acquisition Costs—Third Party Customer Acquisitions.    The majority of these costs represent commissions we pay to third parties to acquire new DIRECTV subscribers, which include our national retailers as well as independent satellite television retailers, dealers, regional Bell operating companies and others. We also include the costs we incur for subsidies of DIRECTV System equipment, installation and advertising.

        Subscriber Acquisition Costs—Direct Customer Acquisitions.    These costs consist primarily of hardware, installation, advertising and customer call center expenses associated with new DIRECTV subscribers added through our direct customer acquisition program.

        SAC.    We calculate SAC, which represents total subscriber acquisition costs stated on a per subscriber basis, by dividing total subscriber acquisition costs for a period (the sum of subscriber acquisition costs reported for third party customer acquisitions and direct customer acquisitions) by the

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number of gross new subscribers that we acquired through third parties and our direct customer acquisition program during the period.

        Upgrade and Retention Costs.    The majority of 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 digital video recorders, or DVRs, high-definition, or HD, receivers and local channels, our multiple set-top receiver offer and similar initiatives. Retention costs primarily include the costs of installing and/or providing hardware under our movers program for subscribers relocating to a new residence.

        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 the DIRECTV signal.

        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.

        Operating Profit Before Depreciation and Amortization.    We calculate 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, by adding amounts under the caption "Depreciation and amortization expense" to "Operating Profit," as presented in the consolidated statements of operations. 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 The DIRECTV Group use Operating Profit Before Depreciation and Amortization to evaluate our operating performance and to allocate resources and capital. We also use this metric 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 intangible assets. To compensate for the exclusion of depreciation and amortization expense from operating profit, our management and The DIRECTV Group 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 a means to compare operating results exclusive of depreciation and amortization expense. We believe 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.

        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 DIRECTV owned and operated subscribers for the period. DIRECTV owned and operated subscribers exclude the subscribers of the former NRTC members and affiliates prior to the NRTC and Pegasus transactions in the second and third quarters of 2004, which we discuss in more detail below in "Discussion of Significant Events." We calculate average DIRECTV owned and operated subscribers for the year and the period by adding the number of DIRECTV owned and operated subscribers as of

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the beginning of the year or 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 DIRECTV subscribers whose service is disconnected, expressed as a percentage of the average total number of DIRECTV subscribers. We calculate average monthly subscriber churn by dividing the average monthly number of disconnected DIRECTV subscribers for the period (the subscribers disconnected during the period divided by the number of months in the period) by average DIRECTV subscribers for the period. Average monthly churn includes the results from the former NRTC and Pegasus subscribers.

        Subscriber Count.    The total number of DIRECTV subscribers represents the total number of subscribers actively subscribing to the DIRECTV service, including the subscribers of the NRTC's members and affiliates, seasonal subscribers and subscribers who are in the process of relocating.

Business Overview

        DIRECTV Holdings is a wholly-owned subsidiary of The DIRECTV Group and consists of DIRECTV Enterprises, LLC and its wholly-owned subsidiaries and DIRECTV Financing Co., Inc.

        We earn the majority of our revenues and generate most of our cash flows from subscribers who subscribe to basic, premium and seasonal sporting event programming, subscriber purchases of pay-per-view and live sporting event programming, and other subscriber revenues, which are derived mostly from mirroring fees.

        The majority of our expenses and cash outflows relate to the cost of programming from third parties, the cost of acquiring and retaining subscribers, and general and administrative expenses. We also use a significant amount of cash for capital expenditures for satellites, broadcast equipment and software to support customer billing, collections and subscriber relationship management.

        Satellite Development.    On April 26, 2005, SPACEWAY 1 was successfully launched. SPACEWAY 1 is the first of four Ka-band satellites that will enable us to broadcast local HD channels into several of the nation's largest markets.

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Results of Operations

        The following table sets forth, for the periods indicated, our unaudited consolidated statements of operations and certain other operating data: