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EchoStar Discloses Accounting Problems, New Subscriber Gains

By | March 11, 2004

      A 15-day extension for filing its annual report could be requested by EchoStar Communications [DISH] to report its 2003 full-year and fourth quarter results, after the company disclosed the Securities and Exchange Commission (SEC) found an accounting problem that may require revision of the company’s 2001 financial statements.

      The SEC has informed the company it over-accrued $17 million and $9 million for the replacement of smart cards during 2001 and 2002, respectively. Those cards, which provide security to prevent non-subscribers from receiving EchoStar programming, become obsolete over time due to piracy. From 1996 through 2002, EchoStar gradually established a reserve to accrue for the estimated cost to replace the smart cards that are embedded in satellite receivers sold and leased by EchoStar to its customers.

      The SEC concluded EchoStar’s accrual to replace the smart cards in satellite receivers sold to and owned by consumers was appropriate. However, the SEC determined EchoStar should not have accrued a liability for smart cards in satellite receivers owned by EchoStar and leased to consumers.

      No other outstanding accounting issues concerning EchoStar’s financial reporting have surfaced, company officials said. While other accounting resolutions are possible, EchoStar would be required to have its 2001 financial statements re-audited by its current auditors, KPMG, unless the SEC reconsiders its current position. EchoStar’s auditor in 2001 was Arthur Andersen LLP.

      Reversal of the accrual would not affect EchoStar’s previously reported free cash flow, but it would increase earnings for those years and would improve EchoStar’s previously reported pre-tax losses on a dollar-for-dollar basis. There can be no assurance that the results of any such re-audit would not result in other modifications to EchoStar’s 2001 financial results or results for other years, company officials said.

      They also expressed hope that a re-audit could be completed and the company’s Form 10-K filed with the SEC by March 30. Representatives from the company, its independent accountants and the SEC are continuing to discuss the matter and expect to conclude these talks in the next several days. EchoStar will issue a subsequent release with the details of its 4Q03 earnings call when the new date for the earnings call has been determined.

      EchoStar also announced Thursday that it had added approximately 340,000 net new subscribers during 4Q03. DISH Network had approximately 9.425 million subscribers as of Dec. 31, 2003, an increase of 1.245 million subscribers from Dec. 31, 2002.

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