Dish Network 2003 Annual Report Download - page 81

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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
F–14
In December 2003, we made an investment in South.com LLC (“South.com”), a company we consolidate in our
consolidated financial statements. South.com was formed to, among other things, bid on and hold FCC licenses.
During December 2003, South.com paid a $7.1 million deposit to participate in the January 2004 FCC license
auction. This initial deposit is included in “Other current assets” in our consolidated balance sheets as of December
31, 2003. South.com participated in the January 2004 FCC license auction and was the high-bidder on several
licenses. Consequently, during January 2004 South.com paid an additional deposit to the FCC of $20.6 million.
As of December 31, 2003 and 2002, we had approximately $52.7 million of gross amortizable identifiable intangible
assets with related accumulated amortization of approximately $42.9 million and $32.6 million, respectively. These
identifiable intangibles primarily include acquired contracts and technology-based intangibles. Amortization of these
intangible assets with an average finite useful life of approximately five years was $10.3 million and $10.9 million for
the years ended December 31, 2003 and 2002, respectively. We estimate that such amortization expense will aggregate
approximately $9.8 million for the remaining useful life of these intangible assets of approximately one year. In
addition, we had approximately $3.4 million of goodwill as of December 31, 2003 and 2002 which arose in connection
with a 2002 acquisition.
Smart Card Replacement
We use conditional access technology, or smart cards, to encrypt the programming we transmit to subscribers so
that only those who pay for service can receive our programming. Theft of cable and satellite programming has
been widely reported and our signal encryption has been pirated and could be further compromised in the future. In
order to combat piracy and maintain the functionality of active set-top boxes that have been sold to subscribers, we
intend to replace older generation smart cards with newer generation smart cards in the future. We have accrued a
liability for the replacement of smart cards in active set-top boxes that have been sold to subscribers. As of
December 31, 2003 and 2002, we had accrued $74.6 million and $80.8 million, respectively, for replacement of
these smart cards. During the years ended December 31, 2003 and 2002, approximately $6.2 million and $717
thousand, respectively, was charged against the smart card accrual for the replacement of older generation smart
cards. This accrual is included in “Other accrued expenses” in our consolidated balance sheets. Charges recorded
to “Subscriber-related expenses” in our consolidated statements of operations and comprehensive income (loss)
totaled $2.9 million and $10.3 million, respectively, during the years ended December 31, 2002 and 2001. There
was no additional expense recorded for smart card replacements during 2003. This liability will be reduced as smart
card replacements occur. The liability for the replacement of smart cards is based on the estimated number of cards
that will be needed to execute our plan. This estimate was established based on a number of variables, including
historical subscriber churn trends and the estimated per card costs for smart card replacements. Different
assumptions or changes in, among other things, the timing of the replacement plan could result in increases or
decreases in the smart card replacement reserve.
Long-Term Deferred Distribution and Carriage Payments
Certain programmers provide us up-front payments. Such amounts are deferred and in accordance with EITF Issue
No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”
(“EITF 02-16”) are recognized as reductions to “Subscriber-related expenses” on a straight-line basis over the
relevant remaining contract term (up to 10 years). The current and long-term portions of these deferred credits are
recorded in the consolidated balance sheets in “Deferred revenue and other” and “Long-term deferred distribution
and carriage payments and other long-term liabilities,” respectively.