Dish Network 2004 Annual Report Download - page 55

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
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reductions in the cost of set-top box equipment of approximately $6.8 million and $6.5 million, respectively. “Cost of
sales - equipment” represented 65.8% and 65.3% of “Equipment sales,” during the years ended December 31, 2003 and
2002, respectively.
Subscriber acquisition costs. “Subscriber acquisition costs” totaled approximately $1.312 billion for the year ended
December 31, 2003, an increase of $143.4 million or 12.3% compared to the same period in 2002. The increase
principally resulted from the sale of equipment at little or no cost to the subscriber, a decrease in subscriber equipment
leases and increases in acquisition marketing as discussed under “SAC and Equivalent SAC” below. This increase
was partially offset by benefits of approximately $77.2 million which were recorded in 2003. These benefits include
approximately $34.4 million related to the receipt of a reimbursement payment for previously sold set-top box
equipment pursuant to a litigation settlement and approximately $42.8 million related to a reduction in the cost of
set-top box equipment resulting from a change in estimated royalty obligations. “Subscriber acquisition costs”
during the year ended December 31, 2002 included a benefit of approximately $47.7 million resulting from the non-
recurring reduction in the cost of set-top box equipment as a result of favorable litigation developments and the
completion of royalty arrangements with more favorable terms than estimated amounts previously accrued.
SAC and Equivalent SAC. Subscriber acquisition costs per new DISH Network subscriber activation were
approximately $453 for the year ended December 31, 2003 and approximately $421 during the same period in 2002.
As discussed above, SAC during the years ended December 31, 2003 and 2002 included benefits of approximately
$77.2 million and $47.7 million, respectively. Absent these benefits, our SAC for 2003 and 2002 would have been
approximately $27 and $17 higher, respectively, or $480 and $438, respectively. The increase in SAC (excluding these
benefits) during the year ended December 31, 2003 as compared to the same period in 2002 was primarily attributable
to an increase in the sale of equipment at little or no cost to the subscriber, including our promotion in which
subscribers are eligible to receive up to three free receivers or a free digital video recorder, together with a decrease in
subscriber equipment leases. The increase also resulted from an increase in acquisition marketing in 2003 compared
to 2002.
Equipment capitalized under our lease program for new customers totaled approximately $108.1 million and $277.6
million for the year ended December 31, 2003 and 2002, respectively. Returned equipment related to disconnected
lease program subscribers, which became available for sale rather than being redeployed through the lease program,
together with payments received in connection with equipment not returned to us, totaled approximately $30.2 million
and $37.8 million during the years ended December 31, 2003 and 2002, respectively. If we included in our calculation
of SAC the equipment capitalized less the value of equipment returned and payments received, our Equivalent SAC
would have been approximately $480 during 2003 compared to $507 during 2002. As discussed above, “Subscriber
acquisition costs” during the years ended December 31, 2003 and 2002 included benefits of approximately $77.2
million and $47.7 million, respectively. Absent these benefits, our Equivalent SAC for 2003 and 2002 would have
been $507 and $524, respectively. This decrease principally resulted from a greater percentage of returned leased
equipment being redeployed to new lease customers and relatively less of that equipment being offered for sale as
remanufactured equipment.
General and administrative expenses. “General and administrative expenses” totaled $332.7 million during the year
ended December 31, 2003, an increase of $12.8 million or 4.0% compared to the same period in 2002. The increase in
“General and administrative expenses” was primarily attributable to increased personnel and infrastructure expenses to
support the growth of the DISH Network. “General and administrative expenses” represented 5.8% and 6.6% of “Total
revenue” during the years ended December 31, 2003 and 2002, respectively. This decrease in “General and
administrative expenses” as a percent of “Total revenue” was the result of increased administrative efficiencies.
Non-cash, stock-based compensation. During 1999, we adopted an incentive plan under our 1995 Stock Incentive
Plan, which provided certain key employees with incentives including stock options. During the year ended
December 31, 2003, we recognized $3.5 million of compensation under this performance-based plan, a decrease of
$7.7 million compared to the same period in 2002. This decrease was primarily attributable to proportionate vesting
and stock option forfeitures resulting from employee terminations. The remaining deferred compensation of $1.2
million as of December 31, 2003 was recognized over the remaining vesting period, ending on March 31, 2004.