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Table of Contents
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
In accordance with the guidance of EITF Issue No. 02-7, “Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible
Asset” (“EITF 02-7”), we combine all our indefinite life FCC licenses into a single unit of accounting. The analysis encompasses future cash
flows from satellites transmitting from such licensed orbital locations, including revenue attributable to programming offerings from such
satellites, the direct operating and subscriber acquisition costs related to such programming, and future capital costs for replacement satellites.
Projected revenue and cost amounts included current and projected subscribers. In conducting our annual impairment test in 2006, we
determined that the estimated fair value of the FCC licenses, calculated using the discounted cash flow analysis, exceeded their carrying
amount.
As of December 31, 2006 and 2005, our identifiable intangibles subject to amortization consisted of the following:
Amortization of these intangible assets, recorded on a straight line basis over an average finite useful life primarily ranging from approximately
three to twenty years, was $36.8 million and $39.0 million for the years ended December 31, 2006 and 2005, respectively. The aggregate
amortization expense is estimated to be $36.5 million for 2007, $22.9 million for 2008, $18.1 million annually for each of the years 2009
through 2011 and $80.8 million thereafter.
The excess of our investments in consolidated subsidiaries over net tangible and intangible asset value at acquisition is recorded as goodwill.
As of December 31, 2006 and 2005, we had $3.4 million of goodwill. In conducting our annual impairment test in 2006, we determined that the
carrying amount of our goodwill was not impaired.
Smart Card Replacement
We use microchips embedded in credit card-sized access cards, called “smart cards,” or in security chips in our EchoStar receiver systems to
control access to authorized programming content. Our signal encryption has been compromised by theft of service and could be further
compromised in the future. We continue to respond to compromises of our encryption system with security measures intended to make signal
theft of our programming more difficult. During 2005, we completed the replacement of our smart cards. While the smart card replacement did
not fully secure our system, we continue to implement software patches and other security measures to help protect our service. There can be
no assurance that our security measures will be effective in reducing theft of our programming signals.
As of December 31, 2006, we did not have any accrual for future smart card replacement. At the time, if ever, that we determine existing smart
cards will be replaced again, we would accrue a liability for the estimated cost to replace those cards in receivers sold to and owned by
subscribers. That cost estimate would be based on the number of cards expected to be replaced, taking into account a number of variables,
including the cost of the cards and historical subscriber churn trends. With respect to receivers we lease, we would record the expenses of
replacement as incurred. The total replacement cost could exceed $100.0 million.
F-13
• Replacement satellite applications are generally authorized by the FCC subject to certain conditions, without substantial cost under
a stable regulatory, legislative and legal environment;
•
Maintenance expenditures in order to obtain future cash flows are not significant;
•
DBS licenses are not technologically dependent; and
•
We intend to use these assets indefinitely.
As of
December 31, 2006
December 31, 2005
Intangible
Accumulated
Intangible
Accumulated
Assets
Amortization
Assets
Amortization
(In thousands)
Contract based
$
189,426
$
(45,924
)
$
189,426
$
(29,739
)
Customer relationships
73,298
(50,142
)
73,298
(31,818
)
Technology
-
based
33,500
(5,655
)
25,500
(3,377
)
Total
$
296,224
$
(101,721
)
$
288,224
$
(64,934
)