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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K  [X]
    
    ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
 OR [  ]
    
    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: 333-31929 EchoStar DBS Corporation  Colorado
(State or other jurisdiction of incorporation or organization)
    
    84-1328967
(I.R.S. Employer Identification No.)
 9601 South Meridian Blvd.
Englewood, Colorado
(Address of principal executive offices)
    
    80112
(Zip Code)
 Registrants telephone number, including area code: (303) 723-1000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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. Yes
[X]  No [  ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [  ] As of
March 29, 2004, the Registrants outstanding Common stock consisted of 1,015 shares of
Common Stock, $0.01 par value. Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
Yes    No    X The Registrant meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing this Annual report on
Form 10-K with the reduced disclosure format. DOCUMENTS INCORPORATED BY REFERENCE  The following documents are incorporated into this Form 10-K by reference:None




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TABLE OF CONTENTS PART IDisclosure regarding
forward-looking statements
    
    
    1Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    4Item 3.
    
    Legal Proceedings
    
    
    4Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    *PART IIItem 5.
    
    Market for Registrant's Common Equity and Related Stockholder Matters
    
    
    10Item 6.
    
    Selected Financial Data
    
    
    *Item 7.
    
    Management's Narrative Analysis of Results of Operations
    
    
    10Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 8.
    
    Financial Statements and Supplementary Data
    
    
    24Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    24Item 9A.
    
    Controls and Procedures
    
    
    24PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    *Item 11.
    
    Executive Compensation
    
    
    *Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    *Item 13.
    
    Certain  Relationships and Related Transactions
    
    
    *Item 14.
    
    Principal Accountant Fees and Services
    
    
    *PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    24Signatures
    
    
    28Index to Financial Statements
    
    
    F-1Certificate of Amendment to the Articles of IncorpSection 302 Certification by Chairman and CEOSection 302 Certification by SVP and CFOSection 906 Certification by Chairman and CEOSection 906 Certification by SVP and CFO
  * This item has been omitted pursuant to the reduced disclosure format
as set forth in General Instruction (2) of Form 10-K.




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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS We make forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 throughout this document. Whenever
you read a statement that is not simply a statement of historical fact (such as
when we describe what we believe, intend, plan, estimate, expect or
anticipate will occur, and other similar statements), you must remember that
our expectations may not be correct, even though we believe they are
reasonable. We do not guarantee that any future transactions or events
described herein will happen as described or that they will happen at all. You
should read this document completely and with the understanding that actual
future results may be materially different from what we expect. Whether actual
events or results will conform with our expectations and predictions is subject
to a number of risks and uncertainties. The risks and uncertainties include,
but are not limited to the following:  
    
    we face intense and increasing competition from the satellite and
cable television industry, new competitors may enter the subscription
television business, and new technologies may increase competition;  
    
    DISH Network subscriber growth may decrease, subscriber turnover
may increase and subscriber acquisition costs may increase;  
    
    satellite programming signals have been pirated and will continue
to be pirated in the future; pirating could cause us to lose
subscribers and revenue and result in higher costs to us;  
    
    programming costs may increase beyond our current expectations; we
may be unable to obtain or renew programming agreements on acceptable
terms or at all; existing programming agreements could be subject to
cancellation;  
    
    weakness in the global or U.S. economy may harm our business
generally, and adverse local political or economic developments may
occur in some of our markets;  
    
    the regulations governing our industry may change;  
    
    our satellite launches may be delayed or fail, or our satellites
may fail in orbit prior to the end of their scheduled lives;  
    
    we currently do not have traditional commercial insurance covering
losses incurred from the failure of satellite launches and/or in-orbit
satellites and we may be unable to settle outstanding claims with
insurers;  
    
    service interruptions arising from technical anomalies on
satellites or on-ground components of our DBS system, or caused by war,
terrorist activities or natural disasters, may cause customer
cancellations or otherwise harm our business;  
    
    we may be unable to obtain needed retransmission consents, Federal
Communications Commission (FCC) authorizations or export licenses,
and we may lose our current or future authorizations;  
    
    we are party to various lawsuits which, if adversely decided, could
have a significant adverse impact on our business;  
    
    we may be unable to obtain patent licenses from holders of
intellectual property or redesign our products to avoid patent
infringement;  
    
    sales of digital equipment and related services to international
direct-to-home service providers may decrease;  
    
    we are highly leveraged and subject to numerous constraints on our
ability to raise additional debt;  
    
    acquisitions, business combinations, strategic partnerships,
divestitures and other significant transactions may involve additional
uncertainties;  
    
    terrorist attacks, consequences of the war in Iraq, and the
possibility of war or hostilities relating to other countries, and
changes in international political conditions as a result of these
events may continue to affect the U.S. and the global economy and may
increase other risks; and  
    
    we may face other risks described from time to time in periodic and
current reports we file with the Securities and Exchange Commission
(SEC). All cautionary statements made herein should be read as being applicable to all
forward-looking statements wherever they appear. In this connection, investors
should consider the risks described herein and should not place undue reliance
on any forward-looking statements. 1




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We assume no responsibility for updating forward-looking information contained
or incorporated by reference herein or in other reports we file with the SEC. In this document, the words we, our, us and EDBS refer to EchoStar DBS

Corporation and its subsidiaries, unless the context otherwise requires.
EchoStar refers to EchoStar Communications Corporation and its subsidiaries. 2




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PART I 
 Item 1. BUSINESS Brief Description of Business We are a wholly-owned subsidiary of EchoStar Communications Corporation
(EchoStar), a publicly traded company listed on the Nasdaq National Market
under the symbol DISH. Unless otherwise stated, or the context otherwise
requires, references to EchoStar include EDBS and all other direct and indirect
wholly-owned subsidiaries of EchoStar. We refer readers of this report to
EchoStars Annual Report on Form 10-K for the year ended December 31, 2003.
Substantially all of EchoStars operations are conducted by
subsidiaries of ours.
The operations of EchoStar include two interrelated business units:  
    
    The DISH Network  which provides a direct broadcast satellite
subscription television service we refer to as DBS in the United
States; and  
    
    EchoStar Technologies Corporation(ETC)
 which designs and
develops DBS set-top boxes, antennae and other digital equipment for the
DISH Network. We refer to this equipment collectively as EchoStar
receiver systems. ETC also designs, develops and distributes similar
equipment for international satellite service providers. Recent Developments Gemstar-TV Guide International transaction.On March 2, 2004, EchoStar
announced a long-term patent license and distribution agreement with Gemstar-TV
Guide International, Inc. This transaction includes a one-time cash payment by
EchoStar of $190.0 million for use of Gemstar intellectual property and
technology, use of the TV Guide brand on its interactive program guides, and
for distribution arrangements with Gemstar to provide for the launch and
carriage of the TV Guide Channel as well as the extension of an existing
distribution agreement for carriage of the TVG Network. EchoStar also signed
an agreement to resolve all outstanding litigation between it and Gemstar. Also on March 2, 2004, EchoStar announced an agreement to acquire Gemstars
Superstar/Netlink Group LLC (SNG), UVTV distribution, and SpaceCom businesses
and related assets for approximately $48.0 million in cash. EchoStars
purchase of these businesses is subject to certain regulatory approvals and
customary conditions. The effectiveness of the patent license, distribution
agreements and settlement agreement are subject to certain conditions,
including the closing of the SNG sale. Repurchase and Redemption of the 9 3/8% Senior Notes.During the fourth
quarter of 2003, we repurchased in open market transactions approximately
$201.6 million of the original $1.625 billion principal amount of our 9 3/8%
Senior Notes due 2009. The difference between the market price paid and the
principal amount of approximately $12.7 million and unamortized debt issuance
costs related to the repurchased notes of approximately $1.6 million were
recorded as charges to earnings during the fourth quarter of 2003. Effective
February 2, 2004, we redeemed the remaining $1.423 billion principal amount of
the notes at 104.688%, for a total of approximately $1.490 billion. The
premium paid of approximately $66.7 million and unamortized debt issuance costs
of approximately $10.8 million were recorded as charges to earnings in February
2004. WHERE YOU CAN FIND MORE INFORMATION We, as a reporting company, are subject to the informational requirements of
the Exchange Act and accordingly file our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy statements and other
information with the Securities and Exchange Commission (SEC). The Public
may read and copy any materials filed with the SEC at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Please call the
SEC at (800) SEC-0330 for further information on the Public Reference Room. As
an electronic filer, our public filings are maintained on the SECs Internet
site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The
address of that website is http://www.sec.gov. 3




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WEBSITE ACCESS Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act also may be accessed free of charge
through our website as soon as reasonably practicable after we have
electronically filed such material with, or furnished it to, the SEC. The
address of that website is http://www.echostar.com. 
 Item 2. Properties The
following table sets forth certain information concerning the principal
properties of EchoStar: Segment(s) Using
    
    Approximate SquareDescription/Use/Location
    
    Property
    
    Footage
    
    Owned or LeasedCorporate headquarters, Englewood, Colorado
    
    All
    
    
    476,000
    
    
    OwnedEchoStar Technologies Corporation engineering offices and
service center,Englewood, Colorado
    
    ETC
    
    
    150,000
    
    
    OwnedEchoStar Technologies Corporation engineering offices,
Englewood, Colorado
    
    ETC
    
    
    63,000
    
    
    OwnedDigital broadcast operations center, Cheyenne, Wyoming
    
    DISH Network
    
    
    123,000
    
    
    OwnedDigital broadcast operations center, Gilbert, Arizona
    
    DISH Network
    
    
    120,000
    
    
    OwnedCustomer service center, Littleton, Colorado
    
    DISH Network
    
    
    202,000
    
    
    OwnedCustomer service center and warehouse, El Paso, Texas
    
    DISH Network
    
    
    171,000
    
    
    OwnedCustomer service center, McKeesport, Pennsylvania
    
    DISH Network
    
    
    106,000
    
    
    LeasedCustomer service center, Christiansburg, Virginia
    
    DISH Network
    
    
    103,000
    
    
    OwnedCustomer service center and general offices, Pine Brook,
New Jersey
    
    DISH Network
    
    
    67,000
    
    
    LeasedCustomer service center, Thornton, Colorado
    
    DISH Network
    
    
    55,000
    
    
    OwnedCustomer service center, Harlingen, Texas
    
    DISH Network
    
    
    54,000
    
    
    OwnedCustomer service center, Bluefield, West Virginia
    
    DISH Network
    
    
    50,000
    
    
    OwnedWarehouse and distribution center, Atlanta, Georgia
    
    DISH Network
    
    
    144,000
    
    
    LeasedWarehouse and distribution center, Denver, Colorado
    
    DISH Network
    
    
    133,000
    
    
    LeasedWarehouse and distribution center, Sacramento, California
    
    DISH Network
    
    
    82,000
    
    
    OwnedWarehouse and distribution center, Dallas, Texas
    
    DISH Network
    
    
    80,000
    
    
    LeasedEngineering offices and warehouse, Almelo, The
Netherlands
    
    Other
    
    
    55,000
    
    
    Owned
 
 Item 3. Legal Proceedings WIC Premium Television Ltd. During July 1998, WIC Premium Television Ltd. (WIC), an Alberta corporation,
filed a lawsuit against EchoStar in the Federal Court of Canada Trial Division.
General Instrument Corporation, HBO, Warner Communications, Inc., Showtime and
United States Satellite Broadcasting Company, Inc. were also named as
defendants. During September 1998, WIC filed another lawsuit against EchoStar in the Court
of Queens Bench of Alberta Judicial District of Edmonton. WIC is authorized
to broadcast certain copyrighted work, such as movies and concerts, to
residents of Canada. WIC alleged that the defendants engaged in, promoted,
and/or allowed satellite dish equipment from the United States to be sold in
Canada and to Canadian residents and that some of the defendants allowed and
profited from Canadian residents purchasing and viewing subscription television
programming that is only authorized for viewing in the United States. During
December 2003, the matter was dismissed with no impact on our business. Distant Network Litigation Until July 1998, EchoStar obtained feeds of distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District
of Florida entered a nationwide permanent injunction requiring PrimeTime 24 to
shut off distant network channels to many of its customers, and henceforth to
sell those channels to consumers in accordance with the injunction. 4




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In October 1998, EchoStar filed a declaratory judgment action against ABC, NBC,
CBS and FOX in the United States District Court for the District of Colorado.
EchoStar asked the Court to find that its method of providing distant network
programming did not violate the Satellite Home Viewer Act and hence did not
infringe the networks copyrights. In November 1998, the networks and their
affiliate association groups filed a complaint against EchoStar in Miami
Federal Court alleging, among other things, copyright infringement. The Court
combined the case that EchoStar filed in Colorado with the case in Miami and
transferred it to the Miami Federal Court. In February 1999, the networks filed a Motion for Temporary Restraining Order,
Preliminary Injunction and Contempt Finding against DirecTV, Inc. in Miami
related to the delivery of distant network channels to DirecTV customers by
satellite. DirecTV settled that lawsuit with the networks. Under the terms of
the settlement between DirecTV and the networks, some DirecTV customers were
scheduled to lose access to their satellite-provided distant network channels
by July 31, 1999, while other DirecTV customers were to be disconnected by
December 31, 1999. Subsequently, substantially all providers of
satellite-delivered network programming other than EchoStar agreed to this
cut-off schedule, although EchoStar does not know if they adhered to this
schedule. In April 2002, EchoStar reached a private settlement with ABC, Inc., one of the
plaintiffs in the litigation and jointly filed a stipulation of dismissal. In
November 2002, EchoStar reached a private settlement with NBC, another of the
plaintiffs in the litigation and jointly filed a stipulation of dismissal. On
March 10, 2004, EchoStar reached a private settlement with CBS, another of the
plaintiffs in the litigation and jointly filed a stipulation of dismissal.
EchoStar also reached private settlements with many independent stations and
station groups. EchoStar was unable to reach a settlement with five of the
original eight plaintiffs  Fox and the associations affiliated with each of
the four networks. A trial took place during April 2003 and the Court issued its final judgment in
June 2003. The District Court found that with one exception EchoStars current
distant network qualification procedures comply with the law. EchoStar has
revised its procedures to comply with the District Courts Order. Although the
plaintiffs asked the District Court to enter an injunction precluding EchoStar
from selling any local or distant network programming, the District Court
refused. While the plaintiffs did not claim monetary damages and none
were awarded, the plaintiffs were recently awarded approximately
$4.8 million in attorneys fees. We intend to appeal this
award even though the amount is substantially less than the amount
sought by the plaintiffs. The District Courts injunction requires EchoStar to use a computer model to
re-qualify, as of June 2003, all of its subscribers who receive ABC, NBC, CBS
or Fox programming by satellite from a market other than the city in which the
subscriber lives. The Court also invalidated all waivers historically provided
by network stations. These waivers, which have been provided by stations for
the past several years through a third party automated system, allow
subscribers who believe the computer model improperly disqualified them for
distant network channels to none-the-less receive those channels by satellite.
Further, even though the Satellite Home Viewer Improvement Act provides that
certain subscribers who received distant network channels prior to October 1999
can continue to receive those channels through December 2004, the District
Court terminated the right of EchoStars grandfathered subscribers to continue
to receive distant network channels. EchoStar believes that the District Court made a number of errors and appealed
the District Courts decision. Plaintiffs cross-appealed. The Court of
Appeals granted EchoStars request to stay the injunction until its appeal is
decided. Oral argument occurred on February 26, 2004. It is not possible to
predict how or when the Court of Appeals will rule on the merits of our appeal. In the event the Court of Appeals upholds the injunction, and if EchoStar does
not reach private settlement agreements with additional stations, EchoStar will
attempt to assist subscribers in arranging alternative means to receive network
channels, including migration to local channels by satellite where available,
and free off air antenna offers in other markets. However, EchoStar cannot
predict with any degree of certainty how many subscribers will cancel their
primary DISH Network programming as a result of termination of their distant
network channels. EchoStar could be required to terminate distant network
programming to all subscribers in the event the plaintiffs prevail on their
cross-appeal and EchoStar is permanently enjoined from delivering all distant
network channels. Termination of distant network programming to subscribers
would result, among other things, in a reduction in average monthly revenue per
subscriber and a temporary increase in churn. 5




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Gemstar During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar-TV Guide
International, Inc. (Gemstar), filed a suit for patent infringement against
EchoStar and certain of its subsidiaries in the United States District Court
for the Western District of North Carolina, Asheville Division. The suit
alleges infringement of United States Patent No. 4,706,121 (the 121 Patent)
which relates to certain electronic program guide functions. In December 2000, EchoStar filed suit against Gemstar-TV Guide (and certain of
its subsidiaries) in the United States District Court for the District of
Colorado alleging violations by Gemstar of various federal and state anti-trust
laws and laws governing unfair competition. Gemstar filed counterclaims
alleging infringement of United States Patent Nos. 5,923,362 and 5,684,525 that
relate to certain electronic program guide functions. In addition, Gemstar
asserted new patent infringement counterclaims regarding United States Patent
Nos. 4,908,713 and 5,915,068. These patents relate to on-screen programming of
VCRs. In February 2001, Gemstar filed patent infringement actions against EchoStar in
the District Court in Atlanta, Georgia and with the ITC. These suits allege
infringement of United States Patent Nos. 5,252,066, 5,479,268 and 5,809,204,
all of which relate to certain electronic program guide functions. In
addition, the ITC action alleged infringement of the 121 Patent which was also
asserted in the North Carolina case previously discussed. On March 1, 2004,
EchoStar entered into a number of agreements with Gemstar including a
settlement agreement which provides for the resolution of the aforemfentioned
disputes between EchoStar and Gemstar. The effectiveness of the settlement is
subject to certain conditions, including the closing of the SNG sale. During 2000, Superguide Corp. (Superguide) also filed suit against EchoStar,
DirecTV and others in the United States District Court for the Western District
of North Carolina, Asheville Division, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. Superguide sought injunctive and declaratory relief
and damages in an unspecified amount. It is EchoStars understanding that
these patents may be licensed by Superguide to Gemstar. Gemstar was added as a
party to this case and asserted these patents against EchoStar. EchoStar
examined these patents and believes that they are not infringed by any of its
products or services. A Markman ruling interpreting the patent claims was
issued by the Court and in response to that ruling, EchoStar filed motions for
summary judgment of non-infringement for each of the asserted patents. Gemstar
filed a motion for summary judgment of infringement with respect to one of the
patents. During July 2002, the Court issued a Memorandum of Opinion on the
summary judgment motions. In its Opinion, the Court ruled that none of
EchoStars products infringe the 5,038,211 and 5,293,357 patents. With respect
to the 4,751,578 patent, the Court ruled that none of EchoStars current
products infringed that patent and asked for additional information before it
could rule on certain low-volume products that are no longer in production.
During July 2002, the Court summarily ruled that the aforementioned low-volume
products did not infringe any of the asserted patents. Accordingly, the Court
dismissed the case and awarded EchoStar its court costs and the case was
appealed to the United States Court of Appeals for the Federal Circuit. On
February 12, 2004, the Federal Circuit affirmed in part and reversed in part
the District Courts findings and remanded the case back to the District Court
for further proceedings. EchoStar will continue to vigorously defend this
case. In the event that a Court ultimately determines that EchoStar infringes
on any of the aforementioned patents, EchoStar may be subject to substantial
damages, which may include treble damages and/or an injunction that could
require EchoStar to materially modify certain user-friendly electronic
programming guide and related features that it currently offers to consumers.
It is not possible to make a firm assessment of the probable outcome of the
suit or to determine the extent of any potential liability or damages. Broadcast Innovation, LLC In November of 2001, Broadcast Innovation, LLC filed a lawsuit against
EchoStar, DirecTV, Thomson Consumer Electronics and others in Federal District
Court in Denver, Colorado. The suit alleges infringement of United States
Patent Nos. 6,076,094 (the 094 patent) and 4,992,066 (the 066 patent).
The 094 patent relates to certain methods and devices for transmitting and
receiving data along with specific formatting information for the data. The
066 patent relates to certain methods and devices for providing the scrambling
circuitry for a pay television system on removable cards. EchoStar examined
these patents and believes that they are not infringed by any of its products
or services. Subsequently, DirecTV and Thomson settled with Broadcast
Innovation leaving EchoStar as the only defendant. On January 23, 2004, the
judge issued an order finding the 066 patent invalid as being 6




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indefinite in violation of 35 U.S.C. Sec. 112. Motions with respect to the
infringement, invalidity and construction of the 094 patent remain pending.
EchoStar will continue to vigorously defend this case. In the event that a
Court ultimately determines that EchoStar infringes on any of the
aforementioned patents, EchoStar may be subject to substantial damages, which
may include treble damages and/or an injunction that could require EchoStar to
materially modify certain user-friendly features that it currently offer to
consumers. It is not possible to make a firm assessment of the probable
outcome of the suit or to determine the extent of any potential liability or
damages. TiVo Inc. In January of 2004, TiVo Inc. filed a lawsuit against EchoStar in the United
States District Court for the Eastern District of Texas. EchoStar has not yet
filed its answer. The suit alleges infringement of United States Patent No.
6,233,389 (the 389 patent). The 389 patent relates to certain methods and
devices for providing what the patent calls time-warping. EchoStar has
examined this patent and does not believe that it is infringed by any of its
products or services. EchoStar intends to vigorously defend this case. In the
event that a Court ultimately determines that EchoStar infringes this patent,
EchoStar may be subject to substantial damages, which may include treble
damages and/or an injunction that could require EchoStar to materially modify
certain user-friendly features that it currently offer to consumers. It is not
possible to make a firm assessment of the probable outcome of the suit or to
determine the extent of any potential liability or damages. California Actions A purported class action was filed against EchoStar in the California State
Superior Court for Alameda County during 2001 by Andrew A. Werby. The
complaint related to late fees, among other things. The matter was settled
with no material impact on our business. A purported class action relating to the use of terms such as crystal clear
digital video, CD-quality audio, and on-screen program guide, and with
respect to the number of channels available in various programming packages was
also filed against EchoStar in the California State Superior Court for Los
Angeles County in 1999 by David Pritikin and by Consumer Advocates, a nonprofit
unincorporated association. The complaint alleges breach of express warranty
and violation of the California Consumer Legal Remedies Act, Civil Code
Sections 1750, et seq., and the California Business & Professions Code Sections
17500 & 17200. A hearing on the plaintiffs motion for class certification and
EchoStars motion for summary judgment was held during June 2002. At the hearing, the
Court issued a preliminary ruling denying the plaintiffs motion for class
certification. However, before issuing a final ruling on class certification,
the Court granted EchoStars motion for summary judgment with respect to all of
the plaintiffs claims. Subsequently, EchoStar filed a motion for attorneys
fees which was denied by the Court. The plaintiffs filed a notice of appeal of
the courts granting of EchoStars motion for summary judgment and EchoStar
cross-appealed the Courts ruling on EchoStars motion for attorneys fees.
On December 5, 2003, the Court of Appeal affirmed in part; and reversed in
part, the lower courts decision granting summary judgment in EchoStars favor.
Specifically, the Court found there were triable issues of fact as to whether
EchoStar may have violated the alleged consumer statutes with representations
concerning the number of channels and the program schedule. However, the
Court found no triable issue of fact as to whether the representations crystal
clear digital video or CD quality audio constituted a cause of action.
Moreover, the Court affirmed that the reasonable consumer standard was
applicable to each of the alleged consumer statutes. Plaintiff argued the
standard should be the least sophisticated consumer. The Court also affirmed
the dismissal of Plaintiffs breach of warranty claim. Plaintiff filed a
Petition for Review with the California Supreme Court and EchoStar responded.
On March 24, 2004, the California Supreme Court denied Plaintiffs Petition for
Review. Therefore, the action has been remanded to the trial court pursuant to
the instructions of the Court of Appeal. It is too early in the litigation to
make an assessment of the probable outcome of the litigation or to determine
the extent of any potential liability against EchoStar. State Investigation During April 2002, two state attorneys general commenced a civil investigation
concerning certain of EchoStars business practices. Over the course of the
next six months, 11 additional states ultimately joined the investigation. The
states alleged failure to comply with consumer protection laws based on
Echostars call response times and policies, advertising and customer agreement
disclosures, policies for handling consumer complaints, issuing rebates and
refunds and charging cancellation fees to consumers, and other matters.
EchoStar cooperated fully in the investigation. 7




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During May 2003, EchoStar entered into an Assurance of Voluntary Compliance
with the states which ended their investigation. The states have released all
claims related to the matters investigated. Retailer Class Actions EchoStar has been sued by retailers in three separate purported class actions.
During October 2000, two separate lawsuits were filed in the Arapahoe County
District Court in the State of Colorado and the United States District Court
for the District of Colorado, respectively, by Air Communication & Satellite,
Inc. and John DeJong, et al. on behalf of themselves and a class of persons
similarly situated. The plaintiffs are attempting to certify nationwide
classes on behalf of certain of EchoStars satellite hardware retailers. The
plaintiffs are requesting the Courts to declare certain provisions of, and
changes to, alleged agreements between EchoStar and the retailers invalid and
unenforceable, and to award damages for lost incentives and payments, charge
backs, and other compensation. EchoStar is vigorously defending against the
suits and have asserted a variety of counterclaims. The United States District
Court for the District of Colorado stayed the Federal Court action to allow the
parties to pursue a comprehensive adjudication of their dispute in the Arapahoe
County State Court. John DeJong, d/b/a Nexwave, and Joseph Kelley, d/b/a
Keltronics, subsequently intervened in the Arapahoe County Court action as
plaintiffs and proposed class representatives. EchoStar has filed a motion for
summary judgment on all counts and against all plaintiffs. The plaintiffs have
filed a motion for additional time to conduct discovery to enable them to
respond to EchoStars motion. The Court has not ruled on either of the two
motions. It is too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages. Satellite Dealers Supply, Inc. (SDS) filed a lawsuit against EchoStar in the
United States District Court for the Eastern District of Texas during September
2000, on behalf of itself and a class of persons similarly situated. The
plaintiff was attempting to certify a nationwide class on behalf of sellers,
installers, and servicers of satellite equipment who contract with EchoStar and
who allege that EchoStar: (1) charged back certain fees paid by members of the
class to professional installers in violation of contractual terms; (2)
manipulated the accounts of subscribers to deny payments to class members; and
(3) misrepresented, to class members, the ownership of certain equipment
related to the provision of its satellite television service. During September
2001, the Court granted EchoStars motion to dismiss. The plaintiff moved for
reconsideration of the Courts order dismissing the case. The Court denied the
plaintiffs motion for reconsideration. The trial court denied EchoStars
motions for sanctions against SDS. Both parties perfected appeals before the
Fifth Circuit Court of Appeals. On appeal, the Fifth Circuit upheld the
dismissal for lack of personal jurisdiction. The Fifth Circuit vacated and
remanded the district courts denial of EchoStars motion for sanctions and
instructed the district court to decide the issue again and to issue a written
opinion, which it had failed to do the first time. It is not possible to make
a firm assessment of the probable outcome on that issue or to determine the
extent of any recovery of sanctions. StarBand Shareholder Lawsuit On August 20, 2002, a limited group of shareholders in StarBand filed an action
in the Delaware Court of Chancery against EchoStar and EchoBand Corporation,
together with four EchoStar executives who sat on the Board of Directors for
StarBand, for alleged breach of the fiduciary duties of due care, good faith
and loyalty, and also against EchoStar and EchoBand Corporation for aiding and
abetting such alleged breaches. Two of the individual defendants, Charles W.
Ergen and David K. Moskowitz, are members of our Board of Directors. The
action stems from the defendants involvement as directors, and EchoBands
position as a shareholder, in StarBand, a broadband Internet satellite venture
in which EchoStar invested. On July 28, 2003, the Court granted the
defendants motion to dismiss on all counts. The Plaintiffs have since filed a
notice of appeal. Oral argument on the appeal was held on January 6, 2004.
EchoStar is waiting for the decision on appeal to the Delaware Supreme Court.
It is not possible to make a firm assessment of the probable outcome of the
appeal or to determine the extent of any potential liability or damages. Shareholder Derivative Action During October 2002, a purported shareholder filed a derivative action against
members of EchoStars Board of Directors in the United States District Court of
Clark County, Nevada and naming EchoStar as a nominal defendant. The complaint
alleges breach of fiduciary duties, corporate waste and other unlawful acts
relating to EchoStars agreement to (1) pay Hughes Electronics Corporation a
$600.0 million termination fee in certain circumstances and (2) 8




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acquire Hughes shareholder interest in PanAmSat. The agreements to pay the
termination fee and acquire PanAmSat were required in the event that the merger
with DirecTV was not completed by January 21, 2003. During July 2003, the
individual Board of Director defendants were dismissed from the suit, and
EchoStar was dismissed during August 2003. The plaintiff did not file an
appeal. Enron Commercial Paper Investment Complaint On November 6, 2003, an action was commenced in the United States Bankruptcy
Court for the Southern District of New York, against approximately 100
defendants, including EchoStar, who invested in Enrons commercial paper. The
complaint alleges that Enrons October 2001 prepayment of its commercial paper
is a voidable preference under the bankruptcy laws and constitutes a fraudulent
conveyance. The complaint alleges that EchoStar received voidable or
fraudulent prepayments of approximately $40.0 million. EchoStar typically
invests in commercial paper and notes which are rated in one of the four
highest rating categories by at least two nationally recognized statistical
rating organizations. At the time of EchoStars investment in Enron commercial
paper, it was considered to be high quality and considered to be a very low
risk. It is too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages. Satellite Insurance In September 1998, EchoStar filed a $219.3 million insurance claim for a total
loss under the launch insurance policies covering EchoStar IV. The satellite
insurance consists of separate substantially identical policies with different
carriers for varying amounts that, in combination, create a total insured
amount of $219.3 million. The insurance carriers include La Reunion Spatiale;
AXA Reinsurance Company (n/k/a AXA Corporate Solutions Reinsurance Company),
United States Aviation Underwriters, Inc., United States Aircraft Insurance
Group; Assurances Generales De France I.A.R.T. (AGF); Certain Underwriters at
Lloyds, London; Great Lakes Reinsurance (U.K.) PLC; British Aviation Insurance
Group; If Skaadeforsikring (previously Storebrand); Hannover Re (a/k/a
International Hannover); The Tokio Marine & Fire Insurance Company, Ltd.;
Marham Space Consortium (a/k/a Marham Consortium Management); Ace Global
Markets (a/k/a Ace London); M.C. Watkins Syndicate; Goshawk Syndicate
Management Ltd.; D.E. Hope Syndicate 10009 (Formerly Busbridge); Amlin
Aviation; K.J. Coles & Others; H.R. Dumas & Others; Hiscox Syndicates, Ltd.;
Cox Syndicate; Hayward Syndicate; D.J. Marshall & Others; TF Hart; Kiln;
Assitalia Le Assicurazioni DItalia S.P.A. Roma; La Fondiaria Assicurazione
S.P.A., Firenze; Vittoria Assicurazioni S.P.A., Milano; Ras  Riunione
Adriatica Di Sicurta S.P.A., Milano; Societa Cattolica Di Assicurazioni,
Verano; Siat Assicurazione E Riassicurazione S.P.A, Genova; E. Patrick; ZC
Specialty Insurance; Lloyds of London Syndicates 588 NJM, 1209 Meb AND 861 Meb;
Generali France Assurances; Assurance France Aviation; and Ace Bermuda
Insurance Ltd. The
insurance carriers offered EchoStar a total of approximately $88.0 million, or
40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers assert, among other things, that EchoStar IV was not a
total loss, as that term is defined in the policy, and that EchoStar did not
abide by the exact terms of the insurance policies. EchoStar strongly disagrees
and filed arbitration claims against the insurers for breach of contract,
failure to pay a valid insurance claim and bad faith denial of a valid claim,
among other things. Due to individual forum selection clauses in certain of
the policies, EchoStar is pursuing its arbitration claims against Ace Bermuda
Insurance Ltd. in London, England, and its arbitration claims against all of
the other insurance carriers in New York, New York. The New York arbitration
commenced on April 28, 2003, and the Arbitration Panel has now conducted
approximately thirty-five days of hearings. The parties to the London
arbitration have agreed to stay that proceeding pending a ruling in the New
York arbitration. There can be no assurance that EchoStar will receive the
amount claimed in either the New York or the London arbitrations or, if it
does, that it will retain title to EchoStar IV with its reduced capacity. In addition to the above actions, we are subject to various other legal
proceedings and claims which arise in the ordinary course of business. In our
opinion, the amount of ultimate liability with respect to any of these actions
is unlikely to materially affect our financial position, results of operations
or liquidity. 9




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PART II 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As
of March 29, 2004, all 1,015 issued and outstanding shares of our common
stock were held by EchoStar. There is currently no established trading market
for our common stock. We have never declared or paid any cash dividends on our common stock and do
not expect to declare dividends in the foreseeable future. Payment of any
future dividends will depend upon our earnings and capital requirements, our
debt facilities, and other factors our Board of Directors considers
appropriate. We currently intend to retain our earnings, if any, to support
future growth and expansion. Our ability to declare dividends is affected by
covenants in our debt facilities. 
 Item 7. MANAGEMENTS NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS EXECUTIVE SUMMARY For competitive and other reasons, we are not providing specific operational or
financial guidance or projections for 2004. Our operating and financial
strategy for 2004 will focus on improving our operating results and free cash
flow by increasing our subscriber base, reducing churn, controlling rising
subscriber acquisition costs and maintaining or improving operating margins. Operational Results and Goals Increase subscriber base.We added approximately 1.245 million net new
subscribers during 2003, ending the year with approximately 9.425 million DISH
Network subscribers. We remain committed to growing our subscriber base with
high quality customers by continuing to offer attractive consumer promotions
and DISH Network programming packages with a better price-to-value
relationship than packages currently offered by most other subscription
television providers. However, there can be no assurance that we will be able
to maintain our current rate of new subscriber growth if our competitors offer
more attractive consumer promotions, better priced or more attractive
programming packages, more compelling programming and services, including
advanced DVR and HDTV services or additional local channels, or otherwise offer
more attractive products and services than us. Reduce subscriber churn.Our percentage monthly churn for the year ended
December 31, 2003 was approximately 1.57%, compared to our percentage churn for
the same period in 2002 of approximately 1.59%. We believe continued
tightening of credit requirements, together with promotions tailored toward
subscribers with multiple receivers and advanced products, will attract better
long-term subscribers and may help reduce churn. We plan to continue to offer
consumer promotions, loyalty programs and dealer programs to improve our
overall subscriber retention. We also continue to undertake initiatives with
respect to our conditional access system to further enhance the security of the
DISH Network signal and attempt to make theft of our programming commercially
impractical or uneconomical. However, many factors can impact subscriber churn
and there can be no assurance that we will be able to maintain or reduce
subscriber churn or that our churn will not increase in future periods. Our success in increasing our subscriber base and reducing churn will depend
on, among other things, our ability to:  
    
    Offer new and compelling programming and services.We plan to
offer our subscribers new and compelling programming and services,
including next generation digital video recorder, or DVR, services,
additional high-definition television, or HDTV, channels and
interactive programming. In addition, we continue to develop bundled
broadband service solutions as we believe this can help us gain and
maintain market share, and retain subscribers.  
    
    Expand the availability of local channels.Assuming successful
launch and continued nominal operation of our satellites, we expect to
increase our local channel coverage from 110 markets to over 140
markets representing approximately 94% of United States television
households, by the end of 2004. 10




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
    
    Improve distribution channels.We continue to strengthen our
distribution channels for our DISH Network business unit through, among
other things, new and improved commercial relationships with companies
like SBC and Qwest.  
    
    Increase satellite capacity.With the formation of strategic
alliances with fixed satellite services providers, the successful
launch of EchoStar IX and the completion of a contract for the future
construction of EchoStar X, we continue to increase our satellite
capacity for additional programming and services. Financial Results and Goals Control rising subscriber acquisition costs.We generally subsidize
installation and all or a portion of the cost of EchoStar receiver systems in
order to attract new DISH Network subscribers. Our average subscriber
acquisition costs on a per new subscriber activation basis were approximately
$453 during 2003 compared to $421 in 2002, excluding costs capitalized for
leased equipment. If a subscriber churns early in the average subscriber
life-cycle, we cannot fully recover the costs related to the acquisition of
that subscriber. We believe continued tightening of credit requirements,
together with promotions tailored toward subscribers with multiple receivers
and advanced products, will attract better long-term subscribers. In addition,
as a result of recent changes in our equipment lease promotion, in 2004 we
anticipate an increase in the number of subscribers who lease rather than
purchase equipment. The resulting anticipated increase in capitalized costs is
expected to more than offset the corresponding reduction in expensed subscriber
acquisition costs, and result in an overall increase in cash used to acquire
subscribers during 2004. Our subscriber acquisition costs, both in the
aggregate and on a per new subscriber basis, may materially increase in the
future to the extent that we introduce more aggressive promotions in response
to new promotions offered by our competitors. Maintain or improve operating margins.We will continue to work to generate
cost savings by improving our operating efficiency and attempting to control
rising programming costs. Our operating margins may be adversely impacted by
rising programming costs. Payments we make to programmers for programming
content represent one of the largest components of our operating costs. We
expect programming providers to continue to demand higher rates for their
programming. We will continue to negotiate aggressively with programming
providers in an effort to control rising programming costs. However, there can
be no assurance we will be successful in controlling these costs. In addition,
there can be no assurance that we will be able to increase the price of our
programming to offset these programming rate increases without affecting the
competitiveness of our programming packages. Financial Statement Restatement During February 2004, we consulted with the Securities and Exchange Commission
(SEC) regarding our accrual for the replacement of smart cards. Those cards,
which provide security that only paying customers can receive programming
delivered by us, become obsolete as a result of piracy. During the
consultation process, the SEC informed us that it believes we over reserved
approximately $30.2 million for the replacement of certain smart cards. During
prior years, ending in 2002, we accrued the estimated cost to replace those
cards, which are included in satellite receivers that we sell and lease to
consumers. The SEC did not object to the accruals to replace the smart cards in
satellite receivers sold to and owned by consumers. However, the SEC believes
that we over reserved approximately $30.2 million, on a pre-tax basis, for the
replacement of smart cards in satellite receivers owned by us and leased to
consumers. On March 12, 2004, the SEC informed us it would not object if we restated our
financial statements for 2002 to record a reversal of the accruals for the
replacement of these smart cards of approximately $4.2 million, $17.2 million
and $8.8 million which were originally accrued in 2000, 2001 and from January
2002 through June 2002, respectively. As a result, we have restated our
financial statements for 2002 to reduce previously reported Subscriber related
expenses, operating losses and pre-tax losses by approximately $30.2 million. Explanation of Key Metrics and Other Items Subscription television services revenue. "Subscription television services
revenue consists principally of revenue from basic, movie, local,
international and pay-per-view subscription television services, as well as
rental and additional outlet fees from subscribers with multiple set-top boxes. 11




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DTH equipment sales. DTH equipment sales consist of sales of digital
set-top boxes by our ETC subsidiary to Bell ExpressVu, a DBS service provider
in Canada. DTH equipment sales also include sales of DBS accessories to DISH
Network subscribers and to retailers and other distributors of our equipment. Subscriber-related expenses. Subscriber-related expenses include costs
incurred in the operation of our DISH Network customer service centers,
programming expenses, copyright royalties, residual commissions, and billing,
lockbox and other variable subscriber expenses. Subscriber-related expenses
also include costs related to subscriber retention. Satellite and transmission expenses. Satellite and transmission expenses
include costs associated with the operation of our digital broadcast centers,
the transmission of local channels, contracted satellite telemetry, tracking
and control services and transponder leases. Cost
of sales  DTH equipment.Cost of sales  DTH equipment principally
includes costs associated with digital set-top boxes and related components
sold to Bell ExpressVu and sales of DBS accessories to DISH Network subscribers
and to retailers and other distributors of our equipment. Subscriber acquisition costs. Generally, under most promotions, we subsidize
the installation and all or a portion of the cost of EchoStar receiver systems
in order to attract new DISH Network subscribers. Our Subscriber acquisition
costs include the cost of EchoStar receiver systems sold to retailers and
other distributors of our equipment, the cost of receiver systems sold directly
by us to subscribers, net costs related to our free installation promotions and
other promotional incentives, and costs related to acquisition advertising. We
exclude equipment capitalized under our equipment lease promotion from our
calculation of Subscriber acquisition costs. We also exclude payments and
certain returned equipment received from disconnecting lease promotion
subscribers from our calculation of Subscriber acquisition costs. SAC.SAC, which represents total subscriber acquisition costs stated on a per
subscriber basis, is calculated by dividing total subscriber acquisition costs
for a period by the number of gross new subscribers acquired during the period.
We are not aware of any uniform standards for calculating SAC and believe
presentations of SAC may not be calculated consistently by different companies
in the same or similar businesses. General and administrative expenses. "General and administrative expenses
primarily includes employee-related costs associated with administrative
services such as legal, information systems, accounting and finance. It also
includes outside professional fees (i.e. legal and accounting services) and
building maintenance expense and other items associated with the administration
of the company. Interest expense.Interest expense primarily includes interest expense,
prepayment premiums and amortization of debt issuance costs associated with our
high yield and convertible debt securities, net of capitalized interest. Other.The main components of Other income and expense are equity in
earnings of our affiliates and gains and losses on the sale of investments or
impairment of marketable and non-marketable investment securities. Earnings before interest, taxes, depreciation and amortization (EBITDA).
EBITDA is defined as Net income (loss) plus Interest expense net of
Interest income, Taxes and Depreciation and amortization. Effective
January 1, 2003, we include Non-cash, stock-based compensation expense in our
definition of EBITDA. Effective April 1, 2003, we include Other income and
expense items and Change in valuation of contingent value rights in our
definition of EBITDA. All prior amounts conform to the current presentation. DISH Network Subscribers.The total number of DISH Network subscribers
includes only those subscribers who are actively subscribing to the DISH
Network service. Monthly average revenue per subscriber (ARPU). Average monthly revenue per
subscriber, or ARPU, is calculated by dividing average monthly revenues for the
period (total revenues during the period divided by the number of months in the
period) by average DISH Network subscribers for the period. Average
subscribers are calculated for the year and the period by adding the average
subscribers for each month and dividing by the number of months in the period.
Average subscribers for each month are calculated by adding the beginning and
ending subscribers for the month and dividing by two. We are not aware of any
uniform standards for calculating ARPU 12




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and believe presentations of ARPU may not be calculated consistently by
different companies in the same or similar businesses. Monthly subscriber churn/subscriber turnover. We calculate percentage monthly
churn by dividing the number of subscribers who terminate service during the
month by total subscribers as of the beginning of the month. We are not aware
of any uniform standards for calculating churn and believe presentations of
churn may not be calculated consistently by different companies in the same or
similar businesses. Free Cash Flow.We define free cash flow as Net cash flows from operating
activities less Purchases of property and equipment, as shown on our
Consolidated Statements of Cash Flows. RESULTS OF OPERATIONS Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002. For the Years EndedDecember 31,
    
    Variance2003
    
    2002
    
    Fav/(Unfav)
    
    %(As Restated) (1)(In thousands)Statements of Operations DataRevenue:Subscription television services
    
    $
    5,397,635
    
    
    $
    4,406,428
    
    
    $
    991,207
    
    
    
    22.5
    %Other subscriber-related revenue
    
    
    11,751
    
    
    
    16,942
    
    
    
    (5,191
    )
    
    
    (30.6
    %)DTH equipment sales
    
    
    240,449
    
    
    
    285,140
    
    
    
    (44,691
    )
    
    
    (15.7
    %)Other
    
    
    81,887
    
    
    
    95,127
    
    
    
    (13,240
    )
    
    
    (13.9
    %)Total revenue
    
    
    5,731,722
    
    
    
    4,803,637
    
    
    
    928,085
    
    
    
    19.3
    %Costs and Expenses:Subscriber-related expenses
    
    
    2,723,129
    
    
    
    2,216,297
    
    
    
    (506,832
    )
    
    
    (22.9
    %)% of Subscription television services revenue
    
    
    50.5
    %
    
    
    50.3
    %Satellite and transmission expenses
    
    
    74,309
    
    
    
    56,656
    
    
    
    (17,653
    )
    
    
    (31.2
    %)% of Subscription television services revenue
    
    
    1.4
    %
    
    
    1.3
    %Cost of
sales  DTH equipment
    
    
    149,995
    
    
    
    177,980
    
    
    
    27,985
    
    
    
    15.7
    %% of DTH equipment sales
    
    
    62.4
    %
    
    
    62.4
    %Cost of
sales  other
    
    
    43,948
    
    
    
    49,699
    
    
    
    5,751
    
    
    
    11.6
    %Subscriber acquisition costs
    
    
    1,310,794
    
    
    
    1,172,971
    
    
    
    (137,823
    )
    
    
    (11.7
    %)General and administrative
    
    
    319,133
    
    
    
    300,387
    
    
    
    (18,746
    )
    
    
    (6.2
    %)% of Total revenue
    
    
    5.6
    %
    
    
    6.3
    %Non-cash, stock-based compensation
    
    
    3,544
    
    
    
    11,279
    
    
    
    7,735
    
    
    
    68.6
    %Depreciation and amortization
    
    
    385,098
    
    
    
    355,754
    
    
    
    (29,344
    )
    
    
    (8.2
    %)Total costs and expenses
    
    
    5,009,950
    
    
    
    4,341,023
    
    
    
    (668,927
    )
    
    
    (15.4
    %)Operating income
    
    
    721,772
    
    
    
    462,614
    
    
    
    259,158
    
    
    
    56.0
    %Other Income (Expense):Interest income
    
    
    18,838
    
    
    
    10,001
    
    
    
    8,837
    
    
    
    88.4
    %Interest expense, net of amounts capitalized
    
    
    (407,030
    )
    
    
    (338,883
    )
    
    
    (68,147
    )
    
    
    (20.1
    %)Other
    
    
    (466
    )
    
    
    (5,900
    )
    
    
    5,434
    
    
    
    92.1
    %Total other income (expense)
    
    
    (388,658
    )
    
    
    (334,782
    )
    
    
    (53,876
    )
    
    
    (16.1
    %)Income before income taxes
    
    
    333,114
    
    
    
    127,832
    
    
    
    205,282
    
    
    
    160.6
    %Income tax provision, net
    
    
    (13,533
    )
    
    
    (80,941
    )
    
    
    67,408
    
    
    
    83.3
    %Net income
    
    $
    319,581
    
    
    $
    46,891
    
    
    $
    272,690
    
    
    
    581.5
    %Subscribers (in millions)
    
    
    9.425
    
    
    
    8.180
    
    
    
    1.245
    
    
    
    15.2
    %Monthly churn percentage
    
    
    1.57
    %
    
    
    1.59
    %
    
    
    0.02
    %
    
    
    1.3
    %Average subscriber acquisition costs per subscriber (SAC)
    
    $
    453
    
    
    $
    421
    
    
    $
    (32
    )
    
    
    (7.6
    %)Average revenue per subscriber (ARPU)
    
    $
    51.11
    
    
    $
    49.17
    
    
    $
    1.94
    
    
    
    3.9
    %EBITDA
    
    $
    1,106,404
    
    
    $
    812,468
    
    
    $
    293,936
    
    
    
    36.2
    %
 (1) We restated our 2002 consolidated financial statements to reverse an accrual of approximately $30.2 million, on a pre-tax basis,
related to the replacement of smart cards in satellite receivers owned by us and leased to consumers. See Note 3 to the Notes to the
Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K. 13




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DISH Network subscribers. As of December 31, 2003, we had approximately 9.425
million DISH Network subscribers compared to approximately 8.180 million at
December 31, 2002, an increase of approximately 15.2%. DISH Network added
approximately 1.245 million net new subscribers for the year ended December 31,
2003 compared to approximately 1.350 million net new subscribers during the
same period in 2002. We believe the reduction in net new subscribers for the
year ended December 31, 2003, compared to the same period in 2002, resulted
from a number of factors, including stronger competition from advanced digital
cable and cable modems. Additionally, as the size of our subscriber base
continues to increase, even if percentage churn remains constant, increasing
numbers of gross new subscribers are required to sustain net subscriber growth. Subscriber additions during the second half of 2003 were negatively impacted by
delays in the delivery of several newly developed products in the third and
fourth quarter of 2003. These delays resulted in a temporary product shortage,
which continued into the first quarter of 2004, and further resulted in
continuing product installation delays. Product shortages and installation
delays could cause us to lose potential future subscribers to our DISH Network
service. Although there can be no assurance, the temporary product shortage
and resulting installation delays currently are not expected to materially
impact 2004 overall net subscriber additions. During March 2004, we were unable to reach an acceptable agreement with Viacom
to renew our contracts to carry CBS owned and operated local stations and cable
channels and we therefore stopped distributing those Viacom channels for
approximately two days. This dispute has since been resolved. As a result of
this dispute, we will have a temporary increase in subscriber churn during the
first quarter of 2004. While there can be no assurance, the Viacom dispute is
not expected to have a material effect on overall net subscriber additions in
2004. Subscription television services revenue.DISH Network Subscription
television services revenue totaled $5.398 billion for the year ended December
31, 2003, an increase of $991.2 million or 22.5% compared to the same period in
2002. This increase was directly attributable to continued DISH Network
subscriber growth and the 2003 price increase discussed in ARPU below. The
increase in Subscription television services revenue was partially offset by
our free and reduced price programming promotions, discussed in New subscriber
promotions below. DISH Network Subscription television services revenue
will continue to increase to the extent we are successful in increasing the
number of DISH Network subscribers and maintaining or increasing revenue per
subscriber. We provided credits to some of our subscribers to compensate them for the
temporary removal of the Viacom programming discussed above. The majority of
our customers received a $1.00 credit. Approximately 1.7 million of our
subscribers who are in CBS markets owned and operated by Viacom received $2.00
credits. On average, our subscriber base received a credit of slightly over
$1.00. These credits will have the effect of reducing operating margins,
earnings and free cash flow during the first quarter of 2004, but are not
expected to have a material impact on overall 2004 results. ARPU. Monthly average revenue per subscriber was approximately $51.11 during
the year ended December 31, 2003 and approximately $49.17 during the same
period in 2002. The $1.94 increase in monthly average revenue per subscriber
is primarily attributable to price increases of up to $2.00 in February 2003,
the increased availability of local channels by satellite and an increase in
subscribers with multiple set-top boxes. These increases were partially offset
by certain subscriber promotions, discussed in New subscriber promotions
below, under which new subscribers received free programming for the first
three months of their term of service, and other promotions under which
subscribers received discounted programming. While there can be no assurance,
notwithstanding the anticipated impact of the credits for the Viacom dispute
discussed above and the potential impact of the network litigation and must
carry rules discussed below, we expect ARPU to continue to increase due to
price increases, availability of local channels by satellite in more markets,
increased programming and interactive services, and the discontinuance of free
and discounted programming promotions. Impacts from EchoStars litigation with the networks in Florida, FCC rules
governing the delivery of superstations and other factors could cause us to
terminate delivery of network channels and superstations to a substantial
number of our subscribers, which could cause many of those customers to cancel
their subscription to our other services. In the event the Court of Appeals
upholds the Miami District Courts network litigation injunction, and if
EchoStar does not reach private settlement agreements with additional stations,
EchoStar will attempt to assist subscribers in arranging alternative means to
receive network channels, including migration to local channels by satellite
where available, and free off air antenna offers in other markets. However,
EchoStar cannot predict with any degree of 14




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certainty how many subscribers might ultimately cancel their primary DISH
Network programming as a result of termination of their distant network
channels. EchoStar could be required to terminate distant network programming
to all subscribers in the event the plaintiffs prevail on their cross-appeal
and EchoStar is permanently enjoined from delivering all distant network
channels. Termination of distant network programming to subscribers would
result in a reduction in average monthly revenue per subscriber and a temporary
increase in churn. In
April 2002, the FCC concluded that EchoStar's must carry implementation methods
were not in compliance with the must carry rules. If the
FCC finds EchoStar's
subsequent remedial actions unsatisfactory, while EchoStar would attempt to continue
providing local network channels in all markets without interruption, EchoStar could
be forced by capacity constraints to reduce the number of markets in
which it
provides local channels. This could cause a temporary increase in churn and a
small reduction in average monthly revenue per subscriber. DTH equipment sales. For the year ended December 31, 2003, DTH equipment
sales totaled $240.4 million, a decrease of $44.7 million compared to the same
period during 2002. The decrease in DTH equipment sales principally resulted
from a decline in the number of digital set-top boxes sold to Bell ExpressVu. We currently have certain binding purchase orders and a minimum volume
commitment from Bell ExpressVu for 2004, and we are actively trying to secure
new orders from other potential international customers. However, we cannot
guarantee at this time that those negotiations will be successful. A
significant portion of our future DTH equipment revenue depends largely on the
success of Bell ExpressVu and other international operators, which in turn,
depends on other factors, such as the level of consumer acceptance of
direct-to-home satellite TV products and the increasing intensity of
competition for international subscription television subscribers. Subscriber-related expenses.Subscriber-related expenses totaled $2.723
billion during the year ended December 31, 2003, an increase of $506.8 million
or 22.9% compared to the same period in 2002. The increase in
Subscriber-related expenses was primarily attributable to the increase in the
number of DISH Network subscribers. This growth resulted in increased expenses
to support the DISH Network including programming costs, personnel expenses,
the opening of a new call center, and increased operating expenses related to
the expansion of our DISH Network Service LLC business. Subscriber-related
expenses represented 50.5% and 50.3% of Subscription television services
revenue during the years ended December 31, 2003 and 2002, respectively. The
increase in Subscriber-related expenses as a percentage of Subscription
television services revenue primarily resulted from the previously discussed
smart card accrual reversal in 2002. This accrual reversal decreased the 2002
expense to revenue ratio from 51.0% to 50.3%. The increase in the expense to
revenue ratio from 2002 to 2003 was partially offset by an increase in monthly
average revenue per subscriber and increased operating efficiencies. During 2003 and 2002, we offered various programs to existing subscribers
including programs for new and upgraded equipment. We generally subsidize
installation and all or a portion of the cost of EchoStar receivers pursuant to
our subscriber retention programs. Costs related to subscriber retention
programs are expected to materially increase in the future as we introduce more
aggressive subscriber retention programs to reduce subscriber churn, to respond
to competition and for other reasons. In the normal course of business, we enter into various contracts with
programmers to provide content. Our programming contracts generally require us
to only make payments based on the number of subscribers to which the
respective content is provided. Consequently, our programming expenses will
continue to increase to the extent we are successful growing our subscriber
base. In addition, because programmers continue to raise the price of content,
there can be no assurance that our Subscriber-related expenses as a
percentage of Subscription television services revenue will not materially
increase without corresponding price increases in our DISH Network programming
packages. Satellite and transmission expenses. Satellite and transmission expenses
totaled $74.3 million during the year ended December 31, 2003, a $17.7 million
increase compared to the same period in 2002. This increase primarily resulted
from launch and operational costs associated with the increasing number of
markets in which we offer local network channels by satellite. During 2003, we
launched 47 additional local markets compared to the launch of 18 additional
markets during 2002. Satellite and transmission expenses totaled 1.4% and
1.3% of Subscription television services revenue during each of the years
ended December 31, 2003 and 2002, respectively. These expenses will increase
further in the future to the extent we successfully obtain commercial in-orbit
satellite insurance and to the 15




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extent we increase the operations at our digital broadcast centers as, among
other things, additional satellites are placed in service and additional local
markets and other programming services are launched. Cost
of sales  DTH equipment.Cost of sales
 DTH equipment totaled $150.0
million during the year ended December 31, 2003, a decrease of $28.0 million
compared to the same period in 2002. This decrease related primarily to a
decrease in sales of digital set-top boxes to Bell ExpressVu. Cost of sales -
DTH equipment during the years ended December 31, 2003 and 2002 include
non-recurring reductions in the cost of set-top box equipment of approximately
$6.8 million and $6.5 million, respectively. Cost of
sales  DTH equipment
represented 62.4% of DTH equipment sales, during the years ended December 31,
2003 and 2002. Subscriber acquisition costs.During the year ended December 31, 2003, our
subscriber acquisition costs totaled approximately $1.311 billion, or
approximately $453 per new subscriber activation. Comparatively, our subscriber
acquisition costs during the year ended December 31, 2002 totaled approximately
$1.173 billion, or approximately $421 per new subscriber activation. The
increase principally resulted from 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. 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 include a non-recurring reduction in
the cost of set-top box equipment of approximately $47.7 million as a result of
favorable litigation developments and the completion of royalty arrangements
with more favorable terms than estimated amounts previously accrued. Our
subscriber acquisition costs, both in the aggregate and on a per new subscriber
activation basis, may materially increase in the future to the extent that we
introduce other more aggressive promotions if we determine that they are
necessary to respond to competition, or for other reasons. We exclude equipment capitalized under our equipment lease promotion from our
calculation of subscriber acquisition costs. We also exclude payments and
certain returned equipment received from disconnecting lease promotion
subscribers from our calculation of subscriber acquisition costs. See further
discussion of capitalized subscriber acquisition costs and payments and certain
returned equipment received from disconnecting lease promotion subscribers
included in Liquidity and Capital Resources  Subscriber acquisition costs.
As a result of recent changes in our equipment lease promotion, in 2004, we
anticipate an increase in the number of subscribers who lease rather than
purchase equipment. The resulting anticipated increase in capitalized costs is
expected to more than offset the corresponding reduction in expensed subscriber
acquisition costs and result in an overall increase in cash used to acquire
subscribers during 2004. New subscriber promotions-As previously discussed, our Subscriber
acquisitions costs include, among other things, net costs related to our new
subscriber promotions. During the year ended December 31, 2003, our
significant new subscriber promotions were as follows: Free
Dish Effective February 1, 2003, our Free DISH promotion provides new
subscribers with a choice of up to two EchoStar receivers, including one
premium model system, and free installation for $49.99. The subscriber receives
a $49.99 credit on their first months bill. To be eligible, subscribers must
provide a valid major credit card, their social security number, pass a credit
score, and make a one-year commitment to subscribe to a qualified programming
package. Effective August 24, 2003, we expanded the above offer to include up
to three EchoStar receivers and require either a one or two year programming
commitment, depending on the set-top box models selected by the subscriber.
Although there can be no assurance as to the ultimate duration of the Free Dish
promotion, we expect it to continue through at least June 30, 2004. Free for All-Effective February 1, 2003, our Free for All promotion provides
new subscribers who purchase up to two receivers for $149 or more, depending on
the models chosen, and subscribe to a qualifying programming package, free
installation, together with credits of $12.50 or $17.00 applied to their
programming bill each month for a year. Effective August 24, 2003, under our
Free for All promotion new subscribers who purchase one or two receiver systems
and subscribe to a qualifying programming package receive a monthly credit of
$10.00 for 15 or 20 months, 16




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respectively. Although there can be no assurance as to the ultimate duration
of the Free for All promotion, we expect it to continue through at least June
30, 2004. Digital Home Plan-Effective February 1, 2003, our Digital Home Plan promotion
offered new subscribers up to four EchoStar receivers, including various
models, with a minimum required programming package subscription. Each plan
includes in-home service, and the consumer must agree to a one-year commitment,
provide a valid major credit card, have an acceptable credit score, incur a
one-time set-up fee of $49.99, and an optional $50.00 upgrade fee. The
subscriber receives a $49.99 credit on their first months bill. Effective
November 15, 2003, for an optional $99.00 upgrade fee or a two-year programming
commitment, we offered new subscribers an option to connect up to three
EchoStar receivers to up to four televisions. Since we retain ownership of
equipment installed pursuant to the Digital Home Plan promotion, equipment
costs are capitalized and depreciated over a period of approximately four
years. Although there can be no assurance as to the ultimate duration of our
current equipment lease promotion, we expect it to continue through at least
June 30, 2004. Free Installation-Under our free installation program all subscribers who
purchase an EchoStar receiver system are eligible to receive free professional
installation of up to two receivers. Although there can be no assurance as to
the ultimate duration of the Free Installation promotion, we expect it to
continue through at least June 30, 2004. General and administrative expenses.General and administrative expenses
totaled $319.1 million during the year ended December 31, 2003, an increase of
$18.7 million 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 5.6% and 6.3% 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 operational 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, which will be reduced by
future forfeitures, if any, will be recognized over the remaining vesting
period, ending on March 31, 2004. We report all non-cash compensation based on stock option appreciation as a
single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan: For the Years EndedDecember 31,2003
    
    2002(In thousands)Subscriber-related
    
    $
    34
    
    
    $
    729Satellite and transmission
    
    
    359
    
    
    
    (7
    )General and administrative
    
    
    3,151
    
    
    
    10,557Total non-cash, stock-based
compensation
    
    $
    3,544
    
    
    $
    11,279
 In addition, options to purchase 7.8 million shares were outstanding under our
long-term incentive plan as of December 31, 2003. These options were granted
with exercise prices at least equal to the market value of the underlying
shares on the dates they were issued during 1999, 2000 and 2001. The
weighted-average exercise price of these options is $8.96. Vesting of these
options is contingent upon meeting certain longer-term goals which have not yet
been achieved. Consequently, no compensation was recorded during the years
ended December 31, 2003 and 2002 related to these long-term options. We will
record the related compensation when achievement of the performance goals
becomes probable, if ever. Such compensation, if recorded, would likely result
in material non-cash, stock-based compensation expense in our statements of
operations. 17




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Depreciation and amortization.Depreciation and amortization expense totaled
$385.1 million during the year ended December 31, 2003, a $29.3 million
increase compared to the same period in 2002. The increase in Depreciation
and amortization expense principally resulted from an increase in depreciation
related to the commencement of commercial operation of EchoStar VII, VIII and
IX in April 2002, October 2002, and October 2003, respectively, and leased
equipment and other additional depreciable assets placed in service during
2003. Interest income.Interest income totaled $18.8 million during the year ended
December 31, 2003, an increase of $8.8 million compared to the same period in
2002. This increase principally resulted from higher cash and
marketable investment securities balances in 2003 as
compared to 2002 partially offset by lower returns. Interest expense, net of amounts capitalized.Interest expense totaled
$407.0 million during the year ended December 31, 2003, an increase of $68.1
million compared to the same period in 2002. This increase primarily resulted
from prepayment premiums and accelerated amortization of debt issuance costs
totaling approximately $60.1 million related to the full and partial
redemptions and repurchases of certain of our debt securities, as discussed
further in Liquidity and Capital Resources, and additional interest expense
totaling approximately $36.3 million related to our $2.5 billion senior notes
offering during October 2003. This increase also resulted from a $15.4 million
reduction in the amount of interest capitalized during the year ended December
31, 2003 as compared to the same period in 2002. Interest is capitalized
during the construction phase of a satellite, however, capitalization of
additional interest ceases upon commercial operation of the satellite.
Therefore, once EchoStar VII, EchoStar VIII and EchoStar IX commenced
commercial operation during April 2002, October 2002 and August 2003,
respectively, we ceased capitalizing interest related to these satellites. The
expensing of this previously capitalized interest resulted in an increase in
Interest expense. This increase was partially offset by a reduction in
interest expense of approximately $42.8 million as a result of the debt
redemptions and repurchases discussed above. Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA was
$1.106 billion during the year ended December 31, 2003, compared to $812.5
million during the same period in 2002. The improvement was primarily
attributable the increase in the number of DISH Network subscribers, which
continues to result in revenue sufficient to support the cost of new and
existing subscribers. The improvement was partially offset by a decrease in
subscribers leasing equipment and a corresponding increase in equipment
subsidies compared to the same period in 2002, as well as a decrease in DTH
equipment sales. EBITDA does not include the impact of capital expenditures
under our equipment lease promotion of approximately $108.1 million and $277.6
million during 2003 and 2002, respectively. As previously discussed, to the
extent we introduce more aggressive marketing promotions and our subscriber
acquisition costs materially increase, our EBITDA results will be negatively
impacted because subscriber acquisition costs are generally expensed as
incurred. The following table reconciles EBITDA to the accompanying financial statements: For the Years EndedDecember 31,2003
    
    2002(As Restated) (1)(In thousands)EBITDA
    
    $
    1,106,404
    
    
    $
    812,468Less:Interest expense, net
    
    
    388,192
    
    
    
    328,882Income tax provision, net
    
    
    13,533
    
    
    
    80,941Depreciation and amortization
    
    
    385,098
    
    
    
    355,754Net income
    
    $
    319,581
    
    
    $
    46,891
  (1)
    
    We restated our 2002 consolidated financial statements to reverse an accrual of
approximately $30.2 million, on a pre-tax basis, related to the replacement of smart
cards in satellite receivers owned by us and leased to consumers. See Note 3 to the Notes
to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K. EBITDA is not a measure determined in accordance with accounting principles
generally accepted in the United States, or GAAP, and should not be considered
a substitute for operating income, net income or any other measure determined
in accordance with GAAP. EBITDA is used as a measurement of operating
efficiency and overall 18




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financial performance and we believe it to be a helpful
measure for those evaluating companies in the multi-channel video programming
distribution industry. Conceptually, EBITDA measures the amount of income
generated each period that could be used to service debt, pay taxes and fund
capital expenditures. EBITDA should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. Net income.Net income was $319.6 million during the year ended December 31,
2003, an increase of $272.7 million compared to $46.9 million for the same
period in 2002. The improvement was primarily attributable to an increase in
Operating income, the components of which are discussed above. Our future
net income (loss) results will be negatively impacted to the extent we
introduce more aggressive marketing promotions that materially increase our
subscriber acquisition costs since these subscriber acquisition costs are
generally expensed as incurred. Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001. For the Years EndedDecember 31,
    
    Variance2002
    
    2001
    
    Fav/(Unfav)
    
    %(As Restated) (1)(In thousands)Statements of Operations DataRevenue:Subscription television services
    
    $
    4,406,428
    
    
    $
    3,583,698
    
    
    $
    822,730
    
    
    
    23.0
    %Other subscriber-related revenue
    
    
    16,942
    
    
    
    21,743
    
    
    
    (4,801
    )
    
    
    (22.1
    %)DTH equipment sales
    
    
    285,140
    
    
    
    266,743
    
    
    
    18,397
    
    
    
    6.9
    %Other
    
    
    95,127
    
    
    
    114,699
    
    
    
    (19,572
    )
    
    
    (17.1
    %)Total revenue
    
    
    4,803,637
    
    
    
    3,986,883
    
    
    
    816,754
    
    
    
    20.5
    %Costs and Expenses:Subscriber-related expenses
    
    
    2,216,297
    
    
    
    1,807,915
    
    
    
    (408,382
    )
    
    
    (22.6
    %)% of Subscription television services revenue
    
    
    50.3
    %
    
    
    50.4
    %Satellite and transmission expenses
    
    
    56,656
    
    
    
    37,555
    
    
    
    (19,101
    )
    
    
    (50.9
    %)% of Subscription television services revenue
    
    
    1.3
    %
    
    
    1.0
    %Cost of
sales  DTH equipment
    
    
    177,980
    
    
    
    187,810
    
    
    
    9,830
    
    
    
    5.2
    %% of DTH equipment sales
    
    
    62.4
    %
    
    
    70.4
    %Cost of
sales  other
    
    
    49,699
    
    
    
    75,385
    
    
    
    25,686
    
    
    
    34.1
    %Subscriber acquisition costs
    
    
    1,172,971
    
    
    
    1,085,681
    
    
    
    (87,290
    )
    
    
    (8.0
    %)General and administrative
    
    
    300,387
    
    
    
    290,756
    
    
    
    (9,631
    )
    
    
    (3.3
    %)% of Total revenue
    
    
    6.3
    %
    
    
    7.3
    %Non-cash, stock-based compensation
    
    
    11,279
    
    
    
    20,173
    
    
    
    8,894
    
    
    
    44.1
    %Depreciation and amortization
    
    
    355,754
    
    
    
    265,912
    
    
    
    (89,842
    )
    
    
    (33.8
    %)Total costs and expenses
    
    
    4,341,023
    
    
    
    3,771,187
    
    
    
    (569,836
    )
    
    
    (15.1
    %)Operating income
    
    
    462,614
    
    
    
    215,696
    
    
    
    246,918
    
    
    
    114.5
    %Other Income (Expense):Interest income
    
    
    10,001
    
    
    
    10,321
    
    
    
    (320
    )
    
    
    (3.1
    %)Interest expense, net of amounts capitalized
    
    
    (338,883
    )
    
    
    (192,900
    )
    
    
    (145,983
    )
    
    
    (75.7
    %)Other
    
    
    (5,900
    )
    
    
    (620
    )
    
    
    (5,280
    )
    
    
    (851.6
    %)Total other income (expense)
    
    
    (334,782
    )
    
    
    (183,199
    )
    
    
    (151,583
    )
    
    
    (82.7
    %)Income before income taxes
    
    
    127,832
    
    
    
    32,497
    
    
    
    95,335
    
    
    
    293.4
    %Income tax provision, net
    
    
    (80,941
    )
    
    
    (846
    )
    
    
    (80,095
    )
    
    
    N/ANet income
    
    $
    46,891
    
    
    $
    31,651
    
    
    $
    15,240
    
    
    
    48.1
    %Subscribers (in millions)
    
    
    8.180
    
    
    
    6.830
    
    
    
    1.350
    
    
    
    19.8
    %Monthly churn percentage
    
    
    1.59
    %
    
    
    1.60
    %
    
    
    0.01
    %
    
    
    0.6
    %Average subscriber acquisition costs per subscriber (SAC)
    
    $
    421
    
    
    $
    395
    
    
    $
    (26
    )
    
    
    (6.6
    %)Average revenue per subscriber (ARPU)
    
    $
    49.17
    
    
    $
    49.32
    
    
    $
    (0.15
    )
    
    
    (0.3
    %)EBITDA
    
    
    812,468
    
    
    
    480,988
    
    
    
    331,480
    
    
    
    68.9
    %
 (1)We restated our 2002 consolidated financial statements to reverse an accrual of approximately $30.2 million, on a pre-tax basis,
related to the replacement of smart cards in satellite receivers owned by us and leased to consumers. See Note 3 to the Notes to the
Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K. 19




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DISH Network subscribers.DISH Network added approximately 1.350 million net
new subscribers for the year ended December 31, 2002 compared to approximately
1.570 million net new subscribers during the same period in 2001. We believe
the reduction in net new subscribers for the year ended December 31, 2002,
compared to the same period in 2001, resulted from a number of factors,
including the continued weak U.S. economy and stronger competition from
advanced digital cable and cable modems. Additionally, as the size of our
subscriber base continues to increase, even if percentage churn remains
constant, increasing numbers of gross new subscribers are required to sustain
net subscriber growth. As of December 31, 2002, we had approximately 8.180
million DISH Network subscribers compared to approximately 6.830 million at
December 31, 2001, an increase of approximately 19.8%. Subscription television services revenue. DISH Network Subscription
television services revenue totaled $4.406 billion for the year ended December
31, 2002, an increase of $822.7 million or 23.0% compared to the same period in
2001. This increase was attributable to continued DISH Network subscriber
growth. ARPU. Monthly average revenue per subscriber was approximately $49.17 during
the year ended December 31, 2002 and approximately $49.32 during the same
period in 2001. The decrease in monthly average revenue per subscriber is
primarily attributable to certain promotions, discussed below, under which new
subscribers received free programming for the first three months of their term
of service, and other promotions under which subscribers received discounted
programming for 12 months. This decrease was partially offset by a $1.00 price
increase in February 2002, the increased availability of local channels by
satellite and an increase in subscribers with multiple set-top boxes. DTH equipment sales. For the year ended December 31, 2002, DTH equipment
sales totaled $285.1 million, an increase of $18.4 million compared to the
same period during 2001. The increase in DTH equipment sales principally
resulted from an increase in sales of DBS accessories to DISH Network
subscribers. This increase was partially offset by a decrease in sales of
digital set-top boxes to our international DTH customers. Subscriber-related expenses. Subscriber-related expenses totaled $2.216
billion during the year ended December, 2002, an increase of $408.4 million
compared to the same period in 2001. The increase in total Subscriber-related
expenses is primarily attributable to the increase in DISH Network
subscribers. This growth resulted in increased expenses to support the DISH
Network including programming costs, personnel and telephone expenses, the
opening of a new call center, increased operating expenses related to the
expansion of our DISH Network Service LLC business, increased competition and
increased costs due to second-dish installations in order to meet the demands
of must carry. These expenses represented 50.3% and 50.4% of Subscription television
services revenues during the years ended December 31, 2002 and 2001,
respectively. This decrease primarily resulted from a variety of factors
including $1.00 price increase in February 2002, the increased availability of
local channels by satellite in 2002 and an increase in subscribers with
multiple set-top boxes. This decrease also resulted from the previously
discussed smart card accrual reversal in 2002. This accrual reversal decreased
the 2002 expense to revenue ratio from 51.0% to 50.3%. This decrease was
offset by the decrease in ARPU resulting from promotions under which
subscribers received free or discounted programming in 2002 as compared to
2001. Satellite and transmission expenses. Satellite and transmission expenses
totaled $56.7 million during the year ended December 31, 2002, a $19.1 million
increase compared to the same period in 2001. The increase in Satellite and
transmission expenses primarily resulted from increased operations at our
digital broadcast centers in order to meet the demands of current must carry
requirements and the launch of 18 additional local markets during the year
ended December 31, 2002. Satellite and transmission expenses totaled 1.3%
and 1.0% of Subscription television services revenue during the years ended
December 31, 2002 and 2001, respectively. Cost
of sales  DTH equipment.Cost of sales
 DTH equipment totaled $178.0
million during the year ended December 31, 2002, a decrease of $9.8 million
compared to the same period in 2001. Cost of sales  DTH equipment
represented 62.4% and 70.4% of DTH equipment sales, during the years ended
December 31, 2002 and 2001, respectively. The decrease, both in aggregate and
as a percentage of revenue, related primarily to reductions in the cost of
set-top box equipment and increased sales of higher margin DBS accessories. Subscriber acquisition costs. During the year ended December 31, 2002, our
subscriber acquisition costs totaled approximately $1.173 billion, or
approximately $421 per new subscriber activation. Comparatively, our subscriber 20




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acquisition costs during the year ended December 31, 2001 totaled approximately
$1.086 billion, or approximately $395 per new subscriber activation. Total
subscriber acquisition costs for the year ended December 31, 2002 include
favorable adjustments which reduced the costs related to the production of
EchoStar receiver systems. During 2002, we recorded adjustments of
approximately $47.7 million as a result of favorable litigation developments
and the completion of royalty arrangements with more favorable terms than
estimated amounts previously accrued. The increase in total subscriber
acquisition costs primarily resulted from an increase in Other subscriber
promotion subsidies related to additional subsidies on second receiver
installations and a decrease in the sales price of manufactured equipment, as
well as an increase in Subscriber acquisition advertising related to
acquisition marketing and our 2002 marketing promotions. A decrease in
equipment leasing in 2002 as compared to 2001 also contributed to this
increase. This increase was partially offset by reductions in the cost of
manufactured equipment and an increase in installations we perform on behalf of
retailers. We exclude equipment capitalized under our equipment lease promotion from our
calculation of subscriber acquisition costs. We also exclude payments and
certain returned equipment received from disconnecting lease promotion
subscribers from our calculation of subscriber acquisition costs. Equipment
capitalized under our equipment lease promotion totaled approximately $277.6
million and $337.7 million for the years ended December 31, 2002 and 2001,
respectively. Payments and returned equipment received from disconnecting
lease promotion subscribers, which became available for sale through other
promotions rather than being redeployed in the equipment lease promotion,
totaled approximately $37.8 million and $15.7 million during the years ended
December 31, 2002 and 2001, respectively. General and administrative expenses.General and administrative expenses
totaled $300.4 million during the year ended December 31, 2002, an increase of
$9.6 million compared to the same period in 2001. The increase in General and
administrative expenses was primarily attributable to increased personnel and
infrastructure expenses to support the growth of the DISH Network. This
increase was partially offset by a decrease in legal expenses and litigation
settlements. General and administrative expenses represented 6.3% and 7.3%
of Total revenue during the years ended December 31, 2002 and 2001,
respectively. Non-cash, stock-based compensation.During the year ended December 31, 2002,
we recognized $11.3 million of compensation under this performance-based plan,
a decrease of $8.9 million compared to the same period in 2001. This decrease
is primarily attributable to proportionate vesting and stock option
forfeitures. We report all non-cash compensation based on stock option appreciation as a
single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan: For the Years EndedDecember 31,2002
    
    2001(In thousands)Subscriber-related
    
    $
    729
    
    
    $
    1,767Satellite and transmission
    
    
    (7
    )
    
    
    1,115General and administrative
    
    
    10,557
    
    
    
    17,291Total non-cash, stock-based
compensation
    
    $
    11,279
    
    
    $
    20,173
 Depreciation and amortization.Depreciation and amortization expense totaled
$355.8 million during the year ended December 31, 2002, a $89.8 million
increase compared to the same period in 2001. The increase in Depreciation
and amortization expense principally resulted from an increase in depreciation
related to the commencement of commercial operation of EchoStar VII in April
2002, commencement of commercial operations of EchoStar VIII in October 2002
and leased equipment and other additional depreciable assets placed in service.
This increase was partially offset by a reduction of approximately $18.8
million of amortization expense as a result of our adoption of Statement of
Financial Accounting Standards No. 142 (FAS 142). In accordance with FAS
142, effective January 2002, we ceased amortization of our FCC authorizations. 21




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Other Income and Expense.Other expense, net, totaled $334.8 million during
the year ended December 31, 2002, an increase of $151.6 million compared to the
same period in 2001. This increase is primarily attributable to an increase in
Interest expense, net of amounts capitalized as a result of the issuance of
our 9 1/8% Senior Notes in December 2001 and due to us recording the
indebtedness of the 10 3/8% Senior Notes as of December 31, 2001. Earnings Before Interest, Taxes, Depreciation and Amortization.EBITDA was
$812.5 million during the year ended December 31, 2002, compared to $481.0
million during the same period in 2001. This increase was mainly attributable
to an increase in the number of DISH Network subscribers, resulting in
recurring revenue which was large enough to support the cost of new and
existing subscribers, together with the introduction of our equipment lease
promotion in July 2000. EBITDA does not include the impact of amounts
capitalized under our equipment lease promotion of approximately $277.6 million
and $337.7 million during 2002 and 2001, respectively. The following table reflects the reconciliation of EBITDA to the accompanying
financial statements: For the Years EndedDecember 31,2002
    
    2001(As Restated) (1)(In thousands)EBITDA
    
    $
    812,468
    
    
    $
    480,988Less:Interest expense, net
    
    
    328,882
    
    
    
    182,579Income tax provision, net
    
    
    80,941
    
    
    
    846Depreciation and
amortization
    
    
    355,754
    
    
    
    265,912Net income
    
    $
    46,891
    
    
    $
    31,651
  (1)
    
    We restated our 2002 consolidated financial statements to reverse an accrual of
approximately $30.2 million, on a pre-tax basis, related to the replacement of smart
cards in satellite receivers owned by us and leased to consumers. See Note 3 to the Notes
to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K. EBITDA is not a measure determined in accordance with accounting principles
generally accepted in the United States, or GAAP, and should not be considered
a substitute for operating income, net income or any other measure determined
in accordance with GAAP. EBITDA is used as a measurement of operating
efficiency and overall financial performance and we believe it to be a helpful
measure for those evaluating companies in the multi-channel video programming
distribution industry. Conceptually, EBITDA measures the amount of income
generated each period that could be used to service debt, pay taxes and fund
capital expenditures. EBITDA should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. Net income.Net income was $46.9 million during the year ended December 31,
2002, an increase of $15.2 million compared to $31.7 million for the same
period in 2001. The increase was primarily attributable to an increase in
Operating income, the components of which are discussed above, partially
offset by an increase in Other income (expense) discussed above and an
increase in Income tax provision. Seasonality Our revenues vary throughout the year. As is typical in the subscription
television service industry, the first half of the year generally
produces fewer
new subscribers than the second half of the year. Our operating results in any
period may be affected by the incurrence of advertising and promotion expenses
that do not necessarily produce commensurate revenues in the short-term until
the impact of such advertising and promotion is realized in future periods. Inflation Inflation has not materially affected our operations during the past three
years. We believe that our ability to increase
the prices charged for our products and services in future periods will depend
primarily on competitive pressures. We do not have any material backlog of our
products. 22




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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risks Associated With Financial Instruments As of December 31, 2003, our restricted and unrestricted cash, cash equivalents
and marketable investment securities had a fair market value of approximately
$3.074 billion which was
invested in: (a) cash; (b) debt instruments of the U.S. Government and its
agencies; (c) commercial paper and notes with an overall average maturity of
less than one year and rated in one of the four highest rating categories by at
least two nationally recognized statistical rating organizations; and (d)
instruments with similar risk characteristics to the commercial paper described
above. The primary purpose of these investing activities has been to preserve
principal until the cash is required to fund operations. Consequently, the
size of this portfolio fluctuates significantly as cash is received and used in
our business. Our restricted and unrestricted cash, cash equivalents and marketable
investment securities had an average annual return for the year ended December
31, 2003 of approximately 2.0%. A hypothetical 10.0% decrease in interest
rates would result in a decrease of approximately $1.9 million in annual
interest income. The value of certain of the investments in this portfolio can
be impacted by, among other things, the risk of adverse changes in securities
and economic markets generally, as well as the risks related to the performance
of the companies whose commercial paper and other instruments we hold.
However, the high quality of these investments (as assessed by independent
rating agencies), reduces these risks. The value of these investments can also
be impacted by interest rate fluctuations. At
December 31, 2003, all of the $3.074 billion was invested in fixed or
variable rate instruments or money market type accounts. While an increase in
interest rates would ordinarily adversely impact the fair market value of fixed
and variable rate investments, we normally hold these investments to maturity.
Consequently, neither interest rate fluctuations nor other market risks
typically result in significant realized gains or losses to this portfolio. A
decrease in interest rates has the effect of reducing our future annual
interest income from this portfolio, since funds would be re-invested at lower
rates as the instruments mature. Over time, any net percentage decrease in
interest rates could be reflected in a corresponding net percentage decrease in
our interest income. In accordance with generally accepted accounting principles, we adjust the
carrying value of our available-for-sale marketable investment securities to
fair market value and report the related temporary unrealized gains and losses
as a separate component of stockholders deficit, net of related deferred
income tax, if applicable. Declines in the fair market value of a marketable
investment security which are estimated to be other than temporary must be
recognized in the statement of operations, thus establishing a new cost basis
for such investment. We evaluate our marketable investment securities
portfolio on a quarterly basis to determine whether declines in the market
value of these securities are other than temporary. This quarterly evaluation
consists of reviewing, among other things, the fair market value of our
marketable investment securities compared to the carrying value of these
securities, the historical volatility of the price of each security and any
market and company specific factors related to each security. Generally,
absent specific factors to the contrary, declines in the fair market value of
investments below cost basis for a period of less than six months are
considered to be temporary. Declines in the fair market value of investments
for a period of six to nine months are evaluated on a case by case basis to
determine whether any company or market-specific factors exist which would
indicate that such declines are other than temporary. Declines in the fair
market value of investments below cost basis for greater than nine months are
considered other than temporary and are recorded as charges to earnings, absent
specific factors to the contrary. As
of December 31, 2003, we estimated the fair market value of our
senior
debt and mortgages and other notes payable to be approximately $5.721 billion
using quoted market prices where available, or discounted cash flow analyses.
The interest rates assumed in such discounted cash flow analyses reflect
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The fair market value of our fixed-rate
debt and mortgages is affected by fluctuations in interest rates. A
hypothetical 10.0% decrease in assumed interest rates would increase the fair
market value of our debt by approximately $159.8 million. To the extent
interest rates increase, our costs of financing would increase at such time as
we are required to refinance our debt. As of December 31, 2003, a hypothetical
10.0% increase in assumed interest rates would increase our annual interest
expense by approximately $42.6 million. 23




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##### Table of Contents



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements are included in this report beginning on
page F-1. 
  Item 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE Not applicable. 
 Item 9A. CONTROLS AND PROCEDURES As of December 31, 2003, an evaluation was performed under the supervision and
with the participation of our management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on that evaluation, our
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective as of
December 31, 2003. There have been no significant changes during the period
covered by this report in our internal control over financial reporting or in
other factors that could significantly affect internal control over financial
reporting. 
 PART IV 
 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K  (a)
    
    The following documents are filed as part of this report:  (1)
    
    Financial Statements PageReport of KPMG LLP, Independent Auditors
    
    
    F-2Report of Arthur Andersen LLP, Independent Auditors
    
    
    F-3Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    F-4Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Changes in Stockholders Deficit for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  (2)
    
    Financial Statement SchedulesNone. All schedules have been included in the Consolidated Financial
Statements or Notes thereto.(3)
    
    Exhibits Exhibit No.
    
    Description3.1(a)*
    
    Articles of Incorporation of EDBS (incorporated by reference to Exhibit 3.4(a)
to the Companys Registration Statement on Form S-4, Registration No.
333-31929).3.1(b)H
    
    Certificate of Amendment of the Articles of Incorporation of EchoStar DBS
Corporation, dated as of August 25, 2003.3.1(c)*
    
    Bylaws of EDBS (incorporated by reference to Exhibit 3.4(b) to the Companys
Registration Statement on Form S-4, Registration No. 333-31929).
 24




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##### Table of Contents



Exhibit No.
    
    Description4.1*
    
    Indenture of Trust, relating to EDBS 9 3/8% Senior Notes due 2009 (Ten Year
Notes), dated as of January 25, 1999, among EDBS, the Guarantors (as defined
therein) and U.S. Bank, as trustee (incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-4 of EDBS, Registration No.
333-71345).4.2*
    
    Registration Rights Agreement, relating to the Ten Year Notes, dated as of
January 25, 1999, by and among EDBS, the Guarantors and the Initial Purchasers
(as defined therein) (incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-4 of EDBS, Registration No. 333-71345).4.3*
    
    Indenture relating to 10 3/8% Senior Notes due 2007, dated as of November 12,
2002, between EDBS and U.S. Bank Trust National Association, as trustee
(incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 2002, Commission File No.0-26176).4.4*
    
    Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated as of December
28, 2001 between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.17 to the Annual Report on Form 10-K
of EchoStar for the year ended December 31, 2001, Commission File No.
0-26176).4.5*
    
    Registration Rights Agreement, relating to the 9 1/8% Senior Notes Due 2009,
dated as of December 28, 2001, by and among EDBS and Deutsche Banc Alex.
Brown, Inc., Credit Suisse First Boston Corporation, Lehman Brothers Inc. and
UBS Warburg LLC (incorporated by reference to Exhibit 4.18 to the Annual
Report on Form 10-K of EchoStar for the year ended December 31, 2001,
Commission File No. 0-26176).4.6*
    
    Indenture, relating to EDBS 5 3/4% Senior Notes due 2008, dated as of October
2, 2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarter ended September 30, 2003, Commission File
No.0-26176).4.7*
    
    Indenture, relating to EDBS 6 3/8% Senior Notes due 2011, dated as of October
2, 2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarter ended September 30, 2003, Commission File
No.0-26176).4.8*
    
    Indenture, relating to EDBS Floating Senior Notes due 2008, dated as of
October 2, 2003, between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to the Quarterly Report on
Form 10-Q of EchoStar for the quarter ended September 30, 2003, Commission
File No.0-26176).4.9*
    
    Registration Rights Agreement dated as of October 2, 2003 among EDBS and the
other parties named herein (incorporated by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended September 30,
2003, Commission File No.0-26176).4.10*
    
    First Supplemental Indenture, relating to the 9 1/8% Senior Notes Due 2009,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.12 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).4.11*
    
    First Supplemental Indenture, relating to the 5 3/4% Senior Notes Due 2008,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.13 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).
 25




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##### Table of Contents



Exhibit No.
    
    Description4.12*
    
    First Supplemental Indenture, relating to the 6 3/8% Senior Notes Due 2011,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.14 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).4.13*
    
    First Supplemental Indenture, relating to the Floating Rate Senior Notes Due
2008, dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.15 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).4.14*
    
    First Supplemental Indenture, relating to the 10 3/8% Senior Notes Due 2007,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.16 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).10.1*
    
    Form of Satellite Launch Insurance Declarations (incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1 of Dish Ltd.,
Registration No. 33-81234).10.2*
    
    Form of Tracking, Telemetry and Control Contract between AT&T Corp. and ESC
(incorporated by reference to Exhibit 10.12 to the Registration Statement on
Form S-1 of Dish Ltd., Registration No. 33-81234).10.3*
    
    Manufacturing Agreement, dated as of March 22, 1995, between HTS and SCI
Technology, Inc. (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Dish Ltd., Commission File No.
33-81234).10.4*
    
    EchoStar 1995 Stock Incentive Plan (incorporated by reference to Exhibit 10.16
to the Registration Statement on Form S-1 of EchoStar, Registration No.
33-91276). **10.5*
    
    Echostar 1999 Stock Incentive Plan (incorporated by reference to Exhibit C to
EchoStars Definitive Proxy Statement on Schedule 14A dated March 23, 1999).**10.6*
    
    2002 Class B CEO Stock Option Plan (incorporated by reference to Appendix A to
EchoStars Definitive Proxy Statement on Schedule 14A dated April 9, 2002).**10.7*
    
    Satellite Construction Contract, dated as of July 18, 1996, between EDBS and
Lockheed Martin Corporation (incorporated by reference to Exhibit 10.18 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).10.8*
    
    Agreement between HTS, ESC and ExpressVu Inc., dated January 8, 1997, as
amended (incorporated by reference to Exhibit 10.18 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 1996, as amended,
Commission File No. 0-26176).10.9*
    
    Agreement to Form NagraStar LLC, dated as of June 23, 1998, by and between
Kudelski S.A., EchoStar and ESC (incorporated by reference to Exhibit 10.28 to
the Annual Report on Form 10-K of EchoStar for the year ended December 31,
1998, Commission File No. 0-26176).10.10*
    
    License and OEM Manufacturing Agreement, dated July 1, 2002, between EchoStar
Satellite Corporation, EchoStar Technologies Corporation and Thomson
multimedia, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended September 30, 2002,
Commission File No. 0-26176). ***10.11*
    
    Amendment No. 19 to License and OEM Manufacturing Agreement, dated July 1,
2002, between EchoStar Satellite Corporation, EchoStar Technologies
Corporation and Thomson multimedia, Inc. (incorporated by reference to Exhibit
10.57 to the Annual Report on Form 10-K of EchoStar for the year ended
December 31, 2002, Commission File No.0-26176).
 26




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##### Table of Contents



Exhibit No.
    
    Description10.12*
    
    Satellite Service Agreement, dated as of March 21, 2003, between SES Americom,
Inc., EchoStar Satellite Corporation and EchoStar Communications Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended March 31, 2003, Commission File
No.0-26176).10.13*
    
    Amendment No. 1 to Satellite Service Agreement dated March 31, 2003 between
SES Americom Inc. and EchoStar (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter ended September
30, 2003, Commission File No.0-26176).10.14*
    
    Satellite Service Agreement dated as of August 13, 2003 between SES Americom
Inc. and EchoStar (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended September 30, 2003,
Commission File No.0-26176).31.1H
    
    Section 302 Certification by Chairman and Chief Executive Officer.31.2H
    
    Section 302 Certification by Senior Vice President and Chief Financial Officer.32.1H
    
    Section 906 Certification by Chairman and Chief Executive Officer.32.2H
    
    Section 906 Certification by Senior Vice President and Chief Financial Officer.
  H
    
    Filed herewith.*
    
    Incorporated by reference.**
    
    Constitutes a management contract or compensatory plan or arrangement.***
    
    Filed in redacted form since confidential treatment has been requested
pursuant to Rule 24.b-2 for certain portions thereof. A conforming
electronic copy is filed herewith.  (b)
    
    Reports on Form 8-K On December 22, 2003 we filed a Current Report on Form 8-K to report our
election to retire all of our outstanding 9 3/8% Senior Notes due 2009, five
years early pursuant to our optional early redemption right. 27




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. ECHOSTAR DBS CORPORATIONBy:
    /s/ Michael R. McDonnellMichael R. McDonnellSenior Vice President and Chief Financial Officer Date: March 29, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated: Signature
    
    Title
    
    Date/s/ Charles W. Ergen
Charles W. Ergen
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 29, 2004/s/ Michael R. McDonnell
Michael R. McDonnell
    
    Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    March 29, 2004/s/ James DeFranco
James DeFranco
    
    Director
    
    March 29, 2004/s/ David K. Moskowitz
David K. Moskowitz
    
    Director
    
    March 29, 2004
 28




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageConsolidated Financial Statements:Report of KPMG LLP, Independent Auditors
    
    
    F-2Report of Arthur Andersen LLP, Independent Auditors
    
    
    F-3Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    F-4Consolidated Statements of Operations and Comprehensive Income for the years ended December 31,
2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Changes in Stockholders Deficit for the years ended December 31, 2001, 2002
and 2003
    
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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INDEPENDENT AUDITORS REPORT The Board of Directors
EchoStar DBS Corporation: We
have audited the accompanying consolidated balance sheets of EchoStar DBS
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations and comprehensive income,
changes in
stockholders deficit and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The 2001 consolidated financial statements of
EchoStar DBS Corporation and subsidiaries were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on
those consolidated financial statements in their report dated February 27,
2002. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EchoStar DBS
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of its operations and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America. As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and intangible assets effective
January 1, 2002. As discussed in note 3, the consolidated financial statements as of and for the
year ended December 31, 2002 have been restated. KPMG LLP Denver, Colorado
March 22, 2004 F-2




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##### Table of Contents



INDEPENDENT AUDITORS REPORT The below report is a copy of a previously issued Arthur Andersen LLP report
and this report has not been reissued. To EchoStar DBS Corporation: We have audited the accompanying consolidated balance sheets of EchoStar DBS
Corporation (a Colorado corporation) and subsidiaries as of December 31, 2000
and 2001, and the related consolidated statements of operations and
comprehensive loss, changes in stockholders deficit and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EchoStar DBS
Corporation and subsidiaries as of December 31, 2000 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Denver, Colorado,
February 27, 2002. F-3




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ECHOSTAR DBS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) As of December 31,2003
    
    2002As Restated(Note 3)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    968,163
    
    
    $
    267,692Marketable investment securities
    
    
    1,929,105
    
    
    
    277,260Trade accounts receivable, net of allowance for uncollectible accounts
of $8,152 and $9,276 respectively
    
    
    342,352
    
    
    
    325,928Inventories
    
    
    154,813
    
    
    
    149,611Other current assets
    
    
    70,904
    
    
    
    17,335Total current assets
    
    
    3,465,337
    
    
    
    1,037,826Restricted cash
    
    
    20
    
    
    
    10Cash reserved for satellite insurance
    
    
    176,843
    
    
    
    151,372Property and equipment, net
    
    
    1,761,376
    
    
    
    1,831,139FCC authorizations
    
    
    696,242
    
    
    
    696,242Insurance receivable
    
    
    106,000
    
    
    
    106,000Other noncurrent assets
    
    
    88,361
    
    
    
    38,492Total assets
    
    $
    6,294,179
    
    
    $
    3,861,081Liabilities and Stockholders DeficitCurrent Liabilities:Trade accounts payable
    
    $
    171,660
    
    
    $
    246,314Deferred revenue
    
    
    514,046
    
    
    
    440,678Accrued programming
    
    
    366,497
    
    
    
    301,282Other accrued expenses
    
    
    434,399
    
    
    
    521,047Advances to
affiliates (Note 14)
    
    
    289,645
    
    
    
    Current portion of long-term obligations
    
    
    14,836
    
    
    
    13,2629 1/4% Senior Notes due 2006 (Note 5)
    
    
    
    
    
    
    375,0009 3/8% Senior Notes due 2009 (Note 5)
    
    
    1,423,351
    
    
    
    Total current liabilities
    
    
    3,214,434
    
    
    
    1,897,583Long-term obligations, net of current portion:9 3/8% Senior Notes due 2009
    
    
    
    
    
    
    1,625,00010 3/8% Senior Notes due 2007
    
    
    1,000,000
    
    
    
    1,000,0009 1/8% Senior Notes due 2009
    
    
    455,000
    
    
    
    700,000Floating Rate Senior Notes due 2008
    
    
    500,000
    
    
    
    5 3/4% Senior Notes due 2008
    
    
    1,000,000
    
    
    
    6 3/8% Senior Notes due 2011
    
    
    1,000,000
    
    
    
    Mortgages and other notes payable, net of current portion
    
    
    41,994
    
    
    
    32,680Long-term deferred distribution and carriage payments and
other long-term liabilities
    
    
    155,015
    
    
    
    92,741Total long-term obligations, net of current portion
    
    
    4,152,009
    
    
    
    3,450,421Total liabilities
    
    
    7,366,443
    
    
    
    5,348,004Commitments
and Contingencies (Note 9)Stockholders Deficit:Class A Common Stock, $.01 par value, 1,000,000 and 1,000 shares authorized,
1,015 and 1,000 shares issued and outstanding, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    930,936
    
    
    
    843,198Non-cash, stock-based compensation
    
    
    (1,180
    )
    
    
    (8,657
    )Accumulated other comprehensive income
    
    
    560
    
    
    
    697Accumulated deficit
    
    
    (2,002,580
    )
    
    
    (2,322,161
    )Total stockholders deficit
    
    
    (1,072,264
    )
    
    
    (1,486,923
    )Total liabilities and stockholders deficit
    
    $
    6,294,179
    
    
    $
    3,861,081
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



ECHOSTAR DBS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands) For the Years Ended December 31,2003
    
    2002
    
    2001As Restated(Note 3)Revenue:Subscription television services
    
    $
    5,397,635
    
    
    $
    4,406,428
    
    
    $
    3,583,698Other subscriber-related revenue
    
    
    11,751
    
    
    
    16,942
    
    
    
    21,743DTH equipment sales
    
    
    240,449
    
    
    
    285,140
    
    
    
    266,743Other
    
    
    81,887
    
    
    
    95,127
    
    
    
    114,699Total revenue
    
    
    5,731,722
    
    
    
    4,803,637
    
    
    
    3,986,883Costs and Expenses:Subscriber-related expenses (exclusive of depreciation shown
below  Note 4)
    
    
    2,723,129
    
    
    
    2,216,297
    
    
    
    1,807,915Satellite and transmission expenses (exclusive of depreciation
shown below  Note 4)
    
    
    74,309
    
    
    
    56,656
    
    
    
    37,555Cost of sales - DTH equipment
    
    
    149,995
    
    
    
    177,980
    
    
    
    187,810Cost of sales - other
    
    
    43,948
    
    
    
    49,699
    
    
    
    75,385Subscriber acquisition costs:Cost of sales - subscriber promotion subsidies (exclusive of
depreciation shown below  Note 4)
    
    
    504,901
    
    
    
    445,448
    
    
    
    466,610Other subscriber promotion subsidies
    
    
    628,929
    
    
    
    574,750
    
    
    
    477,903Subscriber acquisition advertising
    
    
    176,964
    
    
    
    152,773
    
    
    
    141,168Total subscriber acquisition costs
    
    
    1,310,794
    
    
    
    1,172,971
    
    
    
    1,085,681General and administrative
    
    
    319,133
    
    
    
    300,387
    
    
    
    290,756Non-cash, stock-based compensation
    
    
    3,544
    
    
    
    11,279
    
    
    
    20,173Depreciation and amortization (Note 4)
    
    
    385,098
    
    
    
    355,754
    
    
    
    265,912Total costs and expenses
    
    
    5,009,950
    
    
    
    4,341,023
    
    
    
    3,771,187Operating income
    
    
    721,772
    
    
    
    462,614
    
    
    
    215,696Other Income (Expense):Interest income
    
    
    18,838
    
    
    
    10,001
    
    
    
    10,321Interest expense, net of amounts capitalized
    
    
    (407,030
    )
    
    
    (338,883
    )
    
    
    (192,900
    )Other
    
    
    (466
    )
    
    
    (5,900
    )
    
    
    (620
    )Total other income (expense)
    
    
    (388,658
    )
    
    
    (334,782
    )
    
    
    (183,199
    )Income before income taxes
    
    
    333,114
    
    
    
    127,832
    
    
    
    32,497Income tax provision, net
    
    
    (13,533
    )
    
    
    (80,941
    )
    
    
    (846
    )Net income
    
    $
    319,581
    
    
    $
    46,891
    
    
    $
    31,651Foreign currency translation adjustment
    
    
    453
    
    
    
    
    
    
    
    Unrealized holding losses on available-for-sales securities
    
    
    (590
    )
    
    
    (700
    )
    
    
    (635
    )Recognition of previously unrealized losses on available-for-sale
securities included in net income
    
    
    
    
    
    
    2,039
    
    
    
    Comprehensive income
    
    $
    319,444
    
    
    $
    48,230
    
    
    $
    31,016
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



ECHOSTAR DBS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT
(In thousands) AccumulatedDeficit andNon-Cash,
    
    AccumulatedCommon Stock
    
    Additional
    
    Stock-
    
    OtherPaid-In
    
    Based
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Compensation
    
    Income (Loss)
    
    TotalBalance, December 31, 2000
    
    
    1
    
    
    $
    
    
    
    $
    1,440,252
    
    
    $
    (58,193
    )
    
    $
    (2,400,710
    )
    
    $
    (1,018,651
    )Forfeitures of deferred non-cash,
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (12,564
    )
    
    
    5,143
    
    
    
    
    
    
    
    (7,421
    )Deferred stock-based compensation recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,594
    
    
    
    
    
    
    
    27,594Assumption of debt, net of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (992,098
    )
    
    
    
    
    
    
    
    
    
    
    (992,098
    )Changes in unrealized holding gains (losses)
on available-for-sale securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (635
    )
    
    
    (635
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,651
    
    
    
    31,651Balance, December 31, 2001
    
    
    1
    
    
    $
    
    
    
    $
    435,590
    
    
    $
    (25,456
    )
    
    $
    (2,369,694
    )
    
    $
    (1,959,560
    )Forfeitures of deferred non-cash,
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (5,520
    )
    
    
    1,911
    
    
    
    
    
    
    
    (3,609
    )Deferred stock-based compensation recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,888
    
    
    
    
    
    
    
    14,888Capital contribution of 10 3/8% interest payment from EBC
    
    
    
    
    
    
    
    
    
    
    77,812
    
    
    
    
    
    
    
    
    
    
    
    77,812Capital contribution of EchoStar VII from EBC
    
    
    
    
    
    
    
    
    
    
    177,000
    
    
    
    
    
    
    
    
    
    
    
    177,000Capital contribution of EchoStar VIII from EBC
    
    
    
    
    
    
    
    
    
    
    194,913
    
    
    
    
    
    
    
    
    
    
    
    194,913Assumption of EchoStar VII and VIII vendor financing
from EBC
    
    
    
    
    
    
    
    
    
    
    (30,000
    )
    
    
    
    
    
    
    
    
    
    
    (30,000
    )Reversal of deferred tax asset for book stock
compensation that exceeded the related tax deduction
    
    
    
    
    
    
    
    
    
    
    (6,597
    )
    
    
    
    
    
    
    
    
    
    
    (6,597
    )Changes in unrealized holding gains (losses)
on available-for-sale securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,339
    
    
    
    1,339Net income - As Restated (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,891
    
    
    
    46,891Balance, December 31, 2002 - As Restated (Note 3)
    
    
    1
    
    
    $
    
    
    
    $
    843,198
    
    
    $
    (8,657
    )
    
    $
    (2,321,464
    )
    
    $
    (1,486,923
    )Capital
contribution from ECC (Note 5)
    
    
    
    
    
    
    
    
    
    
    267,356
    
    
    
    
    
    
    
    
    
    
    
    267,356Capital
distribution for EchoStar IX to EOC (Note 14)
    
    
    
    
    
    
    
    
    
    
    (171,624
    )
    
    
    
    
    
    
    
    
    
    
    (171,624
    )Forfeitures of deferred non-cash,
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (3,933
    )
    
    
    
    
    
    
    
    
    
    
    (3,933
    )Deferred stock-based compensation recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,477
    
    
    
    
    
    
    
    7,477Reversal of deferred tax asset for book stock
compensation that exceeded the related tax deduction
    
    
    
    
    
    
    
    
    
    
    (4,061
    )
    
    
    
    
    
    
    
    
    
    
    (4,061
    )Changes in unrealized holding gains (losses)
on available-for-sale securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (590
    )
    
    
    (590
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453
    
    
    
    453Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,581
    
    
    
    319,581Balance, December 31, 2003
    
    
    1
    
    
    $
    
    
    
    $
    930,936
    
    
    $
    (1,180
    )
    
    $
    (2,002,020
    )
    
    $
    (1,072,264
    )
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



ECHOSTAR DBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) For the Years Ended December 31,2003
    
    2002
    
    2001As Restated(Note 3)Cash Flows From Operating Activities:Net income
    
    $
    319,581
    
    
    $
    46,891
    
    
    $
    31,651Adjustments to reconcile net income to net cash flows from operating activities:Depreciation and amortization
    
    
    385,098
    
    
    
    355,754
    
    
    
    265,912Realized and unrealized losses on investments
    
    
    
    
    
    
    2,039
    
    
    
    Non-cash, stock-based compensation recognized
    
    
    3,544
    
    
    
    11,279
    
    
    
    20,173Deferred tax expense
    
    
    2,845
    
    
    
    73,139
    
    
    
    Amortization of debt discount and deferred financing costs
    
    
    12,556
    
    
    
    6,176
    
    
    
    3,281Change in long-term assets
    
    
    (49,678
    )
    
    
    
    
    
    
    Change in long-term deferred distribution and carriage payments
    
    
    11,434
    
    
    
    (20,924
    )
    
    
    46,266Other, net
    
    
    1,918
    
    
    
    2,523
    
    
    
    25,751Changes in current assets and current liabilities:Trade accounts receivable, net
    
    
    (16,424
    )
    
    
    (12,075
    )
    
    
    (38,259
    )Inventories
    
    
    17,675
    
    
    
    69,306
    
    
    
    (25,665
    )Other current assets
    
    
    (9,139
    )
    
    
    513
    
    
    
    (6,169
    )Trade accounts payable
    
    
    (74,009
    )
    
    
    50,811
    
    
    
    59,422Deferred revenue
    
    
    73,368
    
    
    
    83,775
    
    
    
    73,964Accrued expenses
    
    
    (1,903
    )
    
    
    143,639
    
    
    
    145,776Net cash flows from operating activities
    
    
    676,866
    
    
    
    812,846
    
    
    
    602,103Cash Flows From Investing Activities:Purchases of marketable investment securities
    
    
    (3,911,404
    )
    
    
    (1,329,043
    )
    
    
    (586,648
    )Sales of marketable investment securities
    
    
    2,258,969
    
    
    
    1,141,401
    
    
    
    501,986Purchases of property and equipment
    
    
    (229,930
    )
    
    
    (349,795
    )
    
    
    (441,874
    )Cash reserved for satellite insurance (Note 4)
    
    
    (58,385
    )
    
    
    (59,680
    )
    
    
    (59,488
    )Change in restricted cash and cash reserved for satellite insurance due to
depreciation on related satellites (Note 4)
    
    
    32,904
    
    
    
    30,376
    
    
    
    19,813Incentive
payments under in-orbit satellite contract - Echo VI
    
    
    
    
    
    
    (8,441
    )
    
    
    (8,441
    )Other
    
    
    453
    
    
    
    (4,332
    )
    
    
    Net cash flows from investing activities
    
    
    (1,907,393
    )
    
    
    (579,514
    )
    
    
    (574,652
    )Cash Flows From Financing Activities:Proceeds from issuance of Floating Rate Senior Notes due 2008
    
    
    500,000
    
    
    
    
    
    
    
    Proceeds from issuance of 5 3/4% Senior Notes due 2008
    
    
    1,000,000
    
    
    
    
    
    
    
    Proceeds from issuance of 6 3/8% Senior Notes due 2011
    
    
    1,000,000
    
    
    
    
    
    
    
    Proceeds from issuance of 9 1/8% Senior Notes due 2009
    
    
    
    
    
    
    
    
    
    
    700,000Non-interest bearing advances from (to) affiliates
    
    
    
    
    
    
    (58
    )
    
    
    (758,756
    )Redemption of 9 1/4% Senior Notes due 2006
    
    
    (375,000
    )
    
    
    
    
    
    
    Partial redemption of 9 1/8% Senior Notes due 2009
    
    
    (245,000
    )
    
    
    
    
    
    
    Repurchase of 9 3/8% Senior Notes due 2009
    
    
    (201,649
    )
    
    
    
    
    
    
    Deferred debt issuance costs
    
    
    (12,500
    )
    
    
    
    
    
    
    (9,450
    )Capital contribution from ECC
    
    
    267,356
    
    
    
    
    
    
    
    Repayments of mortgage indebtedness and other notes payable
    
    
    (2,209
    )
    
    
    (3,419
    )
    
    
    (11,765
    )Other
    
    
    
    
    
    
    (1,215
    )
    
    
    Net cash flows from financing activities
    
    
    1,930,998
    
    
    
    (4,692
    )
    
    
    (79,971
    )Net increase (decrease) in cash and cash equivalents
    
    
    700,471
    
    
    
    228,640
    
    
    
    (52,520
    )Cash and cash equivalents, beginning of year
    
    
    267,692
    
    
    
    39,052
    
    
    
    91,572Cash and cash equivalents, end of year
    
    $
    968,163
    
    
    $
    267,692
    
    
    $
    39,052
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    Organization and Business Activities EchoStar DBS Corporation (EDBS, the Company, we, us and/or our) is a
wholly-owned subsidiary of EchoStar Communications Corporation (EchoStar or
ECC), a publicly traded company listed on the Nasdaq National Market. EDBS
was formed under Colorado law in January 1996. EchoStar has placed ownership
of its nine in-orbit satellites and related FCC licenses into our subsidiaries. Principal Business Unless otherwise stated herein, or the context otherwise requires, references
herein to EchoStar shall include ECC, EDBS and all direct and indirect
wholly-owned subsidiaries thereof. The operations of EchoStar include two
interrelated business units:  
    
    The DISH Network  which provides a direct broadcast satellite
subscription television service we refer to as DBS in the United
States; and  
    
    EchoStar Technologies Corporation(ETC)  which designs and
develops DBS set-top boxes, antennae and other digital equipment for the
DISH Network. We refer to this equipment collectively as EchoStar
receiver systems. ETC also designs, develops and distributes similar
equipment for international satellite service providers. Since 1994, we have deployed substantial resources to develop the EchoStar DBS
System. The EchoStar DBS System consists of our FCC-allocated DBS spectrum,
nine in-orbit satellites (EchoStar I through EchoStar IX), EchoStar
receiver systems, digital broadcast operations centers, customer service
facilities, and other assets utilized in our operations. Our principal
business strategy is to continue developing our subscription television service
in the United States to provide consumers with a fully competitive alternative
to cable television service. Organization and Legal Structure Substantially all of EchoStars operations are conducted by subsidiaries of
EDBS. The following table summarizes the organizational structure of EchoStar
and its principal subsidiaries as of December 31, 2003: Referred toLegal Entity
    
    Herein As
    
    ParentEchoStar Communications Corporation
    
    ECC
    
    Publicly ownedEchoStar Orbital Corporation
    
    EOC
    
    ECCEchoStar Orbital Corporation II
    
    EOC II
    
    EOCEchoStar DBS Corporation
    
    EDBS
    
    EOCEchoStar Satellite LLC
    
    ESLLC
    
    EDBSEchosphere LLC
    
    Echosphere
    
    EDBSEchoStar Technologies Corporation
    
    ETC
    
    EDBSDISH Network Service LLC
    
    DNSLLC
    
    EDBS
 As of December 31, 2003, all of EchoStars DBS FCC licenses and nine of its
in-orbit satellites were owned by our direct subsidiary. Contracts for the
construction and launch of EchoStar X are held in EchoStar Orbital Corporation
II, our sister company. F-8




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Significant Risks and Uncertainties Substantial Leverage.We are highly leveraged, which makes us vulnerable to
changes in general economic conditions. As of December 31, 2003, we had
outstanding long-term debt (including both the current and long-term portions)
totaling approximately $5.435 billion. We have quarterly and semi-annual cash,
debt service obligations for all of our outstanding long-term debt securities,
as follows: Quarterly/Semi-AnnualQuarterly/Semi-Annual
    
    Debt ServicePayment Dates
    
    Requirements9 3/8% Senior Notes
due 2009*
    
    February 1 and August 1
    
    $
    66,719,57810 3/8% Senior Notes
due 2007
    
    April 1 and October 1
    
    $
    51,875,0009 1/8% Senior Notes
due 2009
    
    January 15 and July 15
    
    $
    20,759,375Floating Rate Senior
Notes due 2008
    
    January 1, April 1,
July 1 and October 1
    
    $
    5,512,5005 3/4% Senior Notes
due 2008
    
    April 1 and October 1
    
    $
    28,750,0006 3/8% Senior Notes
due 2011
    
    April 1 and October 1
    
    $
    31,875,000
 * Effective February 2, 2004, these notes were redeemed. See Note 15- Subsequent
Events for further discussion. Semi-annual debt service requirements related to our 5 3/4% Senior Notes due
2008 and our 6 3/8% Senior Notes due 2011 will commence on April 1, 2004.
Quarterly debt service requirements related to our Floating Rate Senior Notes
due 2008 commenced on January 1, 2004. There are no scheduled principal
payment or sinking fund requirements prior to maturity on any of these notes.
Our ability to meet debt service obligations will depend on, among other
factors, the successful execution of our business strategy, which is subject to
uncertainties and contingencies beyond our control.  2.
    
    Summary of Significant Accounting Policies Principles of Consolidation We consolidate all majority owned subsidiaries and investments in entities in
which we have control. Non-majority owned investments are accounted for using
the equity method when we are able to significantly influence the operating
policies of the investee. When we do not significantly influence the operating
policies of an investee, the cost method is used. We eliminate all
intercompany balances and transactions. For entities that are considered
variable interest entities we apply the provisions of FASB Interpretation No.
(FIN) 46-R, Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with the current year presentation. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
for each reporting period. Estimates are used in accounting for, among other
things, allowances for uncollectible accounts, inventory allowances, self
insurance obligations, deferred tax asset valuation allowances, loss
contingencies, fair values of financial instruments, asset impairments, useful
lives of property and equipment, royalty obligations and smart card replacement
obligations. Actual results may differ from previously estimated amounts.
Estimates and assumptions are reviewed periodically, and the effects of
revisions are reflected in the period they occur. F-9




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued During the three months ended December 31, 2003, we recorded approximately
$61.4 million to reduce our estimated royalty obligations related to the
production of EchoStar receiver systems. The following details the decrease in
the financial statement line items affected by this change in estimate (in
thousands): Cost of sales  DTH equipment
    
    $
    (6,839
    )Cost of sales  subscriber promotion subsidies
    
    
    (42,750
    )Depreciation expense
    
    
    (5,937
    )Property and equipment, net
    
    
    (5,341
    )Inventory
    
    
    (505
    )
 Foreign Currency Translation The functional currency of the majority of our foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. However, for our subsidiaries where the functional currency is the
local currency, we translate assets and liabilities into U.S. dollars at the
period end exchange rate and record the translation adjustments as a component
of other comprehensive income. We translate revenues and expenses based on the
exchange rates at the time such transactions arise, if known, or at the average
rate for the period. Transactions denominated in currencies other than the
functional currency are recorded at the exchange rate at the time of the
transaction and are included in other miscellaneous income and expense. Net
transaction gains (losses) during 2003, 2002 and 2001 were not significant. Statements of Cash Flows Data The following presents our supplemental cash flow statement disclosure: For the Years Ended December 31,2003
    
    2002
    
    2001(In thousands)Cash paid for
interest
    
    $
    347,266
    
    
    $
    300,418
    
    
    $
    187,431Capitalized interest
    
    
    8,428
    
    
    
    23,876
    
    
    
    Cash received for
interest
    
    
    18,674
    
    
    
    10,043
    
    
    
    10,679Cash paid for
income taxes
    
    
    10,847
    
    
    
    7,249
    
    
    
    979Assumption of debt,
net of deferred
financing costs
    
    
    
    
    
    
    
    
    
    
    992,098Forfeitures of
deferred non-cash,
stock-based
compensation
    
    
    3,933
    
    
    
    5,520
    
    
    
    12,564EchoStar VII and
EchoStar VIII
satellite vendor
financing
    
    
    
    
    
    
    30,000
    
    
    
    EchoStar IX
satellite vendor
financing
    
    
    10,000
    
    
    
    
    
    
    
    Capital
contribution of
EchoStar VII from
EBC
    
    
    
    
    
    
    177,000
    
    
    
    Capital
contribution of
EchoStar VIII from
EBC
    
    
    
    
    
    
    194,913
    
    
    
    Capital
contribution for EchoStar IX to EOC (Note 14)
    
    
    (171,624
    )
    
    
    
    
    
    
    Capital
contribution from
ECC (Note 5)
    
    
    267,356
    
    
    
    
    
    
    
    
 Cash and Cash Equivalents We consider all liquid investments purchased with an original maturity of 90
days or less to be cash equivalents. Cash equivalents as of December 31, 2003
and 2002 consist of money market funds, corporate notes and commercial paper.
The cost of these investments approximates their fair market value. Marketable and Non-Marketable Investment Securities and Restricted Cash We currently classify all marketable investment securities as
available-for-sale. We adjust the carrying value of our available-for-sale
securities to fair market value and report the related temporary unrealized
gains and losses as a separate component of stockholders deficit, net of
related deferred income tax. Declines in the fair market value of a marketable
investment security which are estimated to be other than temporary are
recognized in the statement of operations, thus establishing a new cost basis
for such investment. We evaluate our marketable investment securities
portfolio on a quarterly basis to determine whether declines in the fair market
value of these securities are other than temporary. This quarterly evaluation
consists of reviewing, among other things, the fair market value of our
marketable investment securities compared to the carrying amount, the
historical volatility of the price of each security and any market and company
specific factors related to each security. Generally, absent specific factors
to the contrary, F-10




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued declines in the fair market value of investments below cost
basis for a period of less than six months are considered to be temporary.
Declines in the fair market value of investments for a period of six to nine
months are evaluated on a case by case basis to determine whether any company
or market-specific factors exist which would indicate that such declines are
other than temporary. Declines in the fair market value of investments below
cost basis for greater than nine months are considered other than temporary and
are recorded as charges to earnings, absent specific factors to the contrary. The major components of marketable investment securities and restricted cash
are as follows: Marketable Investment Securities
    
    Restricted CashAs of December 31,
    
    As of December 31,2003
    
    2002
    
    2003
    
    2002(In thousands)Government bonds
    
    $
    997,953
    
    
    $
    174,614
    
    
    $
    
    
    
    $
    Corporate notes and bonds
    
    
    382,928
    
    
    
    102,646
    
    
    
    
    
    
    
    Commercial paper
    
    
    395,803
    
    
    
    
    
    
    
    
    
    
    
    Asset backed obligations
    
    
    152,421Restricted cash
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    10$
    1,929,105
    
    
    $
    277,260
    
    
    $
    20
    
    
    $
    10
 As of December 31, 2003, marketable investment securities and restricted cash
include debt securities of $1.087 billion with contractual maturities of one
year or less, $691.6 million with contractual maturities between one and five
years and $150.5 million with contractual maturities greater than five years.
Actual maturities may differ from contractual maturities as a result of our
ability to sell these securities prior to maturity. Inventories Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
built by contract manufacturers to our specifications. Manufactured
inventories include materials, labor, freight-in, royalties and manufacturing
overhead. Inventories consist of the following: As of December 31,2003
    
    2002(In thousands)Finished
goods - DBS
    
    $
    103,102
    
    
    $
    104,052Raw materials
    
    
    32,545
    
    
    
    25,618Finished goods -
remanufactured and
other
    
    
    14,981
    
    
    
    16,478Work-in-process
    
    
    9,577
    
    
    
    7,964Consignment
    
    
    1,372
    
    
    
    5,140Inventory allowance
    
    
    (6,764
    )
    
    
    (9,641
    )$
    154,813
    
    
    $
    149,611
 Property and Equipment Property and equipment are stated at cost. Cost includes capitalized interest
of approximately $8.4 million, $23.9 million and zero during the years ended
December 31, 2003, 2002 and 2001, respectively. The costs of satellites under
construction are capitalized during the construction phase, assuming the
eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss
would be charged to expense in the period such loss was incurred. The amount
of any such loss would be reduced to the extent of insurance proceeds received,
if any, as a result of the launch or in-orbit failure. Depreciation is
recorded on a straight-line basis over lives ranging from one to forty years.
Repair and maintenance costs are charged to expense when incurred. Renewals
and betterments are capitalized. F-11




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Long-lived Assets We account for long-lived assets in accordance with the provision of Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144). We review our long-lived assets
and identifiable intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets which are held and used in operations, the asset would
be impaired if the book value of the asset (or asset group) exceeded its
undiscounted future net cash flows. Once an impairment is determined, the
actual impairment is reported as the difference between the book value and the
fair market value as estimated using discounted cash flows. Assets which are
to be disposed of are reported at the lower of the carrying amount or fair
market value less costs to sell. We consider relevant cash flow, estimated
future operating results, trends and other available information in assessing
whether the carrying value of assets are recoverable. Goodwill and Intangible Assets The excess of investment in consolidated subsidiaries over net tangible and
intangible asset value at acquisition is recorded as goodwill. Our intangible
assets consist primarily of FCC licenses. On January 1, 2002, we adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (FAS 142), which requires goodwill and intangible assets
with indefinite useful lives not be amortized but to be tested for impairment
annually or whenever indicators of impairments arise. Intangible assets that
have finite lives continue to be amortized over their estimated useful lives.
The amortization and non-amortization provisions of FAS 142 were applied to all
goodwill and intangible assets acquired after September 30, 2001. As of January
1, 2002, our FCC licenses have indefinite useful lives and are no longer
amortized because:  
    
    FCC spectrum is a non-depleting asset;  
    
    Existing DBS licenses are integral to our business and will contribute to cash flows indefinitely;  
    
    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 for the foreseeable future. Had we not amortized our FCC licenses during the year ended December 31, 2001,
our net loss would have decreased by approximately $18.8 million. At January 1, 2002, we did not have any goodwill. In accordance with FAS 142,
we tested our indefinite-lived intangible assets (consisting of FCC licenses)
and determined that there was no impairment required because the fair market
value of such assets exceeded the carrying value. 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 2003, we determined
that the estimated fair market value of the FCC licenses, calculated using the
discounted cash flow analysis, exceeded their carrying amount. In December 2003, EchoStar made an investment in South.com LLC (South.com), a
company it consolidates in its 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 F-12




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued auction. This initial deposit is included in Other current assets in
EchoStars 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 $1.1 million of gross
amortizable identifiable intangible assets with related accumulated
amortization of approximately $0.3 million in each year. These identifiable
intangibles primarily include acquired contracts. Amortization of these intangible assets with an average finite
useful life of approximately five years was $10 thousand and $296 thousand for
the years ended December 31, 2003 and 2002, respectively. We estimate
amortization of these intangible assets with an average finite useful life of
approximately five years will aggregate approximately $200 thousand annually
for the remaining useful life of these intangible assets of approximately four
years. 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 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. Income Taxes We establish a provision for income taxes currently payable or receivable and
for income tax amounts deferred to future periods in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS
109). FAS 109 requires that deferred tax assets or liabilities be recorded
for the estimated future tax effects of differences that exist between the book
and tax bases of assets and liabilities. Deferred tax assets are offset by
valuation allowances in accordance with FAS 109, because we believe it is more
likely than not that such net deferred tax assets will not be realized. F-13




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Fair Market Value of Financial Instruments Fair market values for our high-yield debt are based on quoted market prices.
The fair market values of our mortgages and other notes payable are estimated
using discounted cash flow analyses.The interest rates assumed in such
discounted cash flow analyses reflect interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. The following table summarizes the book and fair market values of our debt
facilities at December 31, 2003 and 2002: As of December 31, 2003
    
    As of December 31, 2002Book Value
    
    Fair Value
    
    Book Value
    
    Fair Value(In thousands)9 1/4% Senior Notes due 2006
    
    $
    
    
    
    $
    
    
    
    $
    375,000
    
    
    $
    386,2509 3/8% Senior Notes due 2009*
    
    
    1,423,351
    
    
    
    1,498,077
    
    
    
    1,625,000
    
    
    
    1,706,25010 3/8% Senior Notes due 2007
    
    
    1,000,000
    
    
    
    1,100,000
    
    
    
    1,000,000
    
    
    
    1,070,0009 1/8% Senior Notes due 2009
    
    
    455,000
    
    
    
    509,031
    
    
    
    700,000
    
    
    
    717,500Floating Rate Senior Notes due
2008
    
    
    500,000
    
    
    
    520,625
    
    
    
    
    
    
    
    5 3/4% Senior Notes due 2008
    
    
    1,000,000
    
    
    
    1,011,250
    
    
    
    
    
    
    
    6 3/8% Senior Notes due 2011
    
    
    1,000,000
    
    
    
    1,025,000
    
    
    
    
    
    
    
    Mortgages and other notes payable
    
    
    56,830
    
    
    
    56,830
    
    
    
    45,942
    
    
    
    45,942
 *These notes were redeemed February 2, 2004. Due to their short-term nature, book value approximates fair market value for
cash and cash equivalents, trade accounts receivable, net of allowance and
current liabilities for the periods ending December 31, 2003 and 2002. Deferred Debt Issuance Costs Costs of issuing debt are generally deferred and amortized to interest expense
over the terms of the respective notes (see Notes 5 and 15). Revenue Recognition Subscription and pay-per-view revenues are recognized when programming is
broadcast to subscribers. Subscriber fees for multiple set-top receivers and
equipment rental are recognized as revenue, monthly as earned. Advertising
revenue is recognized when the related services are performed. Payments
received from subscribers in advance of the broadcast are recorded as Deferred
revenue in the consolidated balance sheets until earned. Revenue from
international sales of digital set-top boxes and related accessories is
recognized upon shipment to customers. Accounting for our new subscriber promotions which include programming
discounts falls under the scope of EITF Issue No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Capital Products) (EITF 01-9). In accordance with EITF 01-9,
programming revenues under these promotions are recorded at the discounted
monthly rate charged to the subscriber. See Subscriber Acquisition Costs below
for discussion regarding the accounting for costs under these promotions. Programming and Other Costs The cost of television programming distribution rights is generally incurred on
a per subscriber basis and various upfront carriage payments are recognized
when the related programming is distributed to subscribers. The cost of
television programming rights to distribute live sporting events for a season
or tournament is charged to expense using the straight-line method over the
course of the season or tournament. Programming costs are included in
Subscriber-related expenses in the consolidated statements of operations and
comprehensive income. Subscriber Acquisition Costs Subscriber acquisition costs in our consolidated statements of operations and
comprehensive income consist of costs incurred to acquire new subscribers
through third parties and our direct customer acquisition distribution channel. F-14




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Total subscriber acquisition costs include the following line items from our
consolidated statements of operations and comprehensive income:  
    
    Cost of sales  subscriber promotion subsidiesincludes the cost
of EchoStar receiver systems sold to retailers and other
distributors of our equipment and receiver systems sold directly by us
to subscribers.  
    
    Other subscriber promotion subsidiesincludes net costs related
to various installation promotions and other promotional incentives.  
    
    Subscriber acquisition advertisingincludes advertising and
marketing expenses related to the acquisition of new DISH Network
subscribers. Advertising costs generally are expensed as incurred. During the year ended December 31, 2003, our significant new subscriber
promotions were as follows: Free Dish Effective February 1, 2003, our Free DISH promotion provides new
subscribers with a choice of up to two EchoStar receivers, including one
premium model system, and free installation for $49.99. The subscriber receives
a $49.99 credit on their first months bill. To be eligible, subscribers must
provide a valid major credit card, their social security number, pass a credit
score, and make a one-year commitment to subscribe to a qualified programming
package. Effective August 24, 2003, we expanded the above offer to include up
to three EchoStar receivers and require either a one or two year programming
commitment, depending on the set-top box models selected by the subscriber.
Although there can be no assurance as to the ultimate duration of the Free Dish
promotion, we expect it to continue through at least June 30, 2004. Free for All-Effective February 1, 2003, our Free for All promotion provides
new subscribers who purchase up to two receivers for $149 or more, depending on
the models chosen, and subscribe to a qualifying programming package, free
installation, together with credits of $12.50 or $17.00 applied to their
programming bill each month for a year. Effective August 24, 2003, under our
Free for All promotion new subscribers who purchase one or two receiver systems
and subscribe to a qualifying programming package receive a monthly credit of
$10.00 for 15 or 20 months, respectively. Although there can be no assurance
as to the ultimate duration of the Free for All promotion, we expect it to
continue through at least June 30, 2004. Digital Home Plan-Effective February 1, 2003, our Digital Home Plan promotion
offered new subscribers up to four EchoStar receivers, including various
models, with a minimum required programming package subscription. Each plan
includes in-home service, and the consumer must agree to a one-year commitment,
provide a valid major credit card, have an acceptable credit score, incur a
one-time set-up fee of $49.99, and an optional $50.00 upgrade fee. The
subscriber receives a $49.99 credit on their first months bill. Effective
November 15, 2003, for an optional $99.00 upgrade fee or a two-year programming
commitment, we offered new subscribers an option to connect up to three
EchoStar receivers to up to four televisions. Since we retain ownership of
equipment installed pursuant to the Digital Home Plan promotion, equipment
costs are capitalized and depreciated over a period of approximately four
years. Although there can be no assurance as to the ultimate duration of our
current equipment lease promotion, we expect it to continue through at least
June 30, 2004. Free Installation-Under our free installation program all subscribers who
purchase an EchoStar receiver system are eligible to receive free professional
installation of up to two receivers. Although there can be no assurance as to
the ultimate duration of the Free Installation promotion, we expect it to
continue through at least June 30, 2004. Accounting for our dealer sales under our Free Dish and Free for All falls
under the scope of EITF 01-9. In accordance with that guidance, we
characterize as a reduction of revenue, amounts paid to our independent dealers
as consideration for equipment installation services and for equipment buydowns
(commissions and rebates). We expense payments for equipment installation
services as Other subscriber promotion subsidies. Our payments for equipment
buydowns represent a partial or complete return of the dealers purchase price
and are, therefore, netted against the proceeds received from the dealer. We
report the net cost from our various sales promotions through our independent
dealer network as a component of Other subscriber promotion subsidies. No
net proceeds from the sale of subscriber related equipment is recognized as
revenue. Accordingly, subscriber acquisition costs are generally expensed as
incurred except for under our equipment lease promotion wherein the Company
retains title to the receiver and certain other equipment resulting in the
capitalization and depreciation of such equipment cost over its estimated
useful life. Research and Development Costs F-15




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Research and development costs are expensed as incurred. Research and
development costs totaled $19.8 million, $21.8 million and $16.6 million for
the years ended December 31, 2003, 2002 and 2001, respectively. Accounting for Stock-Based Compensation We have elected to follow the intrinsic value method of accounting under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25) and related interpretations in accounting for our
stock-based compensation plans, which are described more fully in Note 7.
Under APB 25, we generally do not recognize compensation expense on the grant
of options under our Stock Incentive Plan because typically the option terms
are fixed and the exercise price equals or exceeds the market price of the
underlying stock on the date of grant. We apply the disclosure only
provisions of Statement of Financial Accounting Standards No. 123, Accounting
and Disclosure of Stock-Based Compensation, (FAS 123). Pro forma information regarding net income and earnings per share is required
by FAS 123 and has been determined as if we had accounted for our stock-based
compensation plans using the fair market value method prescribed by that
statement. For purposes of pro forma disclosures, the estimated fair market
value of the options is amortized to expense over the options vesting period
on a straight-line basis. All options are initially assumed to vest.
Compensation previously recognized is reversed to the extent applicable to
forfeitures of unvested options. The following table illustrates the effect on
net income if we had accounted for our stock-based
compensation plans using the fair market value method: For the Years Ended December 31,2003
    
    2002
    
    2001As Restated(Note 3)(In thousands)Net income, as reported
    
    $
    319,581
    
    
    $
    46,891
    
    
    $
    31,651Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
    
    
    3,420
    
    
    
    10,884
    
    
    
    19,467Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects
    
    
    (24,798
    )
    
    
    (22,960
    )
    
    
    (23,233
    )Pro forma net income
    
    $
    298,203
    
    
    $
    34,815
    
    
    $
    27,885
 For purposes of this pro forma presentation, the fair market value of each
option grant was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: For the Years Ended December 31,2003
    
    2002
    
    2001Risk-free interest rate
    
    
    3.32
    %
    
    
    4.14
    %
    
    
    4.94
    %Volatility factor
    
    
    71.08
    %
    
    
    71.96
    %
    
    
    73.79
    %Expected term of options in
years
    
    
    6.7
    
    
    
    6.7
    
    
    
    6.0Weighted-average fair value
of options granted
    
    $
    20.39
    
    
    $
    15.08
    
    
    $
    17.59
 The dividend yield percentage is zero for all periods since we have not and do
not intend to pay dividends on our common stock in the near future. The
Black-Scholes option valuation model was developed for use in estimating the
fair market value of traded options which have no vesting restrictions and are
fully transferable and so, our estimate of fair market value may differ from
other valuation models. Further, the Black-Scholes model requires the input of
highly subjective assumptions and because changes in the subjective input
assumptions can materially affect the fair
market value estimate, the existing models do not necessarily provide a
reliable single measure of the fair market value of stock-based compensation
awards. 3. Financial Statement Restatement During February 2004, we consulted with the Securities and Exchange Commission
(SEC) regarding our accrual for the replacement of smart cards. Those cards,
which provide security that only paying customers can receive programming
delivered by us, become obsolete as a result of piracy. During the
consultation process, the SEC F-16




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued informed us that it believes we over reserved
approximately $30.2 million for the replacement of certain smart cards. During
prior years, ending in 2002, we accrued the estimated cost to replace those
cards, which are included in satellite receivers that we sell and lease to
consumers. The SEC did not object to the accruals to replace the smart cards
in satellite receivers sold to and owned by consumers. However, the SEC
believes that we over reserved approximately $30.2 million, on a pre-tax basis,
for the replacement of smart cards in satellite receivers owned by us and
leased to consumers. On March 12, 2004, the SEC informed us it would not object if we restated our
financial statements for 2002 to record a reversal of the accruals for the
replacement of these smart cards of approximately $4.2 million, $17.2 million
and $8.8 million which were originally accrued in 2000, 2001 and from January
2002 through June 2002, respectively. As a result, we have restated our
financial statements for 2002 as follows: As of December 31, 2002AsPreviously
    
    
    
    
    
    AsReported
    
    Adjustment
    
    Restated(In thousands)Other accrued
expenses
    
    $
    551,217
    
    
    $
    (30,170
    )
    
    $
    521,047Long-term deferred
distribution and
carriage payments
and other
long-term
liabilites
    
    
    91,282
    
    
    
    1,459
    
    
    
    92,741Accumulated deficit
    
    
    (2,350,872
    )
    
    
    28,711
    
    
    
    (2,322,161
    )
 For the Year Ended December 31, 2002AsPreviously
    
    
    
    
    
    AsReported
    
    Adjustment
    
    Restated(In thousands)Subscriber-related
expenses
    
    $
    2,246,467
    
    
    $
    (30,170
    )
    
    $
    2,216,297Operating income
    
    
    432,444
    
    
    
    30,170
    
    
    
    462,614Income tax
provision, net
    
    
    (79,482
    )
    
    
    (1,459
    )
    
    
    (80,941
    )Net income
    
    
    18,180
    
    
    
    28,711
    
    
    
    46,891
 4. Property and Equipment Property and equipment consist of the following: DepreciableLife
    
    As of December 31,(In Years)
    
    2003
    
    2002(In thousands)EchoStar I
    
    12
    
    $
    201,607
    
    
    $
    201,607EchoStar II
    
    12
    
    
    228,694
    
    
    
    228,694EchoStar III
    
    12
    
    
    234,083
    
    
    
    234,083EchoStar IV
    
    4
    
    
    78,511
    
    
    
    78,511EchoStar V
    
    12
    
    
    210,446
    
    
    
    210,446EchoStar VI
    
    12
    
    
    246,022
    
    
    
    246,022EchoStar VII
    
    12
    
    
    177,000
    
    
    
    177,000EchoStar VIII
    
    12
    
    
    189,513
    
    
    
    194,913EchoStar IX
    
    12
    
    
    127,376
    
    
    
    Furniture, fixtures
and equipment
    
    2-10
    
    
    601,815
    
    
    
    548,506Buildings and
improvements
    
    5-40
    
    
    90,671
    
    
    
    85,306Digital Home Plan
equipment
    
    4
    
    
    543,954
    
    
    
    529,311Tooling and other
    
    1-5
    
    
    4,095
    
    
    
    4,875Land
    
    
    
    
    5,510
    
    
    
    5,186Vehicles
    
    7
    
    
    3,400
    
    
    
    3,435Construction in
progress
    
    
    
    
    51,740
    
    
    
    16,589Total property
and equipment
    
    
    
    
    2,994,437
    
    
    
    2,764,484Accumulated
depreciation
    
    
    
    
    (1,233,061
    )
    
    
    (933,345
    )Property and
equipment, net
    
    
    
    $
    1,761,376
    
    
    $
    1,831,139
 F-17




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Construction in progress consists of the following: As of December 31,2003
    
    2002(In thousands)Software related projects
    
    $
    35,148
    
    
    $
    Gilbert uplink center equipment  local market buildout
    
    
    8,413
    
    
    
    Other
    
    
    8,179
    
    
    
    16,589Construction in progress
    
    $
    51,740
    
    
    $
    16,589
 Depreciation and amortization expense consists of the following: For the Years Ended December 31,2003
    
    2002
    
    2001(In thousands)Digital Home Plan
equipment
    
    $
    138,637
    
    
    $
    130,760
    
    
    $
    65,653Satellites
    
    
    145,232
    
    
    
    128,155
    
    
    
    113,279Furniture, fixtures
and equipment
    
    
    91,396
    
    
    
    90,567
    
    
    
    62,475FCC licenses and
other amortizable
intangibles
    
    
    10
    
    
    
    463
    
    
    
    19,108Buildings and
improvements
    
    
    2,969
    
    
    
    2,658
    
    
    
    2,044Tooling and other
    
    
    6,854
    
    
    
    3,151
    
    
    
    3,353$
    385,098
    
    
    $
    355,754
    
    
    $
    265,912
 Cost of sales and operating expense categories included in our accompanying
consolidated statements of operations and comprehensive income do not include
depreciation expense related to satellites or Digital Home Plan equipment. EchoStar I and II EchoStar I and EchoStar II are both Series 7000 class satellites designed and
manufactured by Lockheed Martin Corporation. While both of those satellites
are currently functioning properly in orbit, a similar Lockheed Series 7000
class satellite owned by Loral Skynet recently experienced total in-orbit
failure. While we currently do not have sufficient information available to
reach any conclusions as to whether other satellites of the Series 7000 class
might be at increased risk of suffering a similar malfunction, no telemetry or
other data indicates EchoStar I or EchoStar II would be expected to experience
a similar failure. During December 2003, a spare Traveling Wave Tube Amplifier
(TWTA) was switched in to support operations on transponder 25 on EchoStar I
due to degraded operation of the primary TWTA. There are a total of 23
remaining TWTAs available to support the 16 operational
transponders on EchoStar I. During 2003, one of the spare TWTAs on EchoStar
II which had been found to be suspect during original In Orbit Test Operations
in 1996 was declared failed. There are a total of 23 remaining TWTAs
available to support the 16 operational transponders on EchoStar II. EchoStar
I and II are currently located at the 148 west orbital location. EchoStar III During January 2004, a TWTA pair on EchoStar III failed, resulting in a loss of
service on one of our licensed transponders. Including the seven TWTA pairs
that malfunctioned in prior years, these anomalies have resulted in the failure
of a total of 16 TWTAs on the satellite to date. While originally designed to
operate a maximum of 32 transponders at any given time, the satellite was
equipped with a total of 44 TWTAs to provide redundancy. EchoStar III can now
operate a maximum of 28 transponders but due to redundancy switching
limitations and the specific channel authorizations, currently it can only
operate on 17 of the 19 FCC authorized frequencies at the 61.5 degree west
orbital location. We are currently evaluating the
performance of EchoStar III and may be required to record an impairment charge
to earnings in future periods. EchoStar V During 2000, 2001 and 2002, EchoStar V experienced anomalies resulting in the
loss of three solar array strings, and during January 2003, EchoStar V
experienced anomalies resulting in the loss of an additional solar array
string. The satellite has a total of approximately 96 solar array strings and
approximately 92 are required to assure full power F-18




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued availability for the
estimated 12-year design life of the satellite. In addition, during January
2003, EchoStar V experienced an anomaly in a spacecraft electronic component
which affects the ability to receive telemetry from certain on-board equipment.
Other methods of communication have been established to alleviate the effects
of the failed component. An investigation of the solar array and electronic
component anomalies, none of which have impacted commercial operation of the
satellite, is continuing. In July 2001, EchoStar V experienced the loss of one
of its three momentum wheels. Two momentum wheels are utilized during normal
operations and a spare wheel was switched in at the time. A second momentum
wheel experienced an anomaly in December 2003 and was switched out resulting in
operation of the spacecraft in a modified mode utilizing thrusters to maintain
spacecraft pointing. While this operating mode provides adequate performance,
it results in an increase in fuel usage and a corresponding reduction of
spacecraft life. This operating mode is not expected to reduce the estimated
design life of the satellite to less than 12 years. The investigation into the
anomaly is continuing. Until the root causes of these anomalies are finally
determined, there can be no assurance future anomalies will not cause further
losses which could impact commercial operation of the satellite. EchoStar VIII During 2002, two of the thrusters on EchoStar VIII experienced anomalous events
and are not currently in use. During March 2003, an additional thruster on
EchoStar VIII experienced an anomalous event and is not currently in use. The
satellite is equipped with a total of 12 thrusters that help control spacecraft
location, attitude, and pointing and is currently operating using a combination
of the other nine thrusters. This workaround requires more frequent maneuvers
to maintain the satellite at its specified orbital location, which are less
efficient and therefore result in accelerated fuel use. In addition, the
workaround has resulted in certain gyroscopes being utilized for aggregate
periods of time substantially in excess of their originally qualified limits.
However, neither of these workarounds are expected to reduce the estimated
design life of the satellite to less than 12 years. An investigation of the
thruster anomalies, including the development of additional workarounds for
long term operations, is continuing. None of these events has impacted
commercial operation of the satellite to date. Until the root cause of these
anomalies has been finally determined, there can be no assurance that these or
future anomalies will not cause further losses which could impact commercial
operation of the satellite. EchoStar VIII is equipped with two solar arrays which convert solar energy into
power for the satellite. Those arrays rotate continuously to maintain optimal
exposure to the sun. During June and July 2003, EchoStar VIII experienced
anomalies that temporarily halted rotation of one of the solar arrays. In
December 2003 the other array experienced a similar anomaly. Both arrays are
currently fully functional, but rotating in a mode recommended by the satellite
manufacturer which allows full rotation but is different than the originally
prescribed mode. An investigation of the solar array anomalies, none of which
have impacted commercial operation of the satellite, is
continuing. Until the root cause of these anomalies is finally determined,
there can be no assurance future anomalies will not cause losses which could
impact commercial operation of the satellite. During September 2003, a single battery cell on EchoStar VIII exhibited reduced
capacity. There are 72 battery cells on EchoStar VIII and all loads can be
maintained for the full design life of the satellite with up to two battery
cells fully failed. An investigation of the battery cell anomaly, which has
not impacted commercial operation of the satellite, is underway. Until the
root cause of the anomaly is determined, there can be no assurance future
anomalies will not cause losses which could impact commercial operation of the
satellite. Satellite Insurance As a result of the failure of EchoStar IV solar arrays to fully deploy and the
failure of 38 transponders to date, a maximum of 6 of the 44 transponders
(including spares) on EchoStar IV are available for use at this time. In
addition to transponder and solar array failures, EchoStar IV has experienced
anomalies affecting its thermal systems and propulsion system. EchoStar IV is
currently located at the 157 degree orbital location. There can be no
assurance that further material degradation, or total loss of use, of EchoStar
IV will not occur in the immediate future. As of December 31, 2003, EchoStar
IV is fully depreciated. In September 1998, EchoStar filed a $219.3 million insurance claim for a total
loss under the launch insurance policies covering EchoStar IV. The satellite
insurance consists of separate substantially identical policies with different
carriers for varying amounts that, in combination, create a total insured
amount of $219.3 million. The insurance carriers F-19




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued include La Reunion Spatiale;
AXA Reinsurance Company (n/k/a AXA Corporate Solutions Reinsurance Company),
United States Aviation Underwriters, Inc., United States Aircraft Insurance
Group; Assurances Generales De France I.A.R.T. (AGF); Certain Underwriters at
Lloyds, London; Great Lakes Reinsurance (U.K.) PLC; British Aviation Insurance
Group; If Skaadeforsikring (previously Storebrand); Hannover Re (a/k/a
International Hannover); The Tokio Marine & Fire Insurance Company, Ltd.;
Marham Space Consortium (a/k/a Marham Consortium Management); Ace Global
Markets (a/k/a Ace London); M.C. Watkins Syndicate; Goshawk Syndicate
Management Ltd.; D.E. Hope Syndicate 10009 (Formerly Busbridge); Amlin
Aviation; K.J. Coles & Others; H.R. Dumas & Others; Hiscox Syndicates, Ltd.;
Cox Syndicate; Hayward Syndicate; D.J. Marshall & Others; TF Hart; Kiln;
Assitalia Le Assicurazioni DItalia S.P.A. Roma; La Fondiaria Assicurazione
S.P.A., Firenze; Vittoria Assicurazioni S.P.A., Milano; Ras - Riunione
Adriatica Di Sicurta S.P.A., Milano; Societa Cattolica Di Assicurazioni,
Verano; Siat Assicurazione E Riassicurazione S.P.A, Genova; E. Patrick; ZC
Specialty Insurance; Lloyds of London Syndicates 588 NJM, 1209 Meb AND 861 Meb;
Generali France Assurances; Assurance France Aviation; and Ace Bermuda
Insurance Ltd. The insurance carriers offered EchoStar a total of approximately $88.0 million, or
40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers assert, among other things, that EchoStar IV was not a
total loss, as that term is defined in the policy, and that EchoStar did not
abide by the exact terms of the insurance policies. EchoStar strongly
disagrees and filed arbitration claims against the insurers for breach of
contract, failure to pay a valid insurance claim and bad faith denial of a
valid claim, among other things. Due to individual forum selection clauses in
certain of the policies, EchoStar is pursuing its arbitration claims against
Ace Bermuda Insurance Ltd. in London, England, and its arbitration claims
against all of the other insurance carriers in New York, New York. The New
York arbitration commenced on April 28, 2003, and the Arbitration Panel has now
conducted approximately thirty-five days of hearings. The parties to the
London arbitration have agreed to stay that proceeding pending a ruling in the
New York arbitration. At the time EchoStar filed its claim in 1998, EchoStar recognized an initial
impairment loss of $106.0 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar will have to reduce the amount of
this receivable if a final settlement is reached for less than this amount.
In addition, during 1999, EchoStar recorded an impairment loss of approximately
$16.0 million as a charge to earnings to further write-down the carrying value
of the satellite. The $106.0 million insurance claim receivable has historically been classified
as a current asset. While there can be no assurance that EchoStar will receive
the amount claimed in either the New York or the London arbitrations, EchoStar
continues to believe the insurance claim amount is fully recoverable and expect
to receive a favorable decision prior to December 31, 2004. However, due to
the delays which have repeatedly occurred in the arbitration,
as well as uncertainty whether any decision might be appealed, EchoStar is not
confident that it will receive the cash proceeds related to this claim prior to
December 31, 2004. Consequently, during 2003, EchoStar reclassified the
insurance claim receivable from current to long-term. The classification of
this receivable will continue to be evaluated each quarter until such time as
payment is received. All prior year amounts have been reclassified to conform
to current year presentation. As a result of transponder, thermal and propulsion system anomalies only 6
transponders are currently available on EchoStar IV. We cannot predict with
certainty how much longer we will be able to transmit programming from EchoStar
IV. The indentures related to certain of our senior notes contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own or lease. As of December 31, 2003, nine of
our in-orbit satellites were in service and owned by our direct subsidiary. As
of December 31, 2003, insurance coverage was therefore required for at least
five of our nine satellites. We currently do not carry launch and/or in-orbit
insurance for any of our nine in-orbit satellites. To satisfy insurance
covenants related to our senior notes, we have reclassified an amount equal to
the depreciated cost of five of our satellites from Cash and cash equivalents
to Cash reserved for satellite insurance on our balance sheet. As of
December 31, 2003, Cash reserved for satellite insurance totaled
approximately $176.8 million. The reclassifications will continue until such
time, if ever, as we can again insure our satellites on acceptable terms and
for acceptable amounts or until the covenants requiring the insurance are no
longer applicable. Reserve requirements for satellite insurance decreased
approximately $57.2 million F-20




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued as of the February 2004 due to the redemption of
the 9 3/8% Senior Notes (See Note 15  Subsequent Events). 5. Long-Term Debt 9 1/4% Senior Notes due 2006 and 9 3/8% Senior Notes due 2009 Effective February 1, 2003, we redeemed all of our outstanding 9 1/4% Senior
Notes due 2006. In accordance with the terms of the indenture governing the
notes, the $375.0 million principal amount of the notes was redeemed at
104.625%, for a total of approximately $392.3 million. As a result of the
redemption, the indentures related to the 9 1/4% Senior Notes were satisfied
and cease to exist. The premium paid of approximately $17.3 million and
unamortized debt issuance costs of approximately $3.3 million were recorded as
charges to earnings and are included in interest expense in the consolidated
statements of operations and comprehensive income (loss). During the fourth quarter of 2003, we repurchased in open market transactions
approximately $201.6 million of the original $1.625 billion principal amount of
our 9 3/8% Senior Notes due 2009. The difference between the market price paid
and the principal amount of approximately $12.7 million and unamortized debt
issuance costs related to the repurchased notes of approximately $1.6 million
were recorded as charges to earnings and are included in interest expense in
the consolidated statements of operations and comprehensive income (loss).
Effective February 2, 2004, the remaining balance of the 9 3/8% Senior Notes of
approximately $1.423 billion was redeemed in accordance with the terms of the
indenture governing the notes (see Note 15 - Subsequent Events). As a portion
of the 9 3/8% Senior Notes remained outstanding as of December 31, 2003, we
continued to be subject to the terms of the related indentures until the 9 3/8%
Senior Notes were redeemed, in full, on February 2, 2004. Interest on the 9 3/8 % Senior Notes accrued at an annual rate of 9 3/8% and
was payable semi-annually in cash in arrears on February 1 and August 1 of each
year, commencing August 1, 1999. With the exception of certain de minimis domestic and foreign subsidiaries, the
9 3/8% Senior Notes were fully, unconditionally and jointly and severally
guaranteed by all of our subsidiaries. The 9 3/8% Senior Notes were general
senior unsecured obligations which:  
    
    ranked pari passuin right of payment to each other and to
all existing and future senior unsecured obligations;  
    
    ranked senior to all existing and future junior obligations;
and  
    
    were effectively junior to secured obligations to the extent
of the collateral securing such obligations, including any
borrowings under future secured credit facilities. Except under certain circumstances requiring prepayment premiums, and in other
limited circumstances, the 9 3/8% Senior Notes were not redeemable at our
option prior to February 1, 2004. The 9 3/8% Senior Notes were subject to
redemption, at our option, in whole or in part, at redemption prices decreasing
from 104.688% during the year commencing February 1, 2004 to 100% on or after
February 1, 2008, together with accrued and unpaid interest thereon to the
redemption date. The indentures related to the 9 3/8% Senior Notes contained restrictive
covenants that, among other things, imposed limitations on our ability to:  
    
    incur additional indebtedness;  
    
    apply the proceeds of certain asset sales;  
    
    create, incur or assume liens;  
    
    create dividend and other payment restrictions with respect to our subsidiaries;  
    
    merge, consolidate or sell assets; and  
    
    enter into transactions with affiliates. In the event of a change of control, as defined in the 9 3/8% Senior Notes
indenture, we were required to make an offer to repurchase all of the 9 3/8%
Senior Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest thereon, to the date
of repurchase. F-21




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 10 3/8% Senior Notes due 2007 The 10 3/8% Senior Notes mature October 1, 2007. Interest accrues at an annual
rate of 10 3/8% and is payable semi-annually in cash in arrears on April 1 and
October 1 of each year. These notes were sold on September 25, 2000 by EchoStar Broadband Corporation
(EBC), a previously wholly-owned subsidiary which was dissolved in 2003.
Under the terms of the 10 3/8% Senior Notes Indenture, EBC agreed to cause us
to make an offer to exchange (the EDBS Exchange Offer) all of the outstanding
10 3/8% Senior Notes for a new class of notes issued by us as soon as practical
following the first date (as reflected in our most recent quarterly or annual
financial statements) on which we were permitted to incur indebtedness in an
amount equal to the outstanding principal balance of the 10 3/8% Senior Notes
under the Indebtedness to Cash Flow Ratio test contained in the indentures
(the EDBS Indentures) governing our 9 1/4% Senior Notes and 9 3/8% Senior
Notes, and such incurrence of indebtedness would not otherwise cause any breach
or violation of, or result in a default under, the terms of the EDBS
Indentures. Effective November 5, 2002, we completed our offer to exchange all of the $1.0
billion principal outstanding of EBCs 10 3/8% Senior Notes for substantially
identical notes of EDBS. Tenders were received from holders of over 99% of the
EBC Notes. Per the terms of the indenture related to the EBC Notes, if at
least 90% in aggregate principal amount of the outstanding EBC Notes have
accepted the exchange offer, then all of the then outstanding EBC Notes shall
be deemed to have been exchanged for the EDBS Notes. Except under certain circumstances requiring prepayment premiums, and in other
limited circumstances, the 10 3/8% Senior Notes are not redeemable at our
option prior to October 1, 2004. Thereafter, the 10 3/8% Senior Notes will be
subject to redemption, at our option, in whole or in part, at redemption prices
decreasing from 105.188% during the year commencing October 1, 2004 to 100% on
or after October 1, 2006, together with accrued and unpaid interest thereon to
the redemption date. The indenture related to the 10 3/8% Senior Notes (the 10 3/8% Senior Notes
Indenture) contains certain restrictive covenants that generally do not impose
material limitations on us. Subject to certain limitations, the 10 3/8% Senior
Notes Indenture permits us to incur additional indebtedness, including secured
and unsecured indebtedness that ranks on parity with the 10 3/8% Senior Notes.
Any secured indebtedness will, as to the collateral securing such indebtedness,
be effectively senior to the 10 3/8% Senior Notes to the extent of such
collateral. The 10 3/8% Senior Notes are:  
    
    general unsecured obligations of ours;  
    
    ranked equally in right of payment with all of our existing and future senior debt;
    
    ranked senior in right of payment to all of our other existing and future subordinated debt; and  
    
    ranked effectively junior to (i) all liabilities (including
trade payables) of our subsidiaries (ii) all debt and other
liabilities (including trade payables) of any Guarantor if such
Guarantors guarantee is subordinated or avoided by a court of
competent jurisdiction, and (iii) all of our secured obligations, to
the extent of the collateral securing such obligations, including
any borrowings under any of our future secured credit facilities, if
any. In the event of a change of control, as defined in the 10 3/8% Senior Notes
Indenture, we will be required to make an offer to repurchase all or any part
of a holders 10 3/8% Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase. 9 1/8% Senior Notes due 2009 The $700.0 million principal amount of our 9 1/8% Senior Notes mature January
15, 2009. Interest accrues at an annual rate of 9 1/8% and is payable
semi-annually in cash, in arrears on January 15 and July 15 of each year,
commencing July 15, 2002. Effective September 3, 2003, we redeemed $245.0 million principal amount of our
9 1/8% Senior Notes due 2009, fully exercising our optional partial redemption
right. The outstanding principal amount of the notes after the redemption is
$455.0 million. In accordance with the terms of the indenture governing the
notes, the full $245.0 million F-22




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued principal amount of the notes eligible for
redemption was redeemed at 109.125% of such amount, for a total redemption
payment of approximately $267.4 million. The premium paid of approximately
$22.4 million and unamortized debt issuance costs of approximately $2.9 million
were recorded as charges to earnings and are included in interest expense in
our consolidated statements of operations and comprehensive income. Interest
on the notes was paid through the September 3, 2003 redemption date. As a
portion of the 9 1/8% Senior Notes remains outstanding as of December 31, 2003,
we continue to be subject to the terms of the related indentures until such
time as the 9 1/8% Senior Notes are fully redeemed. The 9 1/8% Senior Notes are guaranteed by substantially all of our subsidiaries
on a senior basis. The 9 1/8% Senior Notes are general unsecured senior
obligations which:  
    
    rank senior with all of our future subordinated debt; and  
    
    rank junior to any of our secured debt to the extent of the value of the assets securing such debt. Except under certain circumstances requiring prepayment premiums, and in other
limited circumstances, the 9 1/8% Senior Notes are not redeemable at our option
prior to January 15, 2006. Thereafter, the 9 1/8% Senior Notes will be subject
to redemption, at our option, in whole or in part, at redemption prices
decreasing from 104.563% during the year commencing January 15, 2006 to 100% on
or after January 15, 2008, together with accrued and unpaid interest thereon to
the redemption date. The indenture related to the 9 1/8% Senior Notes (the 9 1/8% Senior Notes
Indenture) contains restrictive covenants that, among other things, impose
limitations on our ability and our restricted subsidiaries to:  
    
    incur additional indebtedness or enter into sale and leaseback transactions;  
    
    pay dividends or make distribution on our capital stock or repurchase our capital stock;  
    
    make certain investments;  
    
    create liens;  
    
    enter into transactions with affiliates;  
    
    merge or consolidate with another company; and  
    
    transfer and sell assets In the event of a change of control, as defined in the 9 1/8% Senior Notes
Indenture, we will be required to make an offer to repurchase all or any part
of a holders 9 1/8% Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase. Floating Rate Senior Notes due 2008 On October 2, 2003, we sold $500.0 million principal amount of Floating Rate
Senior Notes which mature October 1, 2008 in a private placement to qualified
institutional buyers in reliance on Rule 144A under the Securities Act of 1933.
Interest accrues at a floating rate based on LIBOR and is payable quarterly
in cash in arrears on January 1, April 1, July 1 and October 1 of each year,
commencing January 1, 2004. The interest rate at December 31, 2003 was 4.41%.
The proceeds, along with proceeds from the 5 3/4% and 6 3/8% Senior Notes, will
be used primarily to repurchase or redeem all or a portion of our outstanding 9
3/8% Senior Notes due 2009 and other outstanding debt securities and for
general corporate purposes. We have agreed to offer to exchange the Floating Rate Senior Notes for new
issues of identical debt securities registered under the Securities Act of
1933. The Floating Rate Senior Notes will be redeemable, in whole or in part, at any
time after October 1, 2005 at redemption prices decreasing from 102% during the
year commencing October 1, 2005 to 100% on or after October 1, 2007. Prior to
October 1, 2006, we may also redeem up to 35% of each of the Floating Rate
Senior Notes at premiums specified in the indenture with the net cash proceeds
from certain equity offerings or capital contributions. The Floating Rate Senior Notes are:  
    
    general unsecured senior obligations of ours;  
    
    ranked equally in right of payment with all of our and the
guarantors existing and future unsecured F-23




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued  senior debt;  
    
    ranked effectively junior to our and the guarantors current
and future secured senior indebtedness up to the value of the
collateral securing such indebtedness. The indenture related to our Floating Rate Senior Notes (the Floating Rate
Senior Notes Indenture) contains restrictive covenants that, among other
things, impose limitations on our ability and our restricted subsidiaries to:  
    
    incur additional indebtedness or enter into sale and leaseback transactions;  
    
    pay dividends or make distribution on our capital stock or repurchase our capital stock;  
    
    make certain investments;  
    

    create liens;  
    
    enter into transactions with affiliates;  
    
    merge or consolidate with another company; and  
    
    transfer and sell assets In the event of a change of control, as defined in the related indenture, we
will be required to make an offer to repurchase all or any part of a holders
Floating Rate Senior Notes at a purchase price equal to 101% of the aggregate
principal amount thereof, together with accrued and unpaid interest thereon, to
the date of repurchase. 5 3/4% Senior Notes due 2008 On October 2, 2003, we sold $1.0 billion principal amount of the 5 3/4% Senior
Notes which mature October 1, 2008 in a private placement to qualified
institutional buyers in reliance on Rule 144A under the Securities Act of 1933.
Interest accrues at an annual rate of 5 3/4% and is payable semi-annually in
cash in arrears on April 1 and October 1 of each year, commencing April 1,
2004. The proceeds, along with proceeds from the Floating Rate Senior Notes
and the 6 3/8% Senior Notes, will be used primarily to repurchase or redeem all
or a portion of our outstanding 9 3/8% Senior Notes due 2009 and other
outstanding debt securities and for general corporate purposes. We have agreed to offer to exchange the 5 3/4% Senior Notes for new issues of
identical debt securities registered under the Securities Act of 1933. The 5 3/4% Senior Notes will be redeemable, in whole or in part, at any time at
a redemption price equal to 100% of their principal amount plus a make-whole
premium, as defined in the related indenture, together with accrued and unpaid
interest. Prior to October 1, 2006, we may also redeem up to 35% of each of
the 5 3/4% Senior Notes at specified premiums with the net cash proceeds from
certain equity offerings or capital contributions. The 5 3/4% Senior Notes are:  
    
    general unsecured senior obligations of ours;  
    
    ranked equally in right of payment with all of our and the
guarantors existing and future unsecured senior debt;  
    
    ranked effectively junior to our and the guarantors current
and future secured senior indebtedness up to the value of the
collateral securing such indebtedness. The indenture related to the 5 3/4% Senior Notes (the 5 3/4% Senior Notes
Indenture) contains restrictive covenants that, among other things, impose
limitations on our ability and our restricted subsidiaries to:  
    
    incur additional indebtedness or enter into sale and leaseback transactions;  
    
    pay dividends or make distribution on our capital stock or repurchase our capital stock;  
    
    make certain investments;  
    
    create liens;  
    
    enter into transactions with affiliates;  
    
    merge or consolidate with another company; and  
    
    transfer and sell assets In the event of a change of control, as defined in the related indenture, we
will be required to make an offer to repurchase all or any part of a holders 5
3/4% Senior Notes at a purchase price equal to 101% of the aggregate F-24




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued principal
amount thereof, together with accrued and unpaid interest thereon, to the date
of repurchase. 6 3/8% Senior Notes due 2011 On October 2, 2003, we sold $1.0 billion principal amount of our 6 3/8% Senior
Notes which mature October 1, 2011 in a private placement to qualified
institutional buyers in reliance on Rule 144A under the Securities Act of 1933.
Interest accrues at an annual rate of 6 3/8% and is payable semi-annually in
cash in arrears on April 1 and October 1 of each year, commencing April 1,
2004. The proceeds, along with proceeds from the Floating Rate Senior Notes
and the 5 3/4% Senior Notes, will be used primarily to repurchase or redeem all
or a portion of our 9 3/8% Senior Notes due 2009 and other outstanding debt
securities and for general corporate purposes. We have agreed to offer to exchange the 6 3/8% Senior Notes for new issues of
identical debt securities registered under the Securities Act of 1933. The 6 3/8% Senior Notes will be redeemable, in whole or in part, at any time at
a redemption price equal to 100% of their principal amount plus a make-whole
premium, together with accrued and unpaid interest. Prior to October 1, 2006,
we may also redeem up to 35% of each of the 6 3/8% Senior Notes at specified
premiums with the net cash proceeds from certain equity offerings or capital
contributions. The 6 3/8% Senior Notes are:  
    
    general unsecured senior obligations of ours;  
    
    ranked equally in right of payment with all of our and the
guarantors existing and future unsecured senior debt;  
    
    ranked effectively junior to our and the guarantors current
and future secured senior indebtedness up to the value of the
collateral securing such indebtedness. The indenture related to the 6 3/8% Senior Notes (the 6 3/8% Senior Notes
Indenture) contains restrictive covenants that, among other things, impose
limitations on our ability and our restricted subsidiaries to:  
    
    incur additional indebtedness or enter into sale and leaseback transactions;  
    
    pay dividends or make distribution on our capital stock or repurchase our capital stock;  
    
    make certain investments;  
    
    create liens;  
    
    enter into transactions with affiliates;  
    
    merge or consolidate with another company; and  
    
    transfer and sell assets In the event of a change of control, as defined in the related indenture, we
will be required to make an offer to repurchase all or any part of a holders 6
3/8% Senior Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest thereon, to the date
of repurchase. F-25




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Mortgages and Other Notes Payable Mortgages and other notes payable consists of the following: As of December 31,2003
    
    2002(In thousands)8.25% note payable for EchoStar IV satellite vendor financing due
upon resolution of satellite insurance claim (Note 4), payable
over 5 years from launch
    
    $
    11,327
    
    
    $
    11,3278% note payable for EchoStar VII satellite vendor financing, payable
over 13 years from launch
    
    
    14,302
    
    
    
    15,0008% note payable for EchoStar VIII satellite vendor financing, payable
over 14 years from launch
    
    
    14,381
    
    
    
    15,0008% note payable for EchoStar IX satellite vendor financing, payable
over 14 years from launch
    
    
    10,000
    
    
    
    Mortgages and other unsecured notes payable due in installments through
November 2009 with interest rates ranging from 2% to 10%
    
    
    6,820
    
    
    
    4,615Total
    
    
    56,830
    
    
    
    45,942Less current portion
    
    
    (14,836
    )
    
    
    (13,262
    )Mortgages and other notes payable, net of current portion
    
    $
    41,994
    
    
    $
    32,680
 Future maturities of our outstanding long-term debt, including the current
portion, are summarized as follows: For the Years Ended December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(In thousands)Long-term debt
    
    $
    1,423,351
    
    
    $
    
    
    
    $
    
    
    
    $
    1,000,000
    
    
    $
    1,500,000
    
    
    $
    1,455,000
    
    
    $
    5,378,351Mortgages and other notes payable
    
    
    14,836
    
    
    
    3,721
    
    
    
    3,683
    
    
    
    3,112
    
    
    
    3,007
    
    
    
    28,471
    
    
    
    56,830Total
    
    $
    1,438,187
    
    
    $
    3,721
    
    
    $
    3,683
    
    
    $
    1,003,112
    
    
    $
    1,503,007
    
    
    $
    1,483,471
    
    
    $
    5,435,181
 Guarantees The repayment obligations of EDBS under the vendor financings for EchoStar IV
and Echostar Orbital Corporation under the vendor financing for EchoStar VII
are guaranteed by EchoStar. The maximum potential future payments under these
guarantees are equal to the respective amounts of outstanding principal and
accrued interest. 6. Income Taxes As of December 31, 2003, we had net operating loss carryforwards (NOLs) for
federal income tax purposes of approximately $2.451 billion and credit
carryforwards of approximately $7.1 million. The NOLs begin to expire in the
year 2011 and capital loss and credit carryforwards will begin to expire in the
year 2006. During 2003, we decreased our valuation allowance by approximately $121.5
million as a result of a decrease in net deferred tax assets. During 2002, we
decreased our valuation allowance by approximately $9.4 million and fully
offset all net deferred tax assets. Included in this valuation is a decrease
of $57.9 million relating to net deferred tax liabilities generated during 2002
and an increase of $67.3 million relating to the balance of the net deferred
tax asset that existed at December 31, 2001. The federal NOL includes amounts related to tax deductions totaling
approximately $228.3 million for exercised stock options. The tax benefit of
these deductions has been allocated directly to contributed capital and has
been offset by a valuation allowance. During 2003 and 2002, stock option compensation expenses related to the 1999
Incentive Plan, for which an estimated deferred tax benefit was previously
recorded, exceeded the actual tax deductions allowed. Tax charges associated
with the reversal of the prior tax benefit have been allocated to additional
paid-in capital in accordance with Accounting Principals Board Opinion No. 25,
Accounting for Stock Issued to Employees. During 2003 and 2002, charges of
$6.0 and $6.6 million, respectively, were made to additional paid-in capital. F-26




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The components of the provision for income taxes are as follows: For the Years Ended December 31,2003
    
    2002
    
    2001As Restated(Note 3)(In thousands)Current (provision) benefit:Federal
    
    $
    
    
    
    $
    
    
    
    $
    (1,400
    )State
    
    
    (12,175
    )
    
    
    (5,946
    )
    
    
    (860
    )Foreign
    
    
    (482
    )
    
    
    (1,856
    )
    
    
    14(12,657
    )
    
    
    (7,802
    )
    
    
    (2,246
    )Deferred (provision) benefit:Federal
    
    
    (114,632
    )
    
    
    (65,465
    )
    
    
    (9,608
    )State
    
    
    (7,756
    )
    
    
    (17,106
    )
    
    
    (26,533
    )Decrease in valuation
allowance
    
    
    121,512
    
    
    
    9,432
    
    
    
    37,541(876
    )
    
    
    (73,139
    )
    
    
    1,400Total provision
    
    $
    (13,533
    )
    
    $
    (80,941
    )
    
    $
    (846
    )
 The actual tax provision for 2003, 2002 and 2001 reconcile to the amounts
computed by applying the statutory Federal tax rate to income before taxes as
follows: For the Years Ended December 31,2003
    
    2002
    
    2001As Restated(Note 3)% of pre-tax income/lossStatutory rate
    
    
    (35.0
    )
    
    
    (35.0
    )
    
    
    (35.0
    )State income taxes,
net of Federal
benefit
    
    
    (3.8
    )
    
    
    (12.2
    )
    
    
    (3.2
    )Foreign taxes and
foreign income not
U. S. taxable
    
    
    0.6
    
    
    
    (0.7
    )
    
    
    Stock option
compensation
    
    
    (2.4
    )
    
    
    4.3
    
    
    
    9.6Cumulative change
in effective state
tax rate
    
    
    
    
    
    
    (24.6
    )
    
    
    (79.5
    )Intangible
amortization and
other
    
    
    0.1
    
    
    
    (2.5
    )
    
    
    (10.0
    )Increase in
valuation allowance
    
    
    36.4
    
    
    
    7.4
    
    
    
    115.5Total (provision)
for income taxes
    
    
    (4.1
    )
    
    
    (63.3
    )
    
    
    (2.6
    )
 F-27




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The temporary differences, which give rise to deferred tax assets and
liabilities as of December 31, 2003 and 2002, are as follows: As of December 31,2003
    
    2002As Restated(Note 3)(In thousands)Deferred tax assets:NOL, credit and other
carryforwards
    
    $
    864,451
    
    
    $
    847,310Unrealized losses on
investments
    
    
    758
    
    
    
    697Accrued expenses
    
    
    29,791
    
    
    
    56,096Stock compensation
    
    
    18,093
    
    
    
    33,489Other
    
    
    41,179
    
    
    
    35,304Total deferred tax assets
    
    
    954,272
    
    
    
    972,896Valuation allowance
    
    
    (671,422
    )
    
    
    (769,273
    )Deferred tax asset after
valuation allowance
    
    
    282,850
    
    
    
    203,623Deferred tax liabilities:Depreciation and
amortization
    
    
    (288,799
    )
    
    
    (207,672
    )State taxes net of
federal tax effect
    
    
    (12,508
    )
    
    
    (8,336
    )Other
    
    
    
    
    
    
    (14
    )Total deferred tax
liabilities
    
    
    (301,307
    )
    
    
    (216,022
    )Net deferred tax asset
(liability)
    
    $
    (18,457
    )
    
    $
    (12,399
    )Current portion of net
deferred tax asset
(liability)
    
    $
    40,425
    
    
    $
    21,606Non current portion of
net deferred tax asset
(liability)
    
    
    (58,882
    )
    
    
    (34,005
    )Total net deferred tax
asset (liability)
    
    $
    (18,457
    )
    
    $
    (12,399
    )
  7.
    
    Stock Compensation Plans Stock Incentive Plan EchoStar has adopted stock incentive plans to provide incentive to attract and
retain officers, directors and key employees. EchoStar currently has 80.0
million shares of its class A common stock reserved for granting awards under
their 1995 Stock Incentive Plan and an additional 80.0 million shares of class
A common stock for granting awards under its 1999 Stock Incentive Plan. In
general, stock options granted through December 31, 2003 have included exercise
prices not less than the fair market value of EchoStars class A common stock
at the date of grant, and vest, as determined by EchoStars Board of Directors,
generally at the rate of 20% per year. During 1999, EchoStar adopted an incentive plan under its 1995 Stock Incentive
Plan, which provided certain key employees a contingent incentive including
stock options and cash. The payment of these incentives was contingent upon
the achievement of certain financial and other goals of EchoStar. EchoStar met
certain of these goals during 1999. Accordingly, in 1999, EchoStar recorded
approximately $178.8 million of deferred compensation related to post-grant
appreciation of options to purchase approximately 4.2 million shares. The
related deferred compensation, net of forfeitures, is being recognized over the
five-year vesting period. During the year ended December 31, 2003, 2002 and
2001, EchoStar recognized expense of $3.5 million, $11.3 million and $20.2
million, respectively, under the 1999 incentive plan. The remaining deferred
compensation of $1.2 million, which will be reduced by future forfeitures, if
any, will be recognized in 2004. We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying consolidated statements of
operations and comprehensive income. The following table represents the other
expense categories in our consolidated statements of operations and
comprehensive income that would be affected if non-cash, stock-based
compensation was allocated to the same expense categories as the base
compensation for key employees who participate in the 1999 incentive plan. F-28




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued For the Years Ended December 31,2003
    
    2002
    
    2001(In thousands)Subscriber-related
    
    $
    34
    
    
    $
    729
    
    
    $
    1,767Satellite and
transmission
    
    
    359
    
    
    
    (7
    )
    
    
    1,115General and
administrative
    
    
    3,151
    
    
    
    10,557
    
    
    
    17,291Total non-cash,
stock-based
compensation
    
    $
    3,544
    
    
    $
    11,279
    
    
    $
    20,173
 Options to purchase an additional 7.8 million shares are outstanding as of
December 31, 2003 and were granted with exercise prices equal to the fair
market value of the underlying shares on the date they were issued during 1999,
2000 and 2001 pursuant to a long term incentive plan under EchoStars 1995 Stock
Incentive Plan. The weighted-average exercise price of these options is $8.96.
Vesting of these options is contingent upon meeting certain longer-term goals
which have not yet been achieved. Consequently, no compensation was recorded
during the years ended December 31, 2003, 2002 and 2001 related to these
long-term options. We will record the related compensation at the achievement
of the performance goals, if ever. Such compensation, if recorded, would
likely result in material non-cash, stock-based compensation expense in our
consolidated statements of operations and comprehensive income. A summary of our stock option activity for the years ended December 31, 2003,
2002 and 2001 are as follows: 2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    Price
    
    Options
    
    PriceOptions
outstanding,beginning of year
    
    
    20,297,369
    
    
    $
    13.75
    
    
    
    22,213,207
    
    
    $
    12.88
    
    
    
    24,791,870
    
    
    $
    11.79Granted
    
    
    1,329,000
    
    
    
    29.95
    
    
    
    531,000
    
    
    
    20.76
    
    
    
    546,000
    
    
    
    36.52Exercised
    
    
    (2,966,987
    )
    
    
    5.71
    
    
    
    (1,409,394
    )
    
    
    5.29
    
    
    
    (1,536,261
    )
    
    
    5.11Forfeited
    
    
    (1,433,694
    )

    
    
    14.68
    
    
    
    (1,037,444
    )
    
    
    10.16
    
    
    
    (1,588,402
    )
    
    
    11.60Options
outstanding, end of
year
    
    
    17,225,688
    
    
    
    16.31
    
    
    
    20,297,369
    
    
    
    13.75
    
    
    
    22,213,207
    
    
    
    12.88Exercisable at end
of year
    
    
    5,333,838
    
    
    
    18.79
    
    
    
    6,137,213
    
    
    
    12.94
    
    
    
    4,628,108
    
    
    
    10.00
 Exercise prices for options outstanding as of December 31, 2003 are as
follows: Options Outstanding
    
    Options
ExercisableNumber Outstanding
    
    Weighted- Average
    
    
    
    
    
    Number Exercisableas of December 31,
    
    Remaining
    
    Weighted- Average
    
    As of December 31,
    
    Weighted- Average2003
    
    Contractual Life
    
    Exercise Price
    
    2003
    
    Exercise Price$
    1.167   -    $2.750
    
    
    
    1,413,817
    
    
    
    2.80
    
    
    $
    2.20
    
    
    
    1,413,817
    
    
    $
    2.203.000   -      3.008
    
    
    
    46,568
    
    
    
    4.25
    
    
    
    3.00
    
    
    
    46,568
    
    
    
    3.005.486   -      6.600
    
    
    
    8,855,573
    
    
    
    5.02
    
    
    
    6.00
    
    
    
    1,397,973
    
    
    
    6.0010.203   -    19.180
    
    
    
    2,143,280
    
    
    
    5.36
    
    
    
    14.15
    
    
    
    715,280
    
    
    
    12.4722.703    -   28.880
    
    
    
    1,549,300
    
    
    
    8.42
    
    
    
    27.87
    
    
    
    132,600
    
    
    
    24.0932.420    -   39.500
    
    
    
    1,890,400
    
    
    
    5.59
    
    
    
    35.42
    
    
    
    918,400
    
    
    
    35.1148.750    -   52.750
    
    
    
    195,750
    
    
    
    5.75
    
    
    
    50.02
    
    
    
    93,000
    
    
    
    49.5260.125    -   79.000
    
    
    
    1,131,000
    
    
    
    6.31
    
    
    
    65.65
    
    
    
    616,200
    
    
    
    64.30$
    1.1667 - $79.000
    
    
    
    17,225,688
    
    
    
    5.34
    
    
    
    16.31
    
    
    
    5,333,838
    
    
    
    18.79
 These amounts include approximately 7.8 million shares outstanding pursuant to
the long-term incentive plan. F-29




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 8. Employee Benefit Plans Employee Stock Purchase Plan During 1997, EchoStars Board of Directors and shareholders approved an
employee stock purchase plan (the ESPP), effective beginning October 1, 1997.
Under the ESPP, EchoStar is authorized to issue a total of 800,000 shares of
class A common stock. Substantially all full-time employees who have been
employed by EchoStar for at least one calendar quarter are eligible to
participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase EchoStars capital stock under all of EchoStars
stock purchase plans at a rate which would exceed $25,000 in fair market value
of capital stock in any one year. The purchase price of the stock is 85% of
the closing price of the class A common stock on the last business day of each
calendar quarter in which such shares of class A common stock are deemed sold
to an employee under the ESPP. The ESPP shall terminate upon the first to
occur of (i) October 1, 2007 or (ii) the date on which the ESPP is terminated
by EchoStars Board of Directors. During 2003, 2002 and 2001 employees
purchased approximately 66,000, 108,000 and 80,000 shares of class A common
stock through the ESPP, respectively. 401(k) Employee Savings Plan EchoStar sponsors a 401(k) Employee Savings Plan (the 401(k) Plan) for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by EchoStar, subject to a maximum annual contribution by EchoStar
of $1,000 per employee. Forfeitures of unvested participant balances which are
retained by the 401(k) Plan may be used to fund matching and discretionary
contributions. Expense recognized related to matching 401(k) contributions,
net of forfeitures, totaled approximately $632 thousand, $993 thousand and $429
thousand during the years ended December 31, 2003, 2002 and 2001, respectively.
EchoStar also may make an annual discretionary contribution to the plan with
approval by its Board of Directors, subject to the maximum deductible limit
provided by the Internal Revenue Code of 1986, as amended. These contributions
may be made in cash or in EchoStars stock. Discretionary contributions, net
of forfeitures, were approximately $15.4 million, $16.9 million and $225
thousand relating to the 401(k) Plan years ended December 31, 2003, 2002 and
2001, respectively. 9. Commitments and Contingencies Commitments Future maturities of our contractual obligations are summarized as follows: For the Years Ended December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(in thousands)Satellite obligations
    
    $
    147,430
    
    
    $
    107,783
    
    
    $
    154,841
    
    
    $
    199,012
    
    
    $
    198,854
    
    
    $
    1,566,164
    
    
    $
    2,374,084Purchase obligations
    
    
    645,529
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    645,529Operating leases
    
    
    17,610
    
    
    
    14,257
    
    
    
    9,941
    
    
    
    6,641
    
    
    
    2,735
    
    
    
    3,159
    
    
    
    54,343Total
    
    $
    810,569
    
    
    $
    122,040
    
    
    $
    164,782
    
    
    $
    205,653
    
    
    $
    201,589
    
    
    $
    1,569,323
    
    
    $
    3,073,956
 Satellite-Related Obligations During July 2003, EchoStar entered into a contract for the construction of
EchoStar X, a Lockheed Martin A2100 class DBS satellite. Construction is
expected to be completed during 2005. EchoStar X will enable better bandwidth
utilization, provide back-up protection for our existing local channel
offerings, allow us to offer local channels by satellite in additional markets;
and could allow DISH Network to offer other value-added services. During March 2003, we entered into a satellite service agreement with SES
Americom for all of the capacity on a new FSS satellite, which may be located
at the 105 degree orbital location or certain other orbital locations. We also
agreed to lease all of the capacity on an existing in-orbit FSS satellite at
the 105 degree orbital location beginning August 1, 2003 and continuing at
least until the new satellite is launched. In connection with this agreement,
we prepaid $50.0 million to SES Americom to partially fund construction of the
new satellite. The ten-year satellite F-30




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued service agreement for the new satellite
is renewable by us on a year to year basis following the initial term, and
provides us with certain rights to replacement satellites. We are required to
make monthly payments to SES Americom for both the existing in-orbit FSS
satellite and also for the new satellite for the ten-year period following its
launch. During August 2003, we exercised our option under the SES Americom
agreement to also lease for an initial ten-year term all of the capacity on a
new DBS satellite at an orbital location to be determined at a future date. We
anticipate that this satellite will be launched during the fourth quarter of
2005. During February 2004, we entered into two additional satellite service
agreements for capacity on FSS satellites. Pending the successful launch and
entry into service of the previously described new FSS satellite, the satellite
under the first of these agreements is scheduled for launch during the first
half of 2005. This agreement is a ten-year satellite service agreement that is
renewable by us on a year to year basis following the initial term, and
provides us with certain rights to replacement satellites. We are required to
make monthly payments for this satellite for the ten-year period following its
launch. The satellite under the second of these agreements is planned for
launch during the second half of 2006 and is contingent upon, among other
things, obtaining necessary regulatory approvals. There can be no assurance
that we will obtain these approvals or that the satellite will ultimately be
launched. It is our intent to use the capacity on this satellite to offer
additional value-added services. Future commitments related to this contingent
satellite are included in the table above. As a result of our recent agreements with fixed satellite service providers and
EchoStars agreement for the construction of EchoStar X, our obligations for payments related to
satellites have increased substantially. In certain circumstances the dates on
which we are obligated to make these payments could be delayed. These amounts
will increase when EchoStar commences payments for the launch of EchoStar X,
and would further increase to the extent we procure insurance for our
satellites or contract for the construction, launch or lease of additional
satellites. Certain of our FSS agreements are guaranteed by EchoStar. Purchase Obligations Our 2004 purchase obligations primarily consist of binding purchase orders for
EchoStar satellite receiver systems and related equipment. Programming Contracts In the normal course of business, we have entered into numerous contracts to
purchase programming content and will continue to do so. These commitments are
not included in the table above. The terms of our contracts typically range
from one to ten years and our payment obligations are fully contingent on the
number of subscribers to which we provide the respective content.
Consequently, our programming expenses will to continue to increase to the
extent we are successful growing our subscriber base. Programming expenses are
included in Subscriber-related expenses in the accompanying consolidated
statements of operations and comprehensive income. Rent Expense Total
rent expense for operating leases approximated $31.6 million,
$17.6
million and $14.5 million in 2003, 2002 and 2001, respectively. Patents and Intellectual Property Many entities, including some of our competitors, now have and may in the
future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. We may not be aware of all patents and other intellectual property
rights that our products may potentially infringe. Damages in patent
infringement cases can include a tripling of actual damages in certain cases.
Further, we cannot estimate the extent to which we may be required in the
future to obtain licenses with respect to patents held by others and the
availability and cost of any such licenses. Various parties have asserted
patent and other intellectual property rights with respect to components within
our direct broadcast satellite system. We cannot be certain that these persons
do not
own the rights they claim, that our products do not infringe on these rights,
that we would be able to obtain licenses from these persons on commercially
reasonable terms or, if we were unable to obtain such licenses, that we would
be able to redesign our products to avoid infringement. F-31




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Contingencies WIC Premium Television Ltd. During July 1998, WIC Premium Television Ltd. (WIC), an Alberta corporation,
filed a lawsuit against EchoStar in the Federal Court of Canada Trial Division.
General Instrument Corporation, HBO, Warner Communications, Inc., Showtime and
United States Satellite Broadcasting Company, Inc. were also named as
defendants. During September 1998, WIC filed another lawsuit against EchoStar in the Court
of Queens Bench of Alberta Judicial District of Edmonton. WIC is authorized
to broadcast certain copyrighted work, such as movies and concerts, to
residents of Canada. WIC alleged that the defendants engaged in, promoted,
and/or allowed satellite dish equipment from the United States to be sold in
Canada and to Canadian residents and that some of the defendants allowed and
profited from Canadian residents purchasing and viewing subscription television
programming that is only authorized for viewing in the United States. During
December 2003, the matter was dismissed with no impact on our business. Distant Network Litigation Until July 1998, EchoStar obtained feeds of distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District
of Florida entered a nationwide permanent injunction requiring PrimeTime 24 to
shut off distant network channels to many of its customers, and henceforth to
sell those channels to consumers in accordance with the injunction. In October 1998, EchoStar filed a declaratory judgment action against ABC, NBC,
CBS and FOX in the United States District Court for the District of Colorado.
EchoStar asked the Court to find that its method of providing distant network
programming did not violate the Satellite Home Viewer Act and hence did not
infringe the networks copyrights. In November 1998, the networks and their
affiliate association groups filed a complaint against EchoStar in Miami
Federal Court alleging, among other things, copyright infringement. The Court
combined the case that EchoStar filed in Colorado with the case in Miami and
transferred it to the Miami Federal Court. In February 1999, the networks filed a Motion for Temporary Restraining Order,
Preliminary Injunction and Contempt Finding against DirecTV, Inc. in Miami
related to the delivery of distant network channels to DirecTV customers by
satellite. DirecTV settled that lawsuit with the networks. Under the terms of
the settlement between DirecTV and the networks, some DirecTV customers were
scheduled to lose access to their satellite-provided distant network channels
by July 31, 1999, while other DirecTV customers were to be disconnected by
December 31, 1999. Subsequently, substantially all providers of
satellite-delivered network programming other than EchoStar agreed to this
cut-off schedule, although EchoStar does not know if they adhered to this
schedule. In April 2002, EchoStar reached a private settlement with ABC, Inc., one of the
plaintiffs in the litigation and jointly filed a stipulation of dismissal. In
November 2002, EchoStar reached a private settlement with NBC, another of the
plaintiffs in the litigation and jointly filed a stipulation of dismissal. On
March 10, 2004, EchoStar reached a private settlement with CBS, another of the
plaintiffs in the litigation and jointly filed a stipulation of dismissal.
EchoStar also reached private settlements with many independent stations and
station groups. EchoStar was unable to reach a settlement with five of the
original eight plaintiffs  Fox and the associations affiliated with each of
the four networks. A trial took place during April 2003 and the Court issued its final judgment in
June 2003. The District Court found that with one exception EchoStars current
distant network qualification procedures comply with the law. EchoStar has
revised its procedures to comply with the District Courts Order. Although the
plaintiffs asked the District Court to enter an injunction precluding EchoStar
from selling any local or distant network programming, the District Court
refused. While the plaintiffs did not claim monetary damages and none
were awarded, the plaintiffs were recently awarded approximately
$4.8 million in attorneys fees. We intend to appeal this
award even though the amount is substantially less than the amount
sought by the plaintiffs. The District Courts injunction requires EchoStar to use a computer model to
re-qualify, as of June 2003, all of its subscribers who receive ABC, NBC, CBS
or Fox programming by satellite from a market other than the city in which the
subscriber lives. The Court also invalidated all waivers historically provided
by network stations. These F-32




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued waivers, which have been provided by stations for the past several years
through a third party automated system, allow subscribers who believe the
computer model improperly disqualified them for distant network channels to
none-the-less receive those channels by satellite. Further, even though the
Satellite Home Viewer Improvement Act provides that certain subscribers who
received distant network channels prior to October 1999 can continue to receive
those channels through December 2004, the District Court terminated the right
of EchoStars grandfathered subscribers to continue to receive distant network
channels. EchoStar believes that the District Court made a number of errors and appealed
the District Courts decision. Plaintiffs cross-appealed. The Court of
Appeals granted EchoStars request to stay the injunction until its appeal is
decided. Oral argument occurred on February 26, 2004. It is not possible to
predict how or when the Court of Appeals will rule on the merits of our appeal. In the event the Court of Appeals upholds the injunction, and if EchoStar does
not reach private settlement agreements with additional stations, EchoStar will
attempt to assist subscribers in arranging alternative means to receive network
channels, including migration to local channels by satellite where available,
and free off air antenna offers in other markets. However, EchoStar cannot
predict with any degree of certainty how many subscribers will cancel their
primary DISH Network programming as a result of termination of their distant
network channels. EchoStar could be required to terminate distant network
programming to all subscribers in the event the plaintiffs prevail on their
cross-appeal and EchoStar is permanently enjoined from delivering all distant
network channels. Termination of distant network programming to subscribers
would result, among other things, in a reduction in average monthly revenue per
subscriber and a temporary increase in churn. Gemstar During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar-TV Guide
International, Inc. (Gemstar), filed a suit for patent infringement against
EchoStar and certain of its subsidiaries in the United States District Court
for the Western District of North Carolina, Asheville Division. The suit
alleges infringement of United States Patent No. 4,706,121 (the 121 Patent)
which relates to certain electronic program guide functions. In December 2000, EchoStar filed suit against Gemstar-TV Guide (and certain of
its subsidiaries) in the United States District Court for the District of
Colorado alleging violations by Gemstar of various federal and state anti-trust
laws and laws governing unfair competition. Gemstar filed counterclaims
alleging infringement of United States Patent Nos. 5,923,362 and 5,684,525 that
relate to certain electronic program guide functions. In addition, Gemstar
asserted new patent infringement counterclaims regarding United States Patent
Nos. 4,908,713 and 5,915,068. These patents relate to on-screen programming of
VCRs. In February 2001, Gemstar filed patent infringement actions against EchoStar in
the District Court in Atlanta, Georgia and with the ITC. These suits allege
infringement of United States Patent Nos. 5,252,066, 5,479,268 and 5,809,204,
all of which relate to certain electronic program guide functions. In
addition, the ITC action alleged infringement of the 121 Patent which was also
asserted in the North Carolina case previously discussed. On March 1, 2004,
EchoStar entered into a number of agreements with Gemstar including a
settlement agreement which provides for the resolution of the aforementioned
disputes between EchoStar and Gemstar. The effectiveness of the settlement is
subject to certain conditions, including the closing of the SNG sale (see Note
15  Subsequent Events). During 2000, Superguide Corp. (Superguide) also filed suit against EchoStar,
DirecTV and others in the United States District Court for the Western District
of North Carolina, Asheville Division, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. Superguide sought injunctive and declaratory relief
and damages in an unspecified amount. It is EchoStars understanding that
these patents may be licensed by Superguide to Gemstar. Gemstar was added as a
party to this case and asserted these patents against EchoStar. EchoStar
examined these patents and believes that they are not infringed by any of its
products or services. A Markman ruling interpreting the patent claims was
issued by the Court and in response to that ruling, EchoStar filed motions for
summary judgment of non-infringement for each of the asserted patents. Gemstar
filed a motion for summary judgment of infringement with respect to one of the
patents. During July 2002, the Court issued a Memorandum of Opinion on the
summary judgment motions. In its Opinion, the Court ruled that none of
EchoStars products infringe the 5,038,211 and 5,293,357 patents. With respect
to the 4,751,578 patent, the Court ruled that none F-33




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued of EchoStars current products infringed that patent and asked for additional
information before it could rule on certain low-volume products that are no
longer in production. During July 2002, the Court summarily ruled that the
aforementioned low-volume products did not infringe any of the asserted
patents. Accordingly, the Court dismissed the case and awarded EchoStar its
court costs and the case was appealed to the United States Court of Appeals for
the Federal Circuit. On February 12, 2004, the Federal Circuit affirmed in
part and reversed in part the District Courts findings and remanded the case
back to the District Court for further proceedings. EchoStar will continue to
vigorously defend this case. In the event that a Court ultimately determines
that EchoStar infringes on any of the aforementioned patents, EchoStar may be
subject to substantial damages, which may include treble damages and/or an
injunction that could require EchoStar to materially modify certain
user-friendly electronic programming guide and related features that it
currently offers to consumers. It is not possible to make a firm assessment of
the probable outcome of the suit or to determine the extent of any potential
liability or damages. Broadcast Innovation, LLC In November of 2001, Broadcast Innovation, LLC filed a lawsuit against
EchoStar, DirecTV, Thomson Consumer Electronics and others in Federal District
Court in Denver, Colorado. The suit alleges infringement of United States
Patent Nos. 6,076,094 (the 094 patent) and 4,992,066 (the 066 patent).
The 094 patent relates to certain methods and devices for transmitting and
receiving data along with specific formatting information for the data. The
066 patent relates to certain methods and devices for providing the scrambling
circuitry for a pay television system on removable cards. EchoStar examined
these patents and believes that they are not infringed by any of its products
or services. Subsequently, DirecTV and Thomson settled with Broadcast
Innovation leaving EchoStar as the only defendant. On January 23, 2004, the
judge issued an order finding the 066 patent invalid as being indefinite in
violation of 35 U.S.C. Sec. 112. Motions with respect to the infringement,
invalidity and construction of the 094 patent remain pending. EchoStar will
continue to vigorously defend this case. In the event that a Court ultimately
determines that EchoStar infringes on any of the aforementioned patents,
EchoStar may be subject to substantial damages, which may include treble
damages and/or an injunction that could require EchoStar to materially modify
certain user-friendly features that it currently offer to consumers. It is not
possible to make a firm assessment of the probable outcome of the suit or to
determine the extent of any potential liability or damages. TiVo Inc. In January of 2004, TiVo Inc. filed a lawsuit against EchoStar in the United
States District Court for the Eastern District of Texas. EchoStar has not yet
filed its answer. The suit alleges infringement of United States Patent No.
6,233,389 (the 389 patent). The 389 patent relates to certain methods and
devices for providing what the patent calls time-warping. EchoStar has
examined this patent and does not believe that it is infringed by any of its
products or services. EchoStar intends to vigorously defend this case. In the
event that a Court ultimately determines that EchoStar infringes this patent,
EchoStar may be subject to substantial damages, which may include treble
damages and/or an injunction that could require EchoStar to materially modify
certain user-friendly features that it currently offer to consumers. It is not
possible to make a firm assessment of the probable outcome of the suit or to
determine the extent of any potential liability or damages. California Actions A purported class action was filed against EchoStar in the California State
Superior Court for Alameda County during 2001 by Andrew A. Werby. The
complaint related to late fees, among other things. The matter was settled
with no material impact on our business. A purported class action relating to the use of terms such as crystal clear
digital video, CD-quality audio, and on-screen program guide, and with
respect to the number of channels available in various programming packages was
also filed against EchoStar in the California State Superior Court for Los
Angeles County in 1999 by David Pritikin and by Consumer Advocates, a nonprofit
unincorporated association. The complaint alleges breach of express warranty
and violation of the California Consumer Legal Remedies Act, Civil Code
Sections 1750, et seq., and the California Business & Professions Code Sections
17500 & 17200. A hearing on the plaintiffs motion for class certification and
EchoStars motion for summary judgment was held during June 2002. At the hearing, the
Court issued a preliminary ruling denying the plaintiffs motion for class
certification. However, before issuing a final ruling on class certification,
the Court granted EchoStars motion for summary judgment with respect to all of
the F-34




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued plaintiffs claims. Subsequently, EchoStar filed a motion for attorneys fees
which was denied by the Court. The plaintiffs filed a notice of appeal of the
courts granting of EchoStars motion for summary judgment and EchoStar cross-appealed
the Courts ruling on EchoStars motion for attorneys fees. On December 5,
2003, the Court of Appeal affirmed in part; and reversed in part, the lower
courts decision granting summary judgment in EchoStars favor. Specifically,
the Court found there were triable issues of fact as to whether EchoStar may
have violated the alleged consumer statutes with representations concerning
the number of channels and the program schedule. However, the Court found no
triable issue of fact as to whether the representations crystal clear digital
video or CD quality audio constituted a cause of action. Moreover, the
Court affirmed that the reasonable consumer standard was applicable to each
of the alleged consumer statutes. Plaintiff argued the standard should be the
least sophisticated consumer. The Court also affirmed the dismissal of
Plaintiffs breach of warranty claim. Plaintiff filed a Petition for Review
with the California Supreme Court and EchoStar responded. On March 24, 2004,
the California Supreme Court denied Plaintiffs Petition for Review.
Therefore, the action has been remanded to the trial court pursuant to the
instructions of the Court of Appeal. It is too early in the litigation to make
an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability against EchoStar. State Investigation During April 2002, two state attorneys general commenced a civil investigation
concerning certain of EchoStars business practices. Over the course of the
next six months, 11 additional states ultimately joined the investigation. The
states alleged failure to comply with consumer protection laws based on
Echostars call response times and policies, advertising and customer agreement
disclosures, policies for handling consumer complaints, issuing rebates and
refunds and charging cancellation fees to consumers, and other matters.
EchoStar cooperated fully in the investigation. During May 2003, EchoStar
entered into an Assurance of Voluntary Compliance with the states which ended
their investigation. The states have released all claims related to the
matters investigated. Retailer Class Actions EchoStar has been sued by retailers in three separate purported class actions.
During October 2000, two separate lawsuits were filed in the Arapahoe County
District Court in the State of Colorado and the United States District Court
for the District of Colorado, respectively, by Air Communication & Satellite,
Inc. and John DeJong, et al. on behalf of themselves and a class of persons
similarly situated. The plaintiffs are attempting to certify nationwide
classes on behalf of certain of EchoStars satellite hardware retailers. The
plaintiffs are requesting the Courts to declare certain provisions of, and
changes to, alleged agreements between EchoStar and the retailers invalid and
unenforceable, and to award damages for lost incentives and payments, charge
backs, and other compensation. EchoStar is vigorously defending against the
suits and have asserted a variety of counterclaims. The United States District
Court for the District of Colorado stayed the Federal Court action to allow the
parties to pursue a comprehensive adjudication of their dispute in the Arapahoe
County State Court. John DeJong, d/b/a Nexwave, and Joseph Kelley, d/b/a
Keltronics, subsequently intervened in the Arapahoe County Court action as
plaintiffs and proposed class representatives. EchoStar has filed a motion for
summary judgment on all counts and against all plaintiffs. The plaintiffs have
filed a motion for additional time to conduct discovery to enable them to
respond to EchoStars motion. The Court has not ruled on either of the two
motions. It is too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages. Satellite Dealers Supply, Inc. (SDS) filed a lawsuit against EchoStar in the
United States District Court for the Eastern District of Texas during September
2000, on behalf of itself and a class of persons similarly situated. The
plaintiff was attempting to certify a nationwide class on behalf of sellers,
installers, and servicers of satellite equipment who contract with EchoStar and
who allege that EchoStar: (1) charged back certain fees paid by members of the
class to professional installers in violation of contractual terms; (2)
manipulated the accounts of subscribers to deny payments to class members; and
(3) misrepresented, to class members, the ownership of certain equipment
related to the provision of its satellite television service. During September
2001, the Court granted EchoStars motion to dismiss. The plaintiff moved for
reconsideration of the Courts order dismissing the case. The Court denied the
plaintiffs motion for reconsideration. The trial court denied EchoStars
motions for sanctions against SDS. Both parties perfected appeals before the
Fifth Circuit Court of Appeals. On appeal, the Fifth Circuit upheld the
dismissal for lack of personal jurisdiction. The Fifth Circuit vacated and
remanded the district courts denial of EchoStars motion for sanctions and
instructed the district court to decide the issue again and to issue a written
opinion, which it F-35




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued had failed to do the first time. It is not possible to make a firm assessment
of the probable outcome on that issue or to determine the extent of any
recovery of sanctions. StarBand Shareholder Lawsuit On August 20, 2002, a limited group of shareholders in StarBand filed an action
in the Delaware Court of Chancery against EchoStar and EchoBand Corporation,
together with four EchoStar executives who sat on the Board of Directors for
StarBand, for alleged breach of the fiduciary duties of due care, good faith
and loyalty, and also against EchoStar and EchoBand Corporation for aiding and
abetting such alleged breaches. Two of the individual defendants, Charles W.
Ergen and David K. Moskowitz, are members of our Board of Directors. The
action stems from the defendants involvement as directors, and EchoBands
position as a shareholder, in StarBand, a broadband Internet satellite venture
in which EchoStar invested. On July 28, 2003, the Court granted the
defendants motion to dismiss on all counts. The Plaintiffs have since filed a
notice of appeal. Oral argument on the appeal was held on January 6, 2004.
EchoStar is waiting for the decision on appeal to the Delaware Supreme Court.
It is not possible to make a firm assessment of the probable outcome of the
appeal or to determine the extent of any potential liability or damages. Shareholder Derivative Action During October 2002, a purported shareholder filed a derivative action against
members of EchoStars Board of Directors in the United States District Court of
Clark County, Nevada and naming EchoStar as a nominal defendant. The complaint
alleges breach of fiduciary duties, corporate waste and other unlawful acts
relating to EchoStars agreement to (1) pay Hughes Electronics Corporation a
$600.0 million termination fee in certain circumstances and (2) acquire Hughes
shareholder interest in PanAmSat. The agreements to pay the termination fee
and acquire PanAmSat were required in the event that the merger with DirecTV
was not completed by January 21, 2003. During July 2003, the individual Board
of Director defendants were dismissed from the suit, and EchoStar was dismissed
during August 2003. The plaintiff did not file an appeal. Enron Commercial Paper Investment Complaint On November 6, 2003, an action was commenced in the United States Bankruptcy
Court for the Southern District of New York, against approximately 100
defendants, including EchoStar, who invested in Enrons commercial paper. The
complaint alleges that Enrons October 2001 prepayment of its commercial paper
is a voidable preference under the bankruptcy laws and constitutes a fraudulent
conveyance. The complaint alleges that EchoStar received voidable or
fraudulent prepayments of approximately $40.0 million. EchoStar typically
invests in commercial paper and notes which are rated in one of the four
highest rating categories by at least two nationally recognized statistical
rating organizations. At the time of EchoStars investment in Enron commercial
paper, it was considered to be high quality and considered to be a very low
risk. It is too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages. In addition to the above actions, we are subject to various other legal
proceedings and claims which arise in the ordinary course of business. In our
opinion, the amount of ultimate liability with respect to any of these actions
is unlikely to materially affect our financial position, results of operations
or liquidity. 10. Financial Information for Subsidiary Guarantors With the exception of certain de minimis domestic and foreign subsidiaries
(collectively, the Non-Guarantors), our senior notes are fully,
unconditionally and jointly and severally guaranteed by all of our subsidiaries
(collectively, the Subsidiary Guarantors). The combined assets, stockholders equity, net loss and operating cash flows of
the Non-Guarantors represent less than 1% of the combined and consolidated
assets, stockholders equity, net loss and operating cash flows of the combined
Subsidiary Guarantors for the years ended December 31, 2003, 2002 and 2001. As
a result, the Subsidiary Guarantors and Non-Guarantors are combined in the
following tables. Consolidating financial information is presented for the
following entities (in thousands): F-36




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued EDBS Parent Company Only (referred to as EDBS  PC)
Subsidiary Guarantors and Other Subsidiaries
Consolidating and Eliminating Adjustments (referred to as C&E)
Consolidated EDBS (referred to as EDBS) Consolidating Balance Sheets  As of December 31, 2003 SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    952,657
    
    
    $
    15,506
    
    
    $
    
    
    
    $
    968,163Marketable investment securities
    
    
    1,929,105
    
    
    
    
    
    
    
    
    
    
    
    1,929,105Trade accounts receivable, net of allowance for
uncollectible accounts of $8,152
    
    
    
    
    
    
    342,352
    
    
    
    
    
    
    
    342,352Inventories
    
    
    
    
    
    
    154,813
    
    
    
    
    
    
    
    154,813Other current assets
    
    
    (3,545
    )
    
    
    74,449
    
    
    
    
    
    
    
    70,904Total current assets
    
    
    2,878,217
    
    
    
    587,120
    
    
    
    
    
    
    
    3,465,337Restricted cash
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Cash reserved for satellite insurance
    
    
    176,843
    
    
    
    
    
    
    
    
    
    
    
    176,843Property and equipment, net
    
    
    
    
    
    
    1,761,376
    
    
    
    
    
    
    
    1,761,376FCC authorizations
    
    
    
    
    
    
    696,242
    
    
    
    
    
    
    
    696,242Investment in subsidiaries
    
    
    1,828,720
    
    
    
    (304
    )
    
    
    (1,828,416
    )
    
    
    Insurance receivable
    
    
    106,000
    
    
    
    
    
    
    
    
    
    
    
    106,000Other noncurrent assets
    
    
    76,151
    
    
    
    12,210
    
    
    
    
    
    
    
    88,361Total assets
    
    $
    5,065,931
    
    
    $
    3,056,664
    
    
    $
    (1,828,416
    )
    
    $
    6,294,179Liabilities and Stockholders Equity (Deficit)Current Liabilities:Trade accounts payable
    
    $
    22,989
    
    
    $
    148,671
    
    
    $
    
    
    
    $
    171,660Deferred revenue

    
    
    
    
    
    
    514,046
    
    
    
    
    
    
    
    514,046Accrued programming
    
    
    
    
    
    
    366,497
    
    
    
    
    
    
    
    366,497Other accrued expenses
    
    
    140,631
    
    
    
    293,768
    
    
    
    
    
    
    
    434,399Advances (to) from affiliates, net
    
    
    554,073
    
    
    
    (264,428
    )
    
    
    
    
    
    
    289,645Current portion of long-term obligations
    
    
    1,008
    
    
    
    13,828
    
    
    
    
    
    
    
    14,8369 3/8% Senior Notes due 2009
    
    
    1,423,351
    
    
    
    
    
    
    
    
    
    
    
    1,423,351Total current liabilities
    
    
    2,142,052
    
    
    
    1,072,382
    
    
    
    
    
    
    
    3,214,434Long-term obligations, net of current portion:10 3/8% Senior Notes due 2007
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,0009 1/8% Senior Notes due 2009
    
    
    455,000
    
    

    
    
    
    
    
    
    
    
    
    455,000Floating Rate Senior Notes due 2008
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,0005 3/4% Senior Notes due 2008
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,0006 3/8% Senior Notes due 2011
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Mortgages and other notes payable, net of current portion
    
    
    1,823
    
    
    
    40,171
    
    
    
    
    
    
    
    41,994Long-term deferred distribution and carriage payments and
other long-term liabilities
    
    
    39,320
    
    
    
    115,695
    
    
    
    
    
    
    
    155,015Total long-term obligations, net of current portion
    
    
    3,996,143
    
    
    
    155,866
    
    
    
    
    
    
    
    4,152,009Total liabilities
    
    
    6,138,195
    
    
    
    1,228,248
    
    
    
    
    
    
    
    7,366,443Stockholders Equity (Deficit):Class A Common Stock, $.01 par value, 1,000,000 shares
authorized, 1,015 shares issued and outstanding
    
    
    
    
    

    
    8
    
    
    
    (8
    )
    
    
    Additional paid-in capital
    
    
    930,936
    
    
    
    1,793,436
    
    
    
    (1,793,436
    )
    
    
    930,936Non-cash, stock-based compensation
    
    
    (1,180
    )
    
    
    (1,180
    )
    
    
    1,180
    
    
    
    (1,180
    )Accumulated other comprehensive income
    
    
    560
    
    
    
    
    
    
    
    
    
    
    
    560Accumulated equity (deficit)
    
    
    (2,002,580
    )
    
    
    36,152
    
    
    
    (36,152
    )
    
    
    (2,002,580
    )Total stockholders equity (deficit)
    
    
    (1,072,264
    )
    
    
    1,828,416
    
    
    
    (1,828,416
    )
    
    
    (1,072,264
    )Total liabilities and stockholders equity (deficit)
    
    $
    5,065,931
    
    
    $
    3,056,664
    
    
    $
    (1,828,416
    )
    
    $
    6,294,179
 F-37




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Consolidating Balance Sheets  As of December 31, 2002 (As Restated  Note 3): SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    259,784
    
    
    $
    7,908
    
    
    $
    
    
    
    $
    267,692Marketable investment securities
    
    
    277,260
    
    
    
    
    
    
    
    
    
    
    
    277,260Trade accounts receivable, net of allowance for
uncollectible accounts of $9,276
    
    
    
    
    
    
    325,928
    
    
    
    
    
    
    
    325,928Inventories
    
    
    
    
    
    
    149,611
    
    
    
    
    
    
    
    149,611Other current assets
    
    
    16,923
    
    
    
    412
    
    
    
    
    
    
    
    17,335Total current assets
    
    
    553,967
    
    
    
    483,859
    
    
    
    
    
    
    
    1,037,826Restricted cash
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Cash reserved for satellite insurance
    
    
    151,372
    
    
    
    
    
    
    
    
    
    
    
    151,372Property and equipment, net
    
    
    
    
    
    
    1,831,139
    
    
    
    
    
    
    
    1,831,139FCC authorizations
    
    
    
    
    
    
    696,242
    
    
    
    
    
    
    
    696,242Investment in subsidiaries
    
    
    1,292,522
    
    
    
    189
    
    
    
    (1,292,711
    )
    
    
    Insurance receivable
    
    
    106,000
    
    
    
    
    
    
    
    
    
    
    
    106,000Other noncurrent assets
    
    
    (11,236
    )
    
    
    49,728
    
    
    
    
    
    
    
    38,492Total assets
    
    $
    2,092,625
    
    
    $
    3,061,167
    
    
    $
    (1,292,711
    )
    
    $
    3,861,081Liabilities and Stockholders Equity (Deficit)Current Liabilities:Trade accounts payable
    
    $
    15,273
    
    
    $
    231,041
    
    
    $
    
    
    
    $
    246,314Deferred revenue
    
    
    
    
    
    
    440,678
    
    
    
    
    
    
    
    440,678Accrued programming
    
    
    
    
    
    
    301,282
    
    
    
    
    
    
    
    301,282Other accrued expenses
    
    
    134,545
    
    
    
    386,502
    
    
    
    
    
    
    
    521,047Advances (to) from affiliates, net
    
    
    (280,362
    )
    
    
    280,362
    
    
    
    
    
    
    
    Current portion of long-term obligations
    
    
    
    
    
    
    13,262
    
    
    
    
    
    
    
    13,2629 1/4% Senior Notes due 2006
    
    
    375,000
    
    
    
    
    
    
    
    
    
    
    
    375,000Total current liabilities
    
    
    244,456
    
    
    
    1,653,127
    
    
    
    
    
    
    
    1,897,583Long-term obligations, net of current portion:9 3/8% Senior Notes due 2009
    
    
    1,625,000
    
    
    
    
    
    
    
    
    
    
    
    1,625,00010 3/8% Senior Notes due 2007
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,0009 1/8% Senior Notes due 2009
    
    
    700,000
    
    
    
    
    
    
    
    
    
    
    
    700,000Mortgages and other notes payable, net of current portion
    
    
    
    
    
    
    32,680
    
    
    
    
    
    
    
    32,680Long-term deferred distribution and carriage payments and
other long-term liabilities
    
    
    10,092
    
    
    
    82,649
    
    
    
    
    
    
    
    92,741Total long-term obligations, net of current portion
    
    
    3,335,092
    
    
    
    115,329
    
    
    
    
    
    
    
    3,450,421Total liabilities
    
    
    3,579,548
    
    
    
    1,768,456
    
    
    
    
    
    
    
    5,348,004Stockholders Equity (Deficit):Class A Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding
    
    
    
    
    
    
    14,368
    
    
    
    (14,368
    )
    
    
    Additional paid-in capital
    
    
    843,198
    
    
    
    1,788,334
    
    
    
    (1,788,334
    )
    
    
    843,198Non-cash, stock-based compensation
    
    
    (8,657
    )
    
    
    (8,657
    )
    
    
    8,657
    
    
    
    (8,657
    )Accumulated other comprehensive income
    
    
    697
    
    
    
    
    
    
    
    
    
    
    
    697Accumulated equity (deficit)
    
    
    (2,322,161
    )
    
    
    (501,334
    )
    
    
    501,334
    
    
    
    (2,322,161
    )Total stockholders equity (deficit)
    
    
    (1,486,923
    )
    
    
    1,292,711
    
    
    
    (1,292,711
    )
    
    
    (1,486,923
    )Total liabilities and stockholders equity (deficit)
    
    $
    2,092,625
    
    
    $
    3,061,167
    
    
    $
    (1,292,711
    )
    
    $
    3,861,081
 F-38




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Consolidating Statements of Operations  Year Ended December 31, 2003 SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)Revenue:Subscription
television services
    
    $
    
    
    
    $
    5,397,635
    
    
    $
    
    
    
    $
    5,397,635Other
subscriber-related
revenue
    
    
    
    
    
    
    300,303
    
    
    
    (288,552
    )
    
    
    11,751DTH equipment sales
    
    
    
    
    
    
    240,449
    
    
    
    
    
    
    
    240,449Other
    
    
    
    
    
    
    81,887
    
    
    
    
    
    
    
    81,887Total revenue
    
    
    
    
    
    
    6,020,274
    
    
    
    (288,552
    )
    
    
    5,731,722Costs and Expenses:Subscriber-related
expenses
    
    
    
    
    
    
    3,011,540
    
    
    
    (288,411
    )
    
    
    2,723,129Satellite and
transmission
expenses
    
    
    
    
    
    
    74,309
    
    
    
    
    
    
    
    74,309Cost of sales - DTH
equipment
    
    
    
    
    
    
    149,995
    
    
    
    
    
    
    
    149,995Cost of sales - other
    
    
    
    
    
    
    44,089
    
    
    
    (141
    )
    
    
    43,948Cost of sales -
subscriber promotion
subsidies
    
    
    
    
    
    
    504,901
    
    
    
    
    
    
    
    504,901Other subscriber
promotion subsidies
    
    
    
    
    
    
    628,929
    
    
    
    
    
    
    
    628,929Subscriber
acquisition
advertising
    
    
    
    
    
    
    176,964
    
    
    
    
    
    
    
    176,964General and
administrative
    
    
    
    
    
    
    319,133
    
    
    
    
    
    
    
    319,133Non-cash,
stock-based
compensation
    
    
    
    
    
    
    3,544
    
    
    
    
    
    
    
    3,544Depreciation and
amortization
    
    
    
    
    
    
    385,098
    
    
    
    
    
    
    
    385,098Total costs and
expenses
    
    
    
    
    
    
    5,298,502
    
    
    
    (288,552
    )
    
    
    5,009,950Operating income
    
    
    
    
    
    
    721,772
    
    
    
    
    
    
    
    721,772Other Income (Expense):Interest income
    
    
    18,638
    
    
    
    200
    
    
    
    
    
    
    
    18,838Interest expense,
net of amounts
capitalized
    
    
    (404,135
    )
    
    
    (2,895
    )
    
    
    
    
    
    
    (407,030
    )Equity in earnings
(losses) of
subsidiaries
    
    
    709,148
    
    
    
    
    
    
    
    (709,148
    )
    
    
    Other
    
    
    
    
    
    
    (466
    )
    
    
    
    
    
    
    (466
    )Total other income
(expense)
    
    
    323,651
    
    
    
    (3,161
    )
    
    
    (709,148
    )
    
    
    (388,658
    )Income (loss) before
income taxes
    
    
    323,651
    
    
    
    718,611
    
    
    
    (709,148
    )
    
    
    333,114Income tax benefit
(provision), net
    
    
    (4,070
    )
    
    
    (9,463
    )
    
    
    
    
    
    
    (13,533
    )Net income (loss)
    
    $
    319,581
    
    
    $
    709,148
    
    
    $
    (709,148
    )
    
    $
    319,581
 F-39




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Consolidating Statements of Operations  Year Ended December 31, 2002 (As
Restated  Note 3) SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)Revenue:Subscription
television services
    
    $
    
    
    
    $
    4,406,428
    
    
    $
    
    
    
    $
    4,406,428Other
subscriber-related
revenue
    
    
    
    
    
    
    254,568
    
    
    
    (237,626
    )
    
    
    16,942DTH equipment sales
    
    
    
    
    
    
    285,140
    
    
    
    
    
    
    
    285,140Other
    
    
    
    
    
    
    95,127
    
    
    
    
    
    
    
    95,127Total revenue
    
    
    
    
    
    
    5,041,263
    
    
    
    (237,626
    )
    
    
    4,803,637Costs and Expenses:Subscriber-related
expenses
    
    
    
    
    
    
    2,453,564
    
    
    
    (237,267
    )
    
    
    2,216,297Satellite and
transmission
expenses
    
    
    
    
    
    
    56,656
    
    
    
    
    
    
    
    56,656Cost of
sales - DTH
equipment
    
    
    
    
    
    
    177,980
    
    
    
    
    
    
    
    177,980Cost of
sales - other
    
    
    
    
    
    
    50,058
    
    
    
    (359
    )
    
    
    49,699Cost of sales -
subscriber promotion
subsidies
    
    
    
    
    
    
    445,448
    
    
    
    
    
    
    
    445,448Other subscriber
promotion subsidies
    
    
    
    
    
    
    574,750
    
    
    
    
    
    
    
    574,750Subscriber
acquisition
advertising
    
    
    
    
    
    
    152,773
    
    
    
    
    
    
    
    152,773General and
administrative
    
    
    147
    
    
    
    300,240
    
    
    
    
    
    
    
    300,387Non-cash,
stock-based
compensation
    
    
    
    
    
    
    11,279
    
    
    
    
    
    
    
    11,279Depreciation and
amortization
    
    
    
    
    
    
    355,754
    
    
    
    
    
    
    
    355,754Total costs and
expenses
    
    
    147
    
    
    
    4,578,502
    
    
    
    (237,626
    )
    
    
    4,341,023Operating income
    
    
    (147
    )
    
    
    462,761
    
    
    
    
    
    
    
    462,614Other Income (Expense):Interest income
    
    
    9,849
    
    
    
    152
    
    
    
    
    
    
    
    10,001Interest expense,
net of amounts
capitalized
    
    
    (336,998
    )
    
    
    (1,885
    )
    
    
    
    
    
    
    (338,883
    )Equity in earnings
(losses) of
subsidiaries
    
    
    439,980
    
    
    
    
    
    
    
    (439,980
    )
    
    
    Other
    
    
    (1,827
    )
    
    
    (4,073
    )
    
    
    
    
    
    
    (5,900
    )Total other income
(expense)
    
    
    111,004
    
    
    
    (5,806
    )
    
    
    (439,980
    )
    
    
    (334,782
    )Income (loss) before
income taxes
    
    
    110,857
    
    
    
    456,955
    
    
    
    (439,980
    )
    
    
    127,832Income tax benefit
(provision), net
    
    
    (63,966
    )
    
    
    (16,975
    )
    
    
    
    
    
    
    (80,941
    )Net income (loss)
    
    $
    46,891
    
    
    $
    439,980
    
    
    $
    (439,980
    )
    
    $
    46,891
 F-40




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Consolidating Statements of Operations  Year Ended December 31, 2001 SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)Revenue:Subscription
television services
    
    $
    
    
    
    $
    3,583,698
    
    
    $
    
    
    
    $
    3,583,698Other
subscriber-related
revenue
    
    
    
    
    
    
    107,447
    
    
    
    (85,704
    )
    
    
    21,743DTH equipment sales
    
    
    
    
    
    
    266,746
    
    
    
    (3
    )
    
    
    266,743Other
    
    
    
    
    
    
    114,699
    
    
    
    
    
    
    
    114,699Total revenue
    
    
    
    
    
    
    4,072,590
    
    
    
    (85,707
    )
    
    
    3,986,883Costs and Expenses:Subscriber-related
expenses
    
    
    
    
    
    
    1,893,619
    
    
    
    (85,704
    )
    
    
    1,807,915Satellite and
transmission
expenses
    
    
    
    
    
    
    37,555
    
    
    
    
    
    
    
    37,555Cost of
sales - DTH
equipment
    
    
    (300
    )
    
    
    188,113
    
    
    
    (3
    )
    
    
    187,810Cost of
sales - other
    
    
    
    
    
    
    75,385
    
    
    
    
    
    
    
    75,385Cost of sales - subscriber promotion
subsidies
    
    
    
    
    
    
    466,610
    
    
    
    
    
    
    
    466,610Other subscriber
promotion subsidies
    
    
    
    
    
    
    477,903
    
    
    
    
    
    
    
    477,903Subscriber
acquisition
advertising
    
    
    
    
    
    
    141,168
    
    
    
    
    
    
    
    141,168General and
administrative
    
    
    (147
    )
    
    
    290,903
    
    
    
    
    
    
    
    290,756Non-cash,
stock-based
compensation
    
    
    
    
    
    
    20,173
    
    
    
    
    
    
    
    20,173Depreciation and
amortization
    
    
    
    
    
    
    265,912
    
    
    
    
    
    
    
    265,912Total costs and
expenses
    
    
    (447
    )
    
    
    3,857,341
    
    
    
    (85,707
    )
    
    
    3,771,187Operating income
    
    
    447
    
    
    
    215,249
    
    
    
    
    
    
    
    215,696Other Income (Expense):Interest income
    
    
    7,297
    
    
    
    3,024
    
    
    
    
    
    
    
    10,321Interest expense,
net of amounts
capitalized
    
    
    (190,840
    )
    
    
    (2,060
    )
    
    
    
    
    
    
    (192,900
    )Equity in earnings
(losses) of
subsidiaries
    
    
    214,044
    
    
    
    
    
    
    
    (214,044
    )
    
    
    Other
    
    
    703
    
    
    
    (1,323
    )
    
    
    
    
    
    
    (620
    )Total other income
(expense)
    
    
    31,204
    
    
    
    (359
    )
    
    
    (214,044
    )
    
    
    (183,199
    )Income (loss) before
income taxes
    
    
    31,651
    
    
    
    214,890
    
    
    
    (214,044
    )
    
    
    32,497Income tax benefit
(provision), net
    
    
    
    
    
    
    (846
    )
    
    
    
    
    
    
    (846
    )Net income (loss)
    
    $
    31,651
    
    
    $
    214,044
    
    
    $
    (214,044
    )
    
    $
    31,651
 F-41




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Consolidating Statements of Cash Flows  Year Ended December 31, 2003 SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)Cash Flows From Operating Activities:Net income (loss)
    
    $
    319,581
    
    
    $
    709,148
    
    
    $
    (709,148
    )
    
    $
    319,581Adjustments to reconcile net income (loss) to net cash flows from operating activities:Depreciation and amortization
    
    
    
    
    
    
    385,098
    
    
    
    
    
    
    
    385,098Equity in (earnings) losses of affiliates
    
    
    (709,148
    )
    
    
    
    
    
    
    709,148
    
    
    
    Non-cash, stock-based compensation recognized
    
    
    
    
    
    
    3,544
    
    
    
    
    
    
    
    3,544Deferred tax expense
    
    
    (36,481
    )
    
    
    39,326
    
    
    
    
    
    
    
    2,845Amortization of debt discount and deferred financing costs
    
    
    53
    
    
    
    12,503
    
    
    
    
    
    
    
    12,556Change in long-term assets
    
    
    
    
    
    
    (49,678
    )
    
    
    
    
    
    
    (49,678
    )Change in long-term deferred distribution and carriage payments
    
    
    
    
    
    
    11,434
    
    
    
    
    
    
    
    11,434Other, net
    
    
    
    
    
    
    1,918
    
    
    
    
    
    
    
    1,918Changes in current assets and current liabilities:Trade accounts receivable, net
    
    
    
    
    
    
    (16,424
    )
    
    
    
    
    
    
    (16,424
    )Inventories
    
    
    
    
    
    
    17,675
    
    
    
    
    
    
    
    17,675Other current assets
    
    
    
    
    
    
    (9,139
    )
    
    
    
    
    
    
    (9,139
    )Trade accounts payable
    
    
    7,716
    
    
    
    (81,725
    )
    
    
    
    
    
    
    (74,009
    )Deferred revenue
    
    
    
    
    
    
    73,368
    
    
    
    
    
    
    
    73,368Accrued expenses
    
    
    6,086
    
    
    
    (7,989
    )
    
    
    
    
    
    
    (1,903
    )Net cash flows from operating activities
    
    
    (412,193
    )
    
    
    1,089,059
    
    
    
    
    
    
    
    676,866Cash Flows From Investing Activities:Purchases of marketable investment securities
    
    
    (3,911,404
    )
    
    
    
    
    
    
    
    
    
    
    (3,911,404
    )Sales of marketable investment securities
    
    
    2,258,969
    
    
    
    
    
    
    
    
    
    
    
    2,258,969Purchases of property and equipment
    
    
    
    
    
    
    (229,930
    )
    
    
    
    
    
    
    (229,930
    )Cash reserved for satellite insurance
    
    
    (58,385
    )
    
    
    
    
    
    
    
    
    
    
    (58,385
    )Change in restricted cash and cash reserved for satellite insurance
due to depreciation on related satellites
    
    
    32,914
    
    
    
    (10
    )
    
    
    
    
    
    
    32,904Other
    
    
    (1
    )
    
    
    454
    
    
    
    
    
    
    
    453Net cash flows from investing activities
    
    
    (1,677,907
    )
    
    
    (229,486
    )
    
    
    
    
    
    
    (1,907,393
    )Cash Flows From Financing Activities:Proceeds from issuance of Floating Rate Senior Notes due 2008
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,000Proceeds from issuance of 5 3/4% Senior Notes due 2008
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Proceeds from issuance of 6 3/8% Senior Notes due 2011
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Non-interest bearing advances from (to) affiliates
    
    
    834,435
    
    
    
    (834,435
    )
    
    
    
    
    
    
    Redemption of 9 1/4% Senior Notes due 2006
    
    
    (375,000
    )
    
    
    
    
    
    
    
    
    
    
    (375,000
    )Partial redemption of 9 1/8% Senior Notes due 2009
    
    
    (245,000
    )
    
    
    
    
    
    
    
    
    
    
    (245,000
    )Repurchase of 9 3/8% Senior Notes due 2009
    
    
    (201,649
    )
    
    
    
    
    
    
    
    
    
    
    (201,649
    )Deferred debt issuance costs
    
    
    
    
    
    
    (12,500
    )
    
    
    
    
    
    
    (12,500
    )Capital contribution from ECC
    
    
    267,356
    
    
    
    
    
    
    
    
    
    
    
    267,356Repayments of mortgage indebtedness and other notes payable
    
    
    
    
    
    
    (2,209
    )
    
    
    
    
    
    
    (2,209
    )Other
    
    
    2,831
    
    
    
    (2,831
    )
    
    
    
    
    
    
    Net cash flows from financing activities
    
    
    2,782,973
    
    
    
    (851,975
    )
    
    
    
    
    
    
    1,930,998Net increase in cash and cash equivalents
    
    
    692,873
    
    
    
    7,598
    
    
    
    
    
    
    
    700,471Cash and cash equivalents, beginning of period
    
    
    259,784
    
    
    
    7,908
    
    
    
    
    
    
    
    267,692Cash and cash equivalents, end of period
    
    $
    952,657
    
    
    $
    15,506
    
    
    $
    
    
    
    $
    968,163
 F-42




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Consolidating Statements of Cash Flows  Year Ended December 31, 2002 (As
Restated  Note 3) SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)Cash Flows From Operating Activities:Net income (loss)
    
    $
    46,891
    
    
    $
    439,980
    
    
    $
    (439,980
    )
    
    $
    46,891Adjustments to reconcile net income (loss) to net cash flows from operating activities:Depreciation and amortization
    
    
    
    
    
    
    355,754
    
    
    
    
    
    
    
    355,754Equity in (earnings) losses of affiliates
    
    
    (439,980
    )
    
    
    
    
    
    
    439,980
    
    
    
    Realized and unrealized losses on investments
    
    
    2,039
    
    
    
    
    
    
    
    
    
    
    
    2,039Non-cash, stock-based compensation recognized
    
    
    
    
    
    
    11,279
    
    
    
    
    
    
    
    11,279Deferred tax expense
    
    
    32,499
    
    
    
    40,640
    
    
    
    
    
    
    
    73,139Amortization of debt discount and deferred financing costs
    
    
    6,172
    
    
    
    4
    
    
    
    
    
    
    
    6,176Change in long-term deferred distribution and carriage payments
    
    
    
    
    
    
    (20,924
    )
    
    
    
    
    
    
    (20,924
    )Other, net
    
    
    (41,991
    )
    
    
    44,514
    
    
    
    
    
    
    
    2,523Changes in current assets and current liabilities:Trade accounts receivable, net
    
    
    
    
    
    
    (12,075
    )
    
    
    
    
    
    
    (12,075
    )Inventories
    
    
    
    
    
    
    69,306
    
    
    
    
    
    
    
    69,306Other current assets
    
    
    (21
    )
    
    
    534
    
    
    
    
    
    
    
    513Trade accounts payable
    
    
    15,273
    
    
    
    35,538
    
    
    
    
    
    
    
    50,811Deferred revenue
    
    
    
    
    
    
    83,775
    
    
    
    
    
    
    
    83,775Accrued expenses
    
    
    128,391
    
    
    
    15,248
    
    
    
    
    
    
    
    143,639Net cash flows from operating activities
    
    
    (250,727
    )
    
    
    1,063,573
    
    
    
    
    
    
    
    812,846Cash Flows From Investing Activities:Purchases of marketable investment securities
    
    
    (1,329,043
    )
    
    
    
    
    
    
    
    
    
    
    (1,329,043
    )Sales of marketable investment securities
    
    
    1,141,401
    
    
    
    
    
    
    
    
    
    
    
    1,141,401Purchases of property and equipment
    
    
    
    
    
    
    (349,795
    )
    
    
    
    
    
    
    (349,795
    )Cash reserved for satellite insurance
    
    
    (59,680
    )
    
    
    
    
    
    
    
    
    
    
    (59,680
    )Change in restricted cash and cash reserved for satellite insurance
due to depreciation on related satellites
    
    
    30,376
    
    
    
    
    
    
    
    
    
    
    
    30,376Incentive
payments under in-orbit satellite contract - Echo VI
    
    
    
    
    
    
    (8,441
    )
    
    
    
    
    
    
    (8,441
    )Other
    
    
    
    
    
    
    (4,332
    )
    
    
    
    
    
    
    (4,332
    )Net cash flows from investing activities
    
    
    (216,946
    )
    
    
    (362,568
    )
    
    
    
    
    
    
    (579,514
    )Cash Flows From Financing Activities:Non-interest bearing advances from (to) affiliates
    
    
    692,419
    
    
    
    (692,477
    )
    
    
    
    
    
    
    (58
    )Repayments of mortgage indebtedness and other notes payable
    
    
    
    
    
    
    (3,419
    )
    
    
    
    
    
    
    (3,419
    )Other
    
    
    (1,215
    )
    
    
    
    
    
    
    
    
    
    
    (1,215
    )Net cash flows from financing activities
    
    
    691,204
    
    
    
    (695,896
    )
    
    
    
    
    
    
    (4,692
    )Net increase in cash and cash equivalents
    
    
    223,531
    
    
    
    5,109
    
    
    
    
    
    
    
    228,640Cash and cash equivalents, beginning of period
    
    
    36,253
    
    
    
    2,799
    
    
    
    
    
    
    
    39,052Cash and cash equivalents, end of period
    
    $
    259,784
    
    
    $
    7,908
    
    
    $
    
    
    
    $
    267,692
 F-43




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Consolidating Statements of Cash Flows  Year Ended December 31, 2001 SubsidiaryGuarantorsEDBS - PC
    
    and Other
    
    C&E
    
    EDBS(In thousands)Cash Flows From Operating Activities:Net income (loss)
    
    $
    31,651
    
    
    $
    214,044
    
    
    $
    (214,044
    )
    
    $
    31,651Adjustments to reconcile net income (loss) to net cash flows from operating activities:Depreciation and amortization
    
    
    
    
    
    
    265,912
    
    
    
    
    
    
    
    265,912Equity in (earnings) losses of affiliates
    
    
    (214,044
    )
    
    
    
    
    
    
    214,044
    
    
    
    Non-cash, stock-based compensation recognized
    
    
    
    
    
    
    20,173
    
    
    
    
    
    
    
    20,173Amortization of debt discount and deferred financing costs
    
    
    3,277
    
    
    
    4
    
    
    
    
    
    
    
    3,281Change in long-term deferred distribution and carriage payments
    
    
    
    
    
    
    46,266
    
    
    
    
    
    
    
    46,266Other, net
    
    
    
    
    
    
    25,751
    
    
    
    
    
    
    
    25,751Changes in current assets and current liabilities:Trade accounts receivable, net
    
    
    
    
    
    
    (38,259
    )
    
    
    
    
    
    
    (38,259
    )Inventories
    
    
    
    
    
    
    (25,665
    )
    
    
    
    
    
    
    (25,665
    )Other current assets
    
    
    (2,906
    )
    
    
    (3,263
    )
    
    
    
    
    
    
    (6,169
    )Trade accounts payable
    
    
    (58
    )
    
    
    59,480
    
    
    
    
    
    
    
    59,422Deferred revenue
    
    
    
    
    
    
    73,964
    
    
    
    
    
    
    
    73,964Accrued expenses
    
    
    1,676
    
    
    
    144,100
    
    
    
    
    
    
    
    145,776Net cash flows from operating activities
    
    
    (180,404
    )
    
    
    782,507
    
    
    
    
    
    
    
    602,103Cash Flows From Investing Activities:Purchases of marketable investment securities
    
    
    (586,648
    )
    
    
    
    
    
    
    
    
    
    
    (586,648
    )Sales of marketable investment securities
    
    
    501,986
    
    
    
    
    
    
    
    
    
    
    
    501,986Purchases of property and equipment
    
    
    
    
    
    
    (441,874
    )
    
    
    
    
    
    
    (441,874
    )Cash reserved for satellite insurance
    
    
    (59,488
    )
    
    
    
    
    
    
    
    
    
    
    (59,488
    )Change in restricted cash and cash reserved for satellite insurance
due to depreciation on related satellites
    
    
    19,813
    
    
    
    
    
    
    
    
    
    
    
    19,813Incentive
payments under in-orbit satellite contract - Echo VI
    
    
    
    
    
    
    (8,441
    )
    
    
    
    
    
    
    (8,441
    )Net cash flows from investing activities
    
    
    (124,337
    )
    
    
    (450,315
    )
    
    
    
    
    
    
    (574,652
    )Cash Flows From Financing Activities:Non-interest bearing advances from (to) affiliates
    
    
    (270,237
    )
    
    
    (488,519
    )
    
    
    
    
    
    
    (758,756
    )Proceeds from issuance of 9 1/8% Senior Notes due 2009
    
    
    700,000
    
    
    
    
    
    
    
    
    
    
    
    700,000Deferred debt issuance costs and prepayment premiums
    
    
    (9,450
    )
    
    
    
    
    
    
    
    
    
    
    (9,450
    )Repayments of mortgage indebtedness and other notes payable
    
    
    
    
    
    
    (11,765
    )
    
    
    
    
    
    
    (11,765
    )Net cash flows from financing activities
    
    
    420,313
    
    
    
    (500,284
    )
    
    
    
    
    
    
    (79,971
    )Net increase in cash and cash equivalents
    
    
    115,572
    
    
    
    (168,092
    )
    
    
    
    
    
    
    (52,520
    )Cash and cash equivalents, beginning of period
    
    
    (79,319
    )
    
    
    170,891
    
    
    
    
    
    
    
    91,572Cash and cash equivalents, end of period
    
    $
    36,253
    
    
    $
    2,799
    
    
    $
    
    
    
    $
    39,052
 F-44




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 11. Segment Reporting Financial Data by Business Unit Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information (FAS 131) establishes
standards for reporting information about operating segments in annual
financial statements of public business enterprises and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate financial information is available and
regularly evaluated by the chief operating decision maker(s) of an enterprise.
Under this definition we currently operate as two business units. The All
Other column consists of revenue from other satellite services and expenses
from other operating segments for which the disclosure requirements of FAS 131
do not apply. EchoStar
    
    
    
    
    
    
    
    
    
    ECC
    
    Other
    
    EDBSDISH
    
    Technologies
    
    All
    
    
    
    
    
    Consolidated
    
    EchoStar
    
    AndNetwork
    
    Corporation
    
    Other
    
    Eliminations
    
    Total
    
    Activities (1)
    
    Subsidiaries(In thousands)Year Ended December 31, 2001Total revenue
    
    $
    3,695,088
    
    
    $
    177,218
    
    
    $
    133,426
    
    
    $
    (4,594
    )
    
    $
    4,001,138
    
    
    $
    (14,255
    )
    
    $
    3,986,883Depreciation and
amortization
    
    
    243,926
    
    
    
    6,566
    
    
    
    28,160
    
    
    
    
    
    
    
    278,652
    
    
    
    (12,740
    )
    
    
    265,912Total costs and expenses
    
    
    3,524,024
    
    
    
    160,626
    
    
    
    108,780
    
    
    
    (4,594
    )
    
    
    3,788,836
    
    
    
    (17,649
    )
    
    
    3,771,187Interest income
    
    
    96,994
    
    
    
    
    
    
    
    949
    
    
    
    (272
    )
    
    
    97,671
    
    
    
    (87,350
    )
    
    
    10,321Interest expense, net of
amounts capitalized
    
    
    (370,331
    )
    
    
    (211
    )
    
    
    (1,095
    )
    
    
    272
    
    
    
    (371,365
    )
    
    
    178,465
    
    
    
    (192,900
    )Income tax benefit
(provision), net
    
    
    (51
    )
    
    
    
    
    
    
    (1,403
    )
    
    
    
    
    
    
    (1,454
    )
    
    
    608
    
    
    
    (846
    )Net income (loss)
    
    
    (254,641
    )
    
    
    16,732
    
    
    
    22,411
    
    
    
    
    
    
    
    (215,498
    )
    
    
    247,149
    
    
    
    31,651Year Ended December 31,
2002 - As Restated (Note 3)Total revenue
    
    $
    4,544,550
    
    
    $
    169,674
    
    
    $
    113,445
    
    
    $
    (6,844
    )
    
    $
    4,820,825
    
    
    $
    (17,188
    )
    
    $
    4,803,637Depreciation and
amortization
    
    
    328,495
    
    
    
    7,114
    
    
    
    37,349
    
    
    
    
    
    
    
    372,958
    
    
    
    (17,204
    )
    
    
    355,754Total costs and expenses
    
    
    4,158,324
    
    
    
    136,387
    
    
    
    81,440
    
    
    
    (6,844
    )
    
    
    4,369,307
    
    
    
    (28,284
    )
    
    
    4,341,023Interest income
    
    
    111,511
    
    
    
    
    
    
    
    1,416
    
    
    
    
    
    
    
    112,927
    
    
    
    (102,926
    )
    
    
    10,001Interest expense, net of
amounts capitalized
    
    
    (482,409
    )
    
    
    (188
    )
    
    
    (306
    )
    
    
    
    
    
    
    (482,903
    )
    
    
    144,020
    
    
    
    (338,883
    )Income tax benefit
(provision), net
    
    
    (75,253
    )
    
    
    4,233
    
    
    
    (2,078
    )
    
    
    
    
    
    
    (73,098
    )
    
    
    (7,843
    )
    
    
    (80,941
    )Net income (loss)
    
    
    (916,501
    )
    
    
    37,440
    
    
    
    27,027
    
    
    
    
    
    
    
    (852,034
    )
    
    
    898,925
    
    
    
    46,891Year Ended December 31, 2003Total revenue
    
    $
    5,518,183
    
    
    $
    131,684
    
    
    $
    97,983
    
    
    $
    (8,554
    )
    
    $
    5,739,296
    
    
    $
    (7,574
    )
    
    $
    5,731,722Depreciation and
amortization
    
    
    347,331
    
    
    
    6,717
    
    
    
    44,158
    
    
    
    
    
    
    
    398,206
    
    
    
    (13,108
    )
    
    
    385,098Total costs and expenses
    
    
    4,852,543
    
    
    
    115,012
    
    
    
    72,747
    
    
    
    (8,554
    )
    
    
    5,031,748
    
    
    
    (21,798
    )
    
    
    5,009,950Interest income
    
    
    64,750
    
    
    
    
    
    
    
    308
    
    
    
    
    
    
    
    65,058
    
    
    
    (46,220
    )
    
    
    18,838Interest expense, net of
amounts capitalized
    
    
    (551,768
    )
    
    
    (161
    )
    
    
    (561
    )
    
    
    
    
    
    
    (552,490
    )
    
    
    145,460
    
    
    
    (407,030
    )Income tax benefit
(provision), net
    
    
    (12,604
    )
    
    
    (1,085
    )
    
    
    (687
    )
    
    
    
    
    
    
    (14,376
    )
    
    
    843
    
    
    
    (13,533
    )Net income
    
    
    182,809
    
    
    
    15,445
    
    
    
    26,252
    
    
    
    
    
    
    
    224,506
    
    
    
    95,075
    
    
    
    319,581
 (1) Other
EchoStar Activities represents the activity of affiliates
consolidated in the ECCs consolidated financial statements
but not included in our consolidated financial statements. F-45




---



##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Geographic Information and Transaction with Major Customers United States
    
    Europe
    
    Total(In thousands)Long-lived assets, including FCC authorizations2002
    
    $
    2,524,557
    
    
    $
    2,824
    
    
    $
    2,527,3812003
    
    $
    2,454,761
    
    
    $
    2,857
    
    
    $
    2,457,618Revenue2001
    
    $
    3,889,352
    
    
    $
    97,531
    
    
    $
    3,986,8832002
    
    $
    4,742,187
    
    
    $
    61,450
    
    
    $
    4,803,6372003
    
    $
    5,679,619
    
    
    $
    52,103
    
    
    $
    5,731,722
 Revenues are attributed to geographic regions based upon the location from
where the sale originated. United States revenue includes transactions with
both United States and International customers. Europe revenue includes
transactions with customers in Europe, Africa and the Middle East. Revenues
from these customers are included within the All Other operating segment. During the years ended December 31, 2003 and 2002, United States revenue
included export sales to one international customer which totaled $127.6
million and $169.1 million, respectively. During the year ended December 31,
2001, United States revenue included export sales to two international
customers which totaled $175.5 million. These international sales accounted
for approximately 2.2%, 3.5% and 4.4% of our total revenue during each of the
years ended December 31, 2003, 2002 and 2001, respectively. Revenues from
these customers are included within the EchoStar Technologies Corporation
operating segment. 12. Valuation and Qualifying Accounts Our valuation and qualifying accounts as of December 31, 2001, 2002 and 2003
are as follows: Balance at
    
    Charged toBeginning of
    
    Costs and
    
    
    
    
    
    Balance atYear
    
    Expenses
    
    Deductions
    
    End of Year(In thousands)Year ended December 31, 2001:Assets:Allowance for doubtful
accounts
    
    $
    19,934
    
    
    $
    59,076
    
    
    $
    (70,162
    )
    
    $
    8,848Reserve for inventory
    
    
    9,842
    
    
    
    12,174
    
    
    
    (8,829
    )
    
    
    13,187Year ended December 31, 2002:Assets:Allowance for doubtful
accounts
    
    $
    8,848
    
    
    $
    52,871
    
    
    $
    (52,443
    )
    
    $
    9,276Reserve for inventory
    
    
    13,187
    
    
    
    7,341
    
    
    
    (10,887
    )
    
    
    9,641Year ended December 31, 2003:Assets:Allowance for doubtful
accounts
    
    $
    9,276
    
    
    $
    61,303
    
    
    $
    (62,427
    )
    
    $
    8,152Reserve for inventory
    
    
    9,641
    
    
    
    1,584
    
    
    
    (4,461
    )
    
    
    6,764
 F-46




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ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 13. Quarterly Financial Data (Unaudited) As previously discussed in Note 3, we restated our 2002 consolidated financial
statements to reverse an accrual of approximately $30.2 million, on a pre-tax
basis, related to the replacement of smart cards in satellite receivers owned
by us and leased to consumers. The amounts originally accrued during 2000,
2001 and through March 2002 have been reversed in the first quarter of 2002.
The amounts originally accrued from April 1, 2002 through June 30, 2002 have
been reversed in the second quarter of 2002. Our quarterly results of operations are summarized as follows: For the Three Months EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In thousands, except per share data)(Unaudited)Year ended December 31, 2002 - As Restated (Note 3):Total revenue
    
    $
    1,101,153
    
    
    $
    1,160,040
    
    
    $
    1,220,482
    
    
    $
    1,321,962Operating income, as previously reported
    
    
    101,617
    
    
    
    143,214
    
    
    
    98,626
    
    
    
    88,987Adjustment:Accrual reversal
    
    
    25,062
    
    
    
    5,108
    
    
    
    
    
    
    
    Operating income, as restated
    
    
    126,679
    
    
    
    148,322
    
    
    
    98,626
    
    
    
    88,987Net income (loss), as previously reported
    
    
    18,927
    
    
    
    51,193
    
    
    
    14,872
    
    
    
    (66,812
    )Adjustment:Accrual reversal, net of tax
    
    
    23,850
    
    
    
    4,861
    
    
    
    
    
    
    
    Net income (loss), as restated
    
    
    42,777
    
    
    
    56,054
    
    
    
    14,872
    
    
    
    (66,812
    )Year ended December 31, 2003:Total revenue
    
    $
    1,356,602
    
    
    $
    1,412,735
    
    
    $
    1,450,465
    
    
    $
    1,511,920Operating income
    
    
    181,395
    
    
    
    224,864
    
    
    
    163,803
    
    
    
    151,710Net income (loss)
    
    
    75,438
    
    
    
    142,431
    
    
    
    56,534
    
    
    
    45,178
 14. Related Party Transactions During the fourth quarter of 2003, we purchased EchoStar IX from EchoStar
Orbital Corporation II (EOC II), a wholly-owned subsidiary of ECC, and our
affiliate, for its fair value of approximately $299.0 million.
We assumed $10.0 million in vendor financing and the difference,
or $289.0 million, as a payable to our affiliate. We recorded the satellite at
EOC IIs carrying value of $127.4 million and recorded the difference, or
$171.6 million, as a capital distribution to our parent company, EOC. EchoStar owns 50% of NagraStar LLC (NagraStar), a joint venture that provides
us with smart cards. Nagra USA owns the other 50% of NagraStar. NagraStar
purchases these smart cards from NagraCard SA, a Swiss company which is an
affiliate of Nagra USA. Because EchoStar is not required to consolidate
NagraStar, but it does exercise significant influence, EchoStar accounted for
its investment in NagraStar under the equity method of accounting for all
periods presented. During the years ended December 31, 2003, 2002 and 2001,
EchoStar purchased from NagraStar approximately $68.4 million, $56.2 million
and $67.4 million, respectively, for smart cards. As of December 31, 2003 and
2002, amounts payable to NagraStar from EchoStar totaled $7.7 million and $5.1
million, respectively. We purchase certain programming content from Satellite Communications Operating
Corporation (SCOC), a wholly-owned subsidiary of ECC, and our affiliate.
During the years ended December 31, 2003, 2002 and 2001, we paid SCOC
approximately $15.6 million, $17.5 million and $18.3 million, respectively, for
programming services. As of December 31, 2003 and 2002, there were no amounts
payable to SCOC. We lease transponders and provide certain other services to Transponder
Encryption Services Corporation (TESC), a wholly-owned subsidiary of ECC, and
our affiliate. During the years ended December 31, 2003, 2002 and 2001, we
recognized approximately $89.8 million, $83.6 million and $72.2 million,
respectively, of revenues F-47




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##### Table of Contents



ECHOSTAR DBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued from TESC for leasing and other services. As of
December 31, 2003 and 2002, amounts payable to TESC were $25.4 million and $4.6
million, respectively. 15. Subsequent Events 9 3/8% Senior Note Redemption Effective February 2, 2004, we redeemed the remainder of our outstanding 9 3/8%
Senior Notes due 2009. In accordance with the terms of the indenture governing
the notes, the remaining $1.423 billion principal amount of the notes was
repurchased at 104.688%, for a total of approximately $1.490 billion. The
premium paid of approximately $66.7 million, along with unamortized debt
issuance costs of approximately $10.8 million, were recorded as charges to
earnings in February 2004. As a result of this redemption, we have been
discharged and released from our obligations under the related indenture.
Subsequent to the redemption, to satisfy insurance covenants under the next
most restrictive indentures related to our remaining senior notes, we are
required to reclassify an amount equal to the depreciated cost of the lesser of
three or half of our satellites. As an indirect result of this redemption,
during February 2004, we were able to reclassify approximately $57.2 million
representing the depreciated cost of two of our satellites from cash reserved
for satellite insurance to cash and cash equivalents. Gemstar-TV Guide International transaction On March 2, 2004, EchoStar announced a long-term patent license
and distribution agreement with Gemstar-TV Guide International, Inc. This
transaction includes a one-time cash payment by EchoStar of $190.0 million for
use of Gemstar intellectual property and technology, use of the TV Guide brand
on its interactive program guides, and for distribution arrangements with
Gemstar to provide for the launch and carriage of the TV Guide Channel as well
as the extension of an existing distribution agreement for carriage of the TVG
Network. EchoStar also signed an agreement to resolve all outstanding
litigation between it and Gemstar. Also on March 2, 2004, EchoStar announced an agreement to acquire Gemstars
Superstar/Netlink Group LLC (SNG), UVTV distribution, and SpaceCom businesses
and related assets for approximately $48.0 million in cash. EchoStars
purchase of these businesses is subject to certain regulatory approvals and
customary conditions. The effectiveness of the patent license, distribution
agreements and settlement agreement are subject to certain conditions,
including the closing of the SNG sale. F-48




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Exhibit Index Exhibit No.
    
    Description3.1(a)*
    
    Articles of Incorporation of EDBS (incorporated by reference to Exhibit 3.4(a)
to the Companys Registration Statement on Form S-4, Registration No.
333-31929).3.1(b)H
    
    Certificate of Amendment of the Articles of Incorporation of EchoStar DBS
Corporation, dated as of August 25, 2003.3.1(c)*
    
    Bylaws of EDBS (incorporated by reference to Exhibit 3.4(b) to the Companys
Registration Statement on Form S-4, Registration No. 333-31929).




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Exhibit No.
    
    Description4.1*
    
    Indenture of Trust, relating to EDBS 9 3/8% Senior Notes due 2009 (Ten Year
Notes), dated as of January 25, 1999, among EDBS, the Guarantors (as defined
therein) and U.S. Bank, as trustee (incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-4 of EDBS, Registration No.
333-71345).4.2*
    
    Registration Rights Agreement, relating to the Ten Year Notes, dated as of
January 25, 1999, by and among EDBS, the Guarantors and the Initial Purchasers
(as defined therein) (incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-4 of EDBS, Registration No. 333-71345).4.3*
    
    Indenture relating to 10 3/8% Senior Notes due 2007, dated as of November 12,
2002, between EDBS and U.S. Bank Trust National Association, as trustee
(incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 2002, Commission File No.0-26176).4.4*
    
    Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated as of December
28, 2001 between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.17 to the Annual Report on Form 10-K
of EchoStar for the year ended December 31, 2001, Commission File No.
0-26176).4.5*
    
    Registration Rights Agreement, relating to the 9 1/8% Senior Notes Due 2009,
dated as of December 28, 2001, by and among EDBS and Deutsche Banc Alex.
Brown, Inc., Credit Suisse First Boston Corporation, Lehman Brothers Inc. and
UBS Warburg LLC (incorporated by reference to Exhibit 4.18 to the Annual
Report on Form 10-K of EchoStar for the year ended December 31, 2001,
Commission File No. 0-26176).4.6*
    
    Indenture, relating to EDBS 5 3/4% Senior Notes due 2008, dated as of October
2, 2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarter ended September 30, 2003, Commission File
No.0-26176).4.7*
    
    Indenture, relating to EDBS 6 3/8% Senior Notes due 2011, dated as of October
2, 2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarter ended September 30, 2003, Commission File
No.0-26176).4.8*
    
    Indenture, relating to EDBS Floating Senior Notes due 2008, dated as of
October 2, 2003, between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to the Quarterly Report on
Form 10-Q of EchoStar for the quarter ended September 30, 2003, Commission
File No.0-26176).4.9*
    
    Registration Rights Agreement dated as of October 2, 2003 among EDBS and the
other parties named herein (incorporated by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended September 30,
2003, Commission File No.0-26176).4.10*
    
    First Supplemental Indenture, relating to the 9 1/8% Senior Notes Due 2009,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.12 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).4.11*
    
    First Supplemental Indenture, relating to the 5 3/4% Senior Notes Due 2008,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.13 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).




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##### Table of Contents



Exhibit No.
    
    Description4.12*
    
    First Supplemental Indenture, relating to the 6 3/8% Senior Notes Due 2011,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.14 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).4.13*
    
    First Supplemental Indenture, relating to the Floating Rate Senior Notes Due
2008, dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.15 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).4.14*
    
    First Supplemental Indenture, relating to the 10 3/8% Senior Notes Due 2007,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.16 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2003,
Commission File No.0-26176).10.1*
    
    Form of Satellite Launch Insurance Declarations (incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1 of Dish Ltd.,
Registration No. 33-81234).10.2*
    
    Form of Tracking, Telemetry and Control Contract between AT&T Corp. and ESC
(incorporated by reference to Exhibit 10.12 to the Registration Statement on
Form S-1 of Dish Ltd., Registration No. 33-81234).10.3*
    
    Manufacturing Agreement, dated as of March 22, 1995, between HTS and SCI
Technology, Inc. (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Dish Ltd., Commission File No.
33-81234).10.4*
    
    EchoStar 1995 Stock Incentive Plan (incorporated by reference to Exhibit 10.16
to the Registration Statement on Form S-1 of EchoStar, Registration No.
33-91276). **10.5*
    
    Echostar 1999 Stock Incentive Plan (incorporated by reference to Exhibit C to
EchoStars Definitive Proxy Statement on Schedule 14A dated March 23, 1999).**10.6*
    
    2002 Class B CEO Stock Option Plan (incorporated by reference to Appendix A to
EchoStars Definitive Proxy Statement on Schedule 14A dated April 9, 2002).**10.7*
    
    Satellite Construction Contract, dated as of July 18, 1996, between EDBS and
Lockheed Martin Corporation (incorporated by reference to Exhibit 10.18 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).10.8*
    
    Agreement between HTS, ESC and ExpressVu Inc., dated January 8, 1997, as
amended (incorporated by reference to Exhibit 10.18 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 1996, as amended,
Commission File No. 0-26176).10.9*
    
    Agreement to Form NagraStar LLC, dated as of June 23, 1998, by and between
Kudelski S.A., EchoStar and ESC (incorporated by reference to Exhibit 10.28 to
the Annual Report on Form 10-K of EchoStar for the year ended December 31,
1998, Commission File No. 0-26176).10.10*
    
    License and OEM Manufacturing Agreement, dated July 1, 2002, between EchoStar
Satellite Corporation, EchoStar Technologies Corporation and Thomson
multimedia, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended September 30, 2002,
Commission File No. 0-26176). ***10.11*
    
    Amendment No. 19 to License and OEM Manufacturing Agreement, dated July 1,
2002, between EchoStar Satellite Corporation, EchoStar Technologies
Corporation and Thomson multimedia, Inc. (incorporated by reference to Exhibit
10.57 to the Annual Report on Form 10-K of EchoStar for the year ended
December 31, 2002, Commission File No.0-26176).




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Exhibit No.
    
    Description10.12*
    
    Satellite Service Agreement, dated as of March 21, 2003, between SES Americom,
Inc., EchoStar Satellite Corporation and EchoStar Communications Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended March 31, 2003, Commission File
No.0-26176).10.13*
    
    Amendment No. 1 to Satellite Service Agreement dated March 31, 2003 between
SES Americom Inc. and EchoStar (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter ended September
30, 2003, Commission File No.0-26176).10.14*
    
    Satellite Service Agreement dated as of August 13, 2003 between SES Americom
Inc. and EchoStar (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended September 30, 2003,
Commission File No.0-26176).31.1H
    
    Section 302 Certification by Chairman and Chief Executive Officer.31.2H
    
    Section 302 Certification by Senior Vice President and Chief Financial Officer.32.1H
    
    Section 906 Certification by Chairman and Chief Executive Officer.32.2H
    
    Section 906 Certification by Senior Vice President and Chief Financial Officer.
  H
    
    Filed herewith.*
    
    Incorporated by reference.**
    
    Constitutes a management contract or compensatory plan or arrangement.***
    
    Filed in redacted form since confidential treatment has been requested
pursuant to Rule 24.b-2 for certain portions thereof. A conforming
electronic copy is filed herewith.