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EchoStar on Investigation: No Damage

EchoStar Communications Corp. shares rose nearly 5% ($1.40 per share) Thursday afternoon after the No. 2 direct-broadcast satellite service provider reported strong fourth-quarter results and said an internal investigation into its accounting policies turned up no material problems.

EchoStar shares were priced at $30.23 per share Thursday afternoon, regaining much of the ground lost last week when a Bloomberg News report said the company was being investigated by the Securities and Exchange Commission regarding accounting irregularities, including questionable payments to a consultant who is a personal friend of chairman and CEO Charlie Ergen.

EchoStar shares had dropped more than 6% ($1.87 per share) to $28.72 each March 10 when the Bloomberg article first came out.

According to its 10-K annual report filed Wednesday, EchoStar said it discovered “one instance in which one of our executive officers in charge of certain business functions directed the preparation in prior years of inaccurate documentation that was used to determine payments made to a vendor. We have also identified several other significant deficiencies, none of which individually or in the aggregate constituted a ‘material weakness’ in our internal control over financial reporting as of Dec. 31, 2004.”

EchoStar said in the filing that it intends to immediately make changes in governance, controls and operating procedures.

On a conference call with analysts discussing its fourth-quarter results, Ergen commented briefly on the accounting issues, adding that the allegations were made by an employee who resigned. Those allegations were forwarded to EchoStar’s legal counsel and led to the internal investigation.

“While from a personal standpoint, you’d like to be perfect as a company, and I am disappointed that a review was necessary, I am very pleased that at least, at EchoStar in this instance, the system worked,” Ergen said.

“We received good recommendations from our audit committee,” he added. “It does include one where we take remedial action against an executive, but it has a lot of other good recommendations that we are embracing as a company and we are implementing.”

Ergen did not identify the executive.

Net income in the quarter skyrocketed to $70.1 million (15 cents per share) compared with a profit of $2.1 million (1 cent) in the prior year. Revenue rose 28% in the period to $1.93 billion.

EchoStar also exceeded analysts’ expectations for net subscriber additions -- 430,000 versus the 350,000-365,000 most analysts anticipated. Churn for the quarter was 1.5% versus 1.7% in the third quarter.

EchoStar said it will continue to aggressively grow subscribers by offering promotions like free or low-cost digital-video recorders and HDTV receivers, but it will also look to otherwise reduce subscriber-acquisition costs by leasing other customer equipment and implementing more stringent credit-checking policies.