|
4. Marketable Investment Securities, Restricted Cash and Other Investment Securities
Our marketable investment securities, restricted cash and other investment securities consist of the following:
|
|
|
As of |
|
|
|
|
September 30, |
|
December 31, |
|
|
|
|
2011 |
|
2010 |
|
|
|
|
(In thousands) |
|
|
Marketable investment securities: |
|
|
|
|
|
|
Current marketable investment securities - VRDNs |
|
$ |
178,785 |
|
$ |
395,715 |
|
|
Current marketable investment securities - strategic |
|
174,331 |
|
232,718 |
|
|
Current marketable investment securities - other |
|
442,553 |
|
360,653 |
|
|
Total marketable investment securities - current |
|
795,669 |
|
989,086 |
|
|
Restricted marketable investment securities (1) |
|
164 |
|
1,337 |
|
|
Total |
|
795,833 |
|
990,423 |
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents (1) |
|
20,452 |
|
16,089 |
|
|
|
|
|
|
|
|
|
Marketable and other investment securities - noncurrent: |
|
|
|
|
|
|
Cost method |
|
26,192 |
|
3,097 |
|
|
Equity method |
|
111,480 |
|
109,366 |
|
|
Fair value method |
|
140,272 |
|
613,125 |
|
|
Total marketable and other investment securities - noncurrent |
|
277,944 |
|
725,588 |
|
|
Total marketable investment securities, restricted cash and other investment securities |
|
$ |
1,094,229 |
|
$ |
1,732,100 |
|
(1) Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” on our Condensed Consolidated Balance Sheets.
Marketable Investment Securities
Our marketable investment securities portfolio consists of various debt and equity instruments, all of which are classified as available-for-sale.
Current Marketable Investment Securities - VRDNs
Variable rate demand notes (“VRDNs”) are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. Our VRDN portfolio is comprised of investments in many municipalities, which are backed by financial institutions or other highly rated companies that serve as the pledged liquidity source. While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.
Current Marketable Investment Securities - Strategic
Our current strategic marketable investment securities are highly speculative and have experienced and continue to experience volatility. As of September 30, 2011, a significant portion of our strategic investment portfolio consisted of securities of several issuers and a significant portion of the value of that portfolio depends on the value of those issuers.
Current Marketable Investment Securities - Other
Our other current marketable investment securities portfolio includes investments in various debt instruments including corporate and government bonds.
Restricted Cash and Marketable Investment Securities
As of September 30, 2011 and December 31, 2010, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.
Marketable and Other Investment Securities - Noncurrent
We account for our unconsolidated debt and equity investments under the fair value, equity and/or cost method of accounting. We have several strategic investments in certain equity securities that are included in noncurrent “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets.
Marketable and Other Investment Securities — Cost and Equity
Non-majority owned investments in equity securities are generally accounted for using the equity method when we have the ability to significantly influence the operating decisions of an investee. However, when we do not have the ability to significantly influence the operating decisions of an investee, the cost method is used.
Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.
Marketable and Other Investment Securities — Fair Value
We elect the fair value method for certain debt and equity investments in affiliates when we believe the fair value method of accounting provides more meaningful information to our investors. For our investments carried at fair value, interest and dividends are measured at fair value and are recorded in “Unrealized gains (losses) on investments accounted for at fair value, net” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See “Investments in TerreStar” below for more information.
Unrealized Gains (Losses) on Marketable Investment Securities
As of September 30, 2011 and December 31, 2010, we had accumulated net unrealized gains of $138 million and $188 million, both net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).” A full valuation allowance has been established against any net deferred tax assets that are capital in nature. The components of our available-for-sale investments are summarized in the table below.
|
|
|
As of September 30, 2011 |
|
As of December 31, 2010 |
|
|
|
|
Marketable |
|
|
|
|
|
|
|
Marketable |
|
|
|
|
|
|
|
|
|
|
Investment |
|
Unrealized |
|
Investment |
|
Unrealized |
|
|
|
|
Securities |
|
Gains |
|
Losses |
|
Net |
|
Securities |
|
Gains |
|
Losses |
|
Net |
|
|
|
|
(In thousands) |
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VRDNs |
|
$ |
178,785 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
395,715 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Other (including restricted) |
|
442,717 |
|
92 |
|
(2,973 |
) |
(2,881 |
) |
375,814 |
|
1,154 |
|
(233 |
) |
921 |
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
174,331 |
|
140,455 |
|
— |
|
140,455 |
|
218,894 |
|
186,745 |
|
— |
|
186,745 |
|
|
Total marketable investment securities |
|
$ |
795,833 |
|
$ |
140,547 |
|
$ |
(2,973 |
) |
$ |
137,574 |
|
$ |
990,423 |
|
$ |
187,899 |
|
$ |
(233 |
) |
$ |
187,666 |
|
As of September 30, 2011, restricted and non-restricted marketable investment securities included debt securities of $510 million with contractual maturities of one year or less and $112 million with contractual maturities greater than one year. Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.
Marketable Investment Securities in a Loss Position
The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have been in an unrealized loss position, aggregated by investment category. We do not intend to sell our investments in debt securities before they recover or mature, and it is more likely than not that we will hold these debt investments until that time. In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity. Therefore, we believe that these changes in the estimated fair values of these marketable investment securities are primarily related to temporary market fluctuations.
|
|
|
As of September 30, 2011 |
|
As of December 31, 2010 |
|
|
|
|
Investment Category |
|
Investment Category |
|
|
|
|
Debt
Securities |
|
Equity
Securities |
|
Total |
|
Debt
Securities |
|
Equity
Securities |
|
Total |
|
|
|
|
(In thousands) |
|
|
Less than Six Months: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
316,580 |
|
$ |
— |
|
$ |
316,580 |
|
$ |
26,358 |
|
$ |
— |
|
$ |
26,358 |
|
|
Unrealized loss |
|
(2,962 |
) |
— |
|
(2,962 |
) |
(44 |
) |
— |
|
(44 |
) |
|
Six to Nine Months: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
— |
|
— |
|
— |
|
17,566 |
|
— |
|
17,566 |
|
|
Unrealized loss |
|
— |
|
— |
|
— |
|
(71 |
) |
— |
|
(71 |
) |
|
Nine Months or More: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
3,919 |
|
— |
|
3,919 |
|
75,211 |
|
— |
|
75,211 |
|
|
Unrealized loss |
|
(11 |
) |
— |
|
(11 |
) |
(118 |
) |
— |
|
(118 |
) |
|
Total Fair Value |
|
$ |
320,499 |
|
$ |
— |
|
$ |
320,499 |
|
$ |
119,135 |
|
$ |
— |
|
$ |
119,135 |
|
Fair Value Measurements
We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs. We apply the following hierarchy in determining fair value:
· Level 1, defined as observable inputs being quoted prices in active markets for identical assets;
· Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
· Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants therefore requiring assumptions based on the best information available.
Our assets measured at fair value on a recurring basis were as follows:
|
|
|
As of |
|
|
|
|
September 30, 2011 |
|
December 31, 2010 |
|
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
(In thousands) |
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VRDNs |
|
$ |
178,785 |
|
$ |
— |
|
$ |
178,785 |
|
$ |
— |
|
$ |
395,715 |
|
$ |
— |
|
$ |
395,715 |
|
$ |
— |
|
|
Other (including restricted) |
|
442,717 |
|
— |
|
442,717 |
|
— |
|
375,814 |
|
— |
|
375,814 |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
174,331 |
|
174,331 |
|
— |
|
— |
|
218,894 |
|
218,894 |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and other investment securities - noncurrent |
|
140,272 |
|
426 |
|
— |
|
139,846 |
|
613,125 |
|
4,170 |
|
— |
|
608,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
936,105 |
|
$ |
174,757 |
|
$ |
621,502 |
|
$ |
139,846 |
|
$ |
1,603,548 |
|
$ |
223,064 |
|
$ |
771,529 |
|
$ |
608,955 |
|
Changes in Level 3 instruments are as follows:
|
|
|
Level 3
Investment
Securities |
|
|
|
|
(In thousands) |
|
|
Balance as of December 31, 2010 |
|
$ |
608,955 |
|
|
Net realized and unrealized gains (losses) included in earnings |
|
3,507 |
|
|
Purchases |
|
51,936 |
|
|
Issuances |
|
27,313 |
|
|
Settlements |
|
(551,865 |
) |
|
Balance as of September 30, 2011 |
|
$ |
139,846 |
|
Unrealized and Realized Gains (Losses) on Marketable Investment Securities and Other Investments
“Unrealized and realized gains (losses) on marketable investment securities and other investments” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes changes in the carrying amount of our investments as follows:
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
|
|
Ended September 30, |
|
Ended September 30, |
|
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
(In thousands) |
|
|
Unrealized and realized gains (losses) on marketable investment securities and other investments: |
|
|
|
|
|
|
|
|
|
|
Marketable investment securities - gains (losses) on sales/exchanges |
|
$ |
4,169 |
|
$ |
(94 |
) |
$ |
6,617 |
|
$ |
(87 |
) |
|
Marketable and other investment securities - gains (losses) on sales/exchanges |
|
— |
|
— |
|
7,258 |
|
— |
|
|
Marketable and other investment securities - other-than-temporary impairments |
|
— |
|
— |
|
— |
|
(22,012 |
) |
|
Total unrealized and realized gains (losses) on marketable investment securities and other investments |
|
$ |
4,169 |
|
$ |
(94 |
) |
$ |
13,875 |
|
$ |
(22,099 |
) |
Investments in TerreStar
We account for our investments in TerreStar Corporation and TerreStar Networks Inc. (“TerreStar Networks”), an indirect, majority-owned subsidiary of TerreStar Corporation, using the fair value method of accounting which we believe provides more meaningful information to our investors. TerreStar Networks is the principal operating subsidiary of TerreStar Corporation. TerreStar Networks and certain of its affiliates filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code on October 19, 2010. TerreStar Corporation and its subsidiary, TerreStar Holdings Inc. (together, the “TSC Debtors”), filed for Chapter 11 protection on February 16, 2011.
In February 2008, we completed several transactions under a Master Investment Agreement between us, TerreStar Corporation and TerreStar Networks. Under the Master Investment Agreement, we acquired $50 million in aggregate principal amount of TerreStar Networks’ 6 1/2% Senior Exchangeable Paid-in-Kind Notes due June 15, 2014 (“Exchangeable Notes”) as well as $50 million aggregate principal amount of TerreStar Networks’ 15% Senior Secured Paid-in-Kind Notes due February 15, 2014 (“15% PIK Notes”). The Master Investment Agreement also provides that we have the right to appoint two representatives to TerreStar Corporation’s Board of Directors. We do not presently have any representatives on TerreStar Corporation’s Board of Directors. We have from time to time acquired, and we currently hold, other securities issued by TerreStar Corporation and TerreStar Networks.
In February 2008, we also entered into a Spectrum Agreement with TerreStar Corporation, under which, in June 2008, TerreStar Corporation completed the acquisition of our holdings of 1.4 GHz spectrum in exchange for the issuance of 30 million shares of its common stock to us, which we continue to hold.
We also entered into an agreement with TerreStar Networks and Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund LP (collectively, “Harbinger”), in February 2008, in which we and Harbinger each committed to provide up to $50 million in secured financing, the proceeds of which were advanced to TerreStar Networks from time to time as required for TerreStar Networks to make required payments in connection with a communications satellite to be constructed and launched for TerreStar Networks (“Line of Credit”).
In connection with the filings by TerreStar Networks and its subsidiaries (the “Debtors”) for protection under Chapter 11 of the U.S. Bankruptcy Code and an ancillary proceeding under the Companies’ Creditors Arrangement Act in Canada, on October 19, 2010, we entered into a commitment to provide a debtor-in-possession credit facility (the “Credit Facility”) to the Debtors. On November 18, 2010, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) approved the Credit Facility on a final basis and authorized the Debtors to enter into the Credit Facility. The Credit Facility consists of a non-revolving, multiple draw term loan in the aggregate principal amount of $90 million, with drawings subject to the terms and conditions set forth in the Credit Facility.
On June 14, 2011, Gamma Acquisition L.L.C. (“Gamma”), a wholly-owned subsidiary of DISH Network entered into an asset purchase agreement (the “TerreStar Purchase Agreement”) with TerreStar Networks and certain of its subsidiaries pursuant to which upon closing of the transaction Gamma will acquire substantially all of the assets of TerreStar Networks and its subsidiaries for a cash purchase price of $1.375 billion and will agree to assume certain liabilities associated with the ongoing operations of the business being acquired. Gamma agreed to fund $1.345 billion of the purchase price prior to receipt of approvals from the FCC or Canadian Department of Industry, and funded such amount on August 11, 2011, after receipt of approval from the U.S. Bankruptcy Court for the Southern District of New York on July 7, 2011. A portion of these proceeds have been used to repay certain of our investments in TerreStar in full, and others in part.
As of September 30, 2011, we had received $552 million from TerreStar, of which $419 million related to the 15% PIK Notes. In addition, this amount includes the repayment of $85 million owed to us under the Credit Facility and the repayment of $48 million owed to us under the Line of Credit. The TerreStar bankruptcy proceedings are ongoing and, subsequent to September 30, 2011, we received an additional $77 million primarily related to the 15% PIK Notes, leaving the estimated fair value of the outstanding amount of our remaining investments in TerreStar at an amount of approximately $63 million.
Our debt investments in TerreStar Networks had an estimated fair value of $140 million and $626 million as of September 30, 2011 and December 31, 2010, respectively. Our equity investments in TerreStar Corporation had a fair value of less than $1 million and $4 million as of September 30, 2011 and December 31, 2010, respectively. Fluctuations in fair value of these investments are recorded in “Unrealized gains (losses) on investments accounted for at fair value, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and directly impact our profitability. For the three months ended September 30, 2011, we recorded a $2 million gain on these investments compared to a $21 million loss for the same period in 2010. For the nine months ended September 30, 2011 and 2010, we recorded a $10 million and a $23 million gain on these investments, respectively.
Our investments in TerreStar Corporation and TerreStar Networks are highly speculative and have experienced and continue to experience volatility associated with their fair values. The value of our investments in TerreStar Networks is determined using Level 3 inputs under the fair value hierarchy. In estimating those fair values we consider quotes from brokers and other pricing services, if available, and obtain both observable and unobservable inputs in our valuation models which include the use of option pricing and discounted cash flow techniques or a liquidation based method. The fair value of these investments can be significantly impacted by adverse changes in securities markets generally, as well as risks related to the performance of TerreStar Corporation and TerreStar Networks, their ability to obtain sufficient capital to execute their business plans, risks associated with their specific industries, bankruptcy and other factors.
On January 14, 2011, TerreStar Corporation filed a Form 15, terminating the registration of its common stock and Series A Voting Convertible Preferred Stock under Section 12(g) of the Securities Exchange Act of 1934 and suspending its obligations to file reports with the Securities and Exchange Commission (other than with respect to its fiscal year ended December 31, 2010). |