Marketable Investment Securities, Restricted Cash and Other Investment Securities

9 Months Ended

Sep. 30, 2011

Marketable Investment Securities, Restricted Cash and Other Investment Securities

Marketable Investment Securities, Restricted Cash and Other Investment Securities

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	$	1,024,275	$	1,334,081
Current marketable investment securities - strategic	334,727		211,141
Current marketable investment securities - other	960,144		754,483
Total current marketable investment securities	2,319,146		2,299,705
Restricted marketable investment securities (1)	55,974		62,196
Noncurrent marketable investment securities - ARS and MBS (2)	104,738		119,121
Total marketable investment securities	2,479,858		2,481,022
Restricted cash and cash equivalents (1)	64,872		82,241
Other investment securities:
Other investment securities - cost method (2)	2,805		2,805
Investment in DBSD North America	1,285,512		102,591
Total other investment securities	1,288,317		105,396
Total marketable investment securities, restricted cash and other investment securities	$	3,833,047	$	2,668,659

(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.
(2)	Noncurrent marketable investment securities — auction rate securities (“ARS”), mortgage backed securities (“MBS”) and other investment securities are included in “Marketable and other 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 include strategic and financial investments in public companies that 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 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 and for our litigation with ESPN (See Note 10).

Noncurrent Marketable Investment Securities — ARS and MBS

We have investments in ARS and MBS which are classified as available-for-sale securities and reported at fair value.  Events in the credit markets have reduced or eliminated current liquidity for certain of our ARS and MBS investments.  As a result, we classify these investments as noncurrent assets, as we intend to hold these investments until they recover or mature.  See below for further discussion on the July 1, 2010 fair value election on certain ARS investments.

The valuation of our ARS and MBS investments portfolio is subject to uncertainties that are difficult to estimate.  Due to the lack of observable market quotes for identical assets, we utilize analyses that rely on Level 2 and/or Level 3 inputs, as defined in “Fair Value Measurements.”  These inputs include, among other things, observed prices on similar assets as well as our assumptions and estimates related to the counterparty credit quality, default risk underlying the security and overall capital market liquidity.  These securities were also compared, when possible, to other observable market data for financial instruments with similar characteristics.

Fair Value Election.  As of September 30, 2011 our ARS and MBS noncurrent marketable investment securities portfolio of $105 million includes $55 million of securities accounted for under the fair value method.

Other Investment Securities

We have a few strategic investments in certain debt and equity securities that are included in noncurrent “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets and accounted for using the cost, equity and/or fair value methods of accounting.

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.

Investment in DBSD North America

Over the past several years, we have made various strategic investments in DBSD North America Inc. (“DBSD North America”), a subsidiary of Pendrell Corporation, formerly known as ICO Global Communications (Holdings) Limited (“ICO”).  DBSD North America is developing an advanced hybrid system which combines both satellite and terrestrial communications capable of supporting wireless voice, data and/or Internet services throughout the United States.  We have committed, through various agreements described below, to acquire 100% of the equity of reorganized DBSD North America for approximately $1.4 billion.  Our ultimate acquisition of 100% of the equity of reorganized DBSD North America is subject to the satisfaction of certain conditions, including approval by the FCC and DBSD North America’s emergence from bankruptcy.  In the event that necessary approval from the FCC is not obtained, we have the right to direct DBSD North America to sell substantially all of its assets under Section 363 of the bankruptcy code.  Because of our ownership of certain claims and DBSD North America debt, and our rights under the Implementation Agreement (as defined below), we are entitled to receive substantially all of the proceeds of any such sales.  There can be no assurance, however, that such sales will result in proceeds equal to the value of the claims or DBSD North America debt held by us.  While we hold a material amount of financial instruments in DBSD North America, we do not have the power to direct its activities and will not until the acquisition is closed.  DBSD North America will be consolidated into our financial statements if the acquisition is approved and DBSD North America has emerged from bankruptcy.  As of September 30, 2011, our total investment in DBSD North America is $1.286 billion and is included on our Condensed Consolidated Balance Sheets under the caption “Investment in DBSD North America.” The following paragraphs discuss the various components of our investment in DBSD North America.

Investment in DBSD North America.  As of September 30, 2011 and December 31, 2010, our other investment securities portfolio included DBSD North America’s 7.5% Convertible Senior Secured Notes due 2009 of $112 million and $56 million, respectively.  In addition, as of September 30, 2011 and December 31, 2010, we held a $47 million line of credit pursuant to the Amended and Restated Revolving Credit Agreement, dated as of April 7, 2008 between us and DBSD North America.  During the nine months ended September 30, 2011, we made additional investments in DBSD North America pursuant to various agreements discussed below.

Investment Agreement.  On February 1, 2011, we entered into an $88 million Credit Facility with DBSD North America and committed to acquire 100% of the equity of reorganized DBSD North America (the “Investment Agreement”) for approximately $1.4 billion subject to certain adjustments, including interest accruing on DBSD North America’s existing debt.  As of September 30, 2011, we had funded $66 million under the Credit Facility.

On February 24, 2011 and again on March 15, 2011, we amended the Investment Agreement (the “Revised Investment Agreement”).  Pursuant to the Revised Investment Agreement, on March 22, 2011, we initiated a tender offer to purchase all of DBSD North America’s outstanding 7.5% Convertible Senior Secured Notes due 2009, certain claims against a DBSD North America’s debtor affiliate and certain allowed claims against DBSD North America.  The tender offer expired on April 18, 2011 and on April 20, 2011 we made payments of approximately $727 million to purchase tendered DBSD North America’s 7.5% Convertible Senior Secured Notes due 2009, and $19 million in payments for certain claims against a DBSD North America’s debtor affiliate and claims against DBSD North America.

Restructuring Support Agreement and Implementation Agreement.  In connection with the Revised Investment Agreement on March 15, 2011, we entered into a restructuring support agreement (the “Restructuring Support Agreement”) and an implementation agreement (the “Implementation Agreement”) with ICO, the parent company of DBSD North America, pursuant to which ICO provided us with certain assets, rights and ICO’s support of the reorganization of DBSD North America in exchange for approximately $325 million, of which $315 million has been paid.  On March 21, 2011, we paid $35 million to ICO pursuant to the Implementation Agreement.  On April 26, 2011, we made a second payment of approximately $280 million to ICO pursuant to the Implementation Agreement for the capital stock of DBSD North America.  We have also agreed to indemnify ICO against certain liabilities in connection with certain pending litigation related to DBSD North America.

All of our investments in DBSD North America are accounted for under the cost method of accounting, except for the 7.5% Convertible Senior Secured Notes due 2009.  We account for unrealized gains and losses associated with the 7.5% Convertible Senior Secured Notes due 2009 as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit)” on our Condensed Consolidated Balance Sheets.

Unrealized Gains (Losses) on Marketable Investment Securities

As of September 30, 2011 and December 31, 2010, we had accumulated net unrealized gains of $53 million and $93 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 deferred taxes that are capital in nature.  The components of our available-for-sale investments are detailed 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	$	1,024,275	$	—	$	—		$	—		$	1,334,081	$	—	$	—		$	—
ARS and MBS	49,349		998		(12,844		)	(11,846		)	56,430		902		(12,262		)	(11,360		)
ARS fair value election	55,389		—		—			—			62,691		—		—			—
Other (including restricted)	1,032,222		5,574		(8,136		)	(2,562		)	832,798		9,330		(1,676		)	7,654
Equity securities:
Other	318,623		74,206		(85,880		)	(11,674		)	195,022		82,565		(8,429		)	74,136
Subtotal	2,479,858		80,778		(106,860		)	(26,082		)	2,481,022		92,797		(22,367		)	70,430
Investment in DBSD North America (1)	839,009		78,749		—			78,749			55,823		22,926		—			22,926
Total	$	3,318,867	$	159,527	$	(106,860	)	$	52,667		$	2,536,845	$	115,723	$	(22,367	)	$	93,356

(1) Of our total investment in DBSD North America of $1.286 billion as of September 30, 2011 and $103 million as of December 31, 2010, only our $839 million and $56 million, respectively, investment in the 7.5% Convertible Senior Secured Notes due 2009 are accounted for as available-for-sale investments.

As of September 30, 2011, restricted and non-restricted marketable investment securities include debt securities of $1.917 billion with contractual maturities of one year or less and $244 million with contractual maturities greater than one year, excluding our $839 million available-for-sale investment in DBSD North America.  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.  As of September 30, 2011 and December 31, 2010, the unrealized losses on our investments in equity securities represent investments in broad-based indexes and several companies in the telecommunications and technology industries.  We are not aware of any specific factors which indicate the unrealized losses in these investments are due to anything other than temporary market fluctuations.  As of September 30, 2011 and December 31, 2010, the unrealized losses on our investments in debt securities primarily represent investments in auction rate, mortgage and asset-backed securities.  We do not intend to sell our investments in these debt securities before they recover or mature, and it is more likely than not that we will hold these 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 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	$	482,720		$	172,351		$	655,071		$	93,072		$	26,890		$	119,962
Unrealized loss	(5,491		)	(85,880		)	(91,371		)	(174		)	(8,429		)	(8,603		)
Six to Nine Months:
Fair value	218,174			—			218,174			26,182			—			26,182
Unrealized loss	(1,474		)	—			(1,474		)	(103		)	—			(103		)
Nine Months or More:
Fair value	114,601			—			114,601			193,603			—			193,603
Unrealized loss	(14,015		)	—			(14,015		)	(13,661		)	—			(13,661		)
Total Fair Value	$	815,495		$	172,351		$	987,846		$	312,857		$	26,890		$	339,747

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	$	1,024,275	$	—	$	1,024,275	$	—	$	1,334,081	$	—	$	1,334,081	$	—
ARS and MBS	104,738		—		3,667		101,071		119,121		—		6,031		113,090
Other (including restricted)	1,032,222		4,200		1,027,003		1,019		832,798		21,835		810,883		80
Equity securities	318,623		318,623		—		—		195,022		195,022		—		—
Subtotal	2,479,858		322,823		2,054,945		102,090		2,481,022		216,857		2,150,995		113,170
Investment in DBSD North America (1)	839,009		—		—		839,009		55,823		—		—		55,823
Total	$	3,318,867	$	322,823	$	2,054,945	$	941,099	$	2,536,845	$	216,857	$	2,150,995	$	168,993

(1)     Of our total investment in DBSD North America of $1.286 billion as of September 30, 2011 and $103 million as of December 31, 2010, only our $839 million and $56 million, respectively, investment in the 7.5% Convertible Senior Secured Notes due 2009 are accounted for as available-for-sale investments.

Changes in Level 3 instruments are as follows:

	Level 3 Investment  Securities
	(In thousands)
Balance as of December 31, 2010	$	168,993
Net realized and unrealized gains (losses) included in earnings	(9,146		)
Net realized and unrealized gains (losses) included in other comprehensive income (loss)	56,339
Purchases	727,364
Settlements	(2,451		)
Balance as of September 30, 2011	$	941,099

Gains and Losses on Sales and Changes in Carrying Values of Investments

“Other, net” income and expense included on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes other changes in the carrying amount of our marketable and non-marketable investments as follows:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
Other Income (Expense):	2011			2010			2011			2010
	(In thousands)
Marketable investment securities - gains (losses) on sales/exchanges	$	11,668		$	19,227		$	13,400		$	19,237
Marketable investment securities - unrealized gains (losses) on investments accounted for at fair value	12,361			6,818			(7,147		)	6,818
Other investment securities - gains (losses) on sales/exchanges	—			—			10,000			1,545
Marketable and other investment securities - other-than-temporary impairments	(2,161		)	(3,858		)	(2,161		)	(1,712		)
Other	(1,570		)	140			(1,955		)	(2,634		)
Total	$	20,298		$	22,327		$	12,137		$	23,254