Spectrum Investments

12 Months Ended

Dec. 31, 2011

Spectrum Investments

Spectrum Investments

10.    Spectrum Investments

TerreStar Transaction

Gamma Acquisition L.L.C. (“Gamma”), a wholly-owned subsidiary of DISH Network, entered into the TerreStar Transaction on June 14, 2011.  On July 7, 2011, the U.S. Bankruptcy Court for the Southern District of New York approved the asset purchase agreement with TerreStar and we subsequently paid $1.345 billion of the cash purchase price.  DISH Network is a party to the asset purchase agreement solely with respect to certain guaranty obligations.  We have paid all but $30 million of the purchase price for the TerreStar Transaction, which will be paid upon closing of the TerreStar Transaction, or upon certain other conditions being met under the asset purchase agreement.  Consummation of the acquisition contemplated in the asset purchase agreement is subject to, among other things, approval by the FCC.  On February 7, 2012, the Canadian federal Department of Industry (“Industry Canada”) approved the transfer of the Canadian spectrum licenses held by TerreStar to us.  If the remaining required approvals are not obtained, subject to certain exceptions, we have the right to require and direct the sale of some or all of the TerreStar assets to a third party and we would be entitled to the proceeds from such a sale. These proceeds could, however, be substantially less than amounts we have paid in the TerreStar Transaction.  Additionally, Gamma is responsible for providing certain working capital and certain administrative expenses of TerreStar and certain of its subsidiaries after December 31, 2011.

We expect that the TerreStar Transaction will be accounted for as a business combination using purchase price accounting.  We also expect to allocate the purchase price to the various components of the acquisition based upon the fair value of each component using various valuation techniques, including the market approach, income approach and/or cost approach.  We expect the purchase price of the TerreStar assets to be allocated to, among other things, spectrum and satellites.

Investment in DBSD North America

Over the past several years, we have made various strategic investments in DBSD North America, a subsidiary of Pendrell Corporation, formerly known as ICO.  DBSD North America is developing an advanced hybrid system that 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 December 31, 2011, our total investment in DBSD North America is $1.298 billion.  The following paragraphs discuss the various components of our investment in DBSD North America.

Investment in DBSD North America.  As of December 31, 2011 and 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 December 31, 2011 and 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 year ended December 31, 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 December 31, 2011, we had funded $78 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.

Sprint Settlement Agreement

On November 3, 2011, we and Sprint entered into the Sprint Settlement Agreement pursuant to which all disputed issues relating to our acquisition of DBSD North America and the TerreStar Transaction were resolved between us and Sprint, including, but not limited to, issues relating to costs allegedly incurred by Sprint to relocate users from the spectrum now licensed to DBSD North America and TerreStar (the “Sprint Clearing Costs”).  EchoStar was a party to the Sprint Settlement Agreement solely for the purposes of executing a mutual release between it and Sprint relating to the Sprint Clearing Costs.  As of December 31, 2011, EchoStar is currently a holder of certain TerreStar debt instruments.  Pursuant to the terms of the Sprint Settlement Agreement, we made a net payment of approximately $114 million to Sprint, which is included on our Consolidated Balance Sheets under the caption “Other noncurrent assets, net.”  As this payment relates directly to our acquisitions of DBSD North America and TerreStar, the $114 million will be allocated evenly between these investments as purchase consideration on the dates of the respective closings.