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| SKYT.OB > SEC Filings for SKYT.OB > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including statements regarding the Company's capital needs, business strategy, expectations and intentions. The Company urges you to consider that statements that use the terms "believe," "do not believe," "anticipate," "expect," "plan," "estimate," "intend" and similar expressions are intended to identify forward-looking statements. These statements reflect the Company's current views with respect to future events. The Company's business is subject to numerous risks and uncertainties, including the risks described in the "Risk Factors" section of the Company's annual report on Form 10-K for the year ended December 31, 2007. Accordingly, the Company's actual results could differ materially from those anticipated in the forward-looking statements, including those set forth below under this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. Actual results will most likely differ from those reflected in these statements, and the differences could be substantial. The Company disclaims any obligation to publicly update these statements, or disclose any difference between the Company's actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Overview
All SkyTerra Communications, Inc. (SkyTerra or the Company) operating and development activity is performed through its 99.3% owned consolidated subsidiary Mobile Satellite Ventures LP (MSV). MSV holds a 46.6% effective interest in Mobile Satellite Ventures (Canada) Inc. (MSV Canada) through its 20% interest in MSV Canada and a 33.3% interest in Mobile Satellite Ventures Holdings (Canada) Inc., which is the parent company of MSV Canada. MSV has determined that it is the primary beneficiary of MSV Canada as a result of its obligation, by contract, to fund the operations of MSV Canada, and as a result of a rights and services agreement and a capacity lease agreement between MSV and MSV Canada. As such, and in accordance with FASB Interpretation No. 46, Variable Interest Entities (FIN 46), MSV Canada has been consolidated into the financial results of MSV. Although MSV Canada is Canadian owned and controlled within the meaning of the Telecommunications Act (Canada) and the Radiocommunication Regulations (Canada), references to the "Company" or MSV, include MSV Canada.
The Company currently offers a range of mobile satellite services using two geostationary satellites that support the delivery of data, voice, fax and dispatch radio services. MSV is licensed by the United States and Canadian governments to operate both current and next generation satellite systems in the L-band spectrum which MSV has coordinated for its use. MSV holds an ancillary terrestrial component (ATC) authorization that will allow operation of a satellite/terrestrial hybrid network in the United States. Deployment of an ATC network has not yet begun, and development is in process. The Company's spectrum footprint covers a total population of nearly 330 million.
The Company is developing a next generation integrated satellite and terrestrial communications network to provide ubiquitous wireless broadband services, including internet access and voice services, in the United States and Canada. As part of this network, the Company plans to allocate spectrum between satellite and terrestrial service. Using an all-IP, open architecture, the Company believes its network will provide significant advantages over existing wireless networks. Such potential advantages include higher data speeds, lower costs per bit and flexibility to support a range of custom IP applications and services. The Company was the first MSS provider to receive a license to operate an ATC network from the Federal Communications Commission (FCC). The ATC licenses permit the use of the Company's L-band satellite frequencies, in a complementary tower based network, in the operation of an advanced, integrated network capable of providing wireless broadband on a fixed, portable and fully mobile basis. The Company plans to launch two new satellites that will serve as the core of this new network. The launch window for MSV-1 is expected to open in the fourth quarter of 2009, and continue through the first quarter of 2010. The launch of MSV-1 is currently expected to occur in the first quarter of 2010. The launch of MSV-2 is currently expected to occur in the second half of 2010.
The Company's satellite development efforts are at a stage where delays against construction plans can reasonably be expected to occur, generally as a result of delays in the construction of satellite components and integration of those components into the spacecrafts. In particular, delays experienced in the construction, integration, and testing of the reflector component of the satellites could result in a delay of the delivery of the satellites to the launch site, as compared to the Company's current expectations. Presently, such a delay is not anticipated to affect the launch date of the satellites as some amount of flexibility is provided for in the Company's construction and launch plans. There are no assurances that delays will not occur in this and other component construction, integration, and testing. Such delays could affect the planned launch date of the satellites. In the event
As part of the agreement to amend the satellite contract (see Note 6 to the Condensed Consolidated Financial Statements) MSV agreed to extend the delivery date of the MSV-2 satellite network by four months, to July 11, 2010. MSV also agreed that in the event any liquidated damages would be due and payable by Boeing for late delivery of either satellite system, $19 million of any such liquidated damages that would have been earned back by Boeing over a more extended period, would be accelerated and able to be earned back by Boeing over a period of two and one-half years.
The Company currently expects to offer a range of three broad services on its next generation network. First, the Company will facilitate the transition of its current customers to the next generation services platform and will continue to support current generation communications ground segments and mobile data system network terminals, which it expects will generate revenue through at least the end of 2012. Second, the Company plans to provide bandwidth and power to customers of the next generation system who will implement and operate their own networks, generating revenue after the launch of the next generation satellites which could continue until end of next generation system life. No such bandwidth and power customers currently exist for the next generation system. Finally, the Company plans to provide next generation wireless coverage that will be accessible on conventional handsets that enable interoperable, feature-rich voice and high-speed data services. Based on the integrated chipset development and production schedule required for such services, the Company does not currently expect to generate next generation wireless coverage revenues until some time after the next generation satellites have been launched and placed into service. The Company has made significant investments in technology to support its next generation network. To the extent that the Company changes its strategic direction, or otherwise changes its technology platform, material amounts of assets capitalized to date could become impaired if they no longer have expected future use.
The Company's current business plan for the next generation network is a wholesale model whereby the Company's strategic partners and other wholesale customers can use the network to provide differentiated broadband services to their subscribers. The Company believes its planned open network, in contrast to legacy networks currently operated by incumbent providers, will allow distribution and other strategic partners to have open network access and create a wide variety of custom applications and services for consumers. To address the opportunities and challenges inherent in the development of the Company's next generation network, the Company continues to focus on initiatives related to:
• Monitoring of satellite and MSS ground-based network construction by the manufacturer.
• Development of the infrastructure and technologies required to operate MSS services upon launch of next generation space-based network.
• Continued coordination of L-band spectrum with other operators.
• Evaluating and managing development and construction timelines as new components of the next generation network are added (chipsets, air-interfaces) to ensure integration and cost-effectiveness.
• Arrangement of distribution partnerships for both MSS and ATC components of the next generation network.
• Development and evaluation of funding alternatives.
Corporate Activity
Qualcomm Satellite Enabled Mobile Chipsets
On September 12, 2008, MSV entered into a fifteen-year agreement with Qualcomm for the provision by Qualcomm of satellite enabled mobile chipsets and satellite base station components built upon Qualcomm-adapted EV-DO technology to facilitate the development of L-band and S-band mobile devices and network systems. A broad range of Qualcomm chipsets, to be available on a mass-market basis, will include satellite and L-band capabilities. The agreement contemplates that from September 12, 2008, through November 15, 2008, MSV and Qualcomm will complete the detailed specifications and approach for the technology development (the R&S Period). MSV has the right to terminate the Agreement at any time during the R&S Period without any further obligations.
On July 25, 2008, SkyTerra, MSV, and MSV Finance Co. entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with affiliates of Harbinger, pursuant to which MSV and MSV Finance Co. will issue to Harbinger up to $500,000,000 aggregate principal amount of 16.0% Senior Unsecured Notes due July 1, 2013 (the "Notes") in four tranches, with the first tranche available on January 6, 2009. In conjunction with the issuance of Notes pursuant to the Securities Purchase Agreement, SkyTerra will issue to Harbinger warrants to purchase up to an aggregate of 25,000,000 shares of voting or non-voting common stock of SkyTerra (at the option of the holder) at an exercise price of $0.01 per share of common stock. Harbinger's purchase of these Notes is not conditioned upon the commencement or consummation of a business combination with Inmarsat, as described below. Harbinger may not be required to fund the committed financing under certain circumstances, including upon the occurrence of a material adverse change.
Master Support and Contribution Agreement; Stock Purchase Agreement
On July 25, 2008, the Company, MSV and Mobile Satellite Ventures Subsidiary LLC entered into a Master Contribution and Support Agreement (the "Master Agreement") and certain other agreements with Harbinger and certain of its affiliates. The Master Agreement provides for the possible combination of SkyTerra and Inmarsat, subject to the receipt of required regulatory and antitrust clearances. SkyTerra and Harbinger expect the regulatory approval process, which includes approval from the U.S. Federal Communications Commission, other telecommunications approvals, and antitrust clearances to take approximately 12 to 18 months. Assuming an acceptable conclusion to the regulatory and competition approval process and Harbinger's determination to proceed with the transaction, the proposed business combination with Inmarsat is expected to be structured as an offer by SkyTerra to acquire all issued and to be issued shares of Inmarsat not owned by Harbinger (the "Offer"), on terms to be determined by Harbinger and in accordance with the Master Agreement. Harbinger has not yet proposed the formal terms or structure of a possible Offer to SkyTerra or Inmarsat. Harbinger may terminate the Master Agreement at any time and is not obligated to proceed with any business combination transaction involving SkyTerra and Inmarsat.
If Harbinger decides to proceed with the Offer following the receipt of required regulatory approvals, Harbinger would arrange for committed equity and debt financing to fund the Offer. SkyTerra would undertake to use its best efforts to assist Harbinger in obtaining debt financing. To provide equity financing for the Offer, Harbinger may purchase newly issued shares of SkyTerra voting common stock for $2.4 billion in cash or such other amount as Harbinger may determine. The per share purchase price for the newly issued shares will be $10.00 per share subject to an adjustment ratchet relating to the successful Offer price paid for each Inmarsat share. If the Offer price for each Inmarsat share is greater or lower than 535 British Pence Sterling then the purchase price for the newly issued SkyTerra shares will increase or decrease proportionately (adjustment ratchet). The 535 British Pence Sterling per share and $10.00 per share prices are reference prices for the purposes of the Master Agreement and the arrangements between Harbinger and SkyTerra. The 535 British Pence Sterling per share does not constitute a term or reference price for the Offer. No Offer pricing discussion has taken place with the board of Inmarsat and no determination has been made by SkyTerra or Harbinger as to any appropriate Offer price. SkyTerra shareholders other than Harbinger may participate in the equity financing for the Offer through a rights offering of voting common stock up to $100 million.
If the Offer is completed Harbinger would contribute to SkyTerra 132 million ordinary shares in Inmarsat and $37.6 million in aggregate principal value of 1.75% convertible bonds issued by Inmarsat and due in 2017, in each case currently owned by Harbinger and its affiliates. In exchange for such contributions, SkyTerra would issue to Harbinger new shares of voting common stock at $10.00 per share subject to the adjustment ratchet. The issuance of new voting and non-voting shares of SkyTerra common stock will be subject to SkyTerra shareholder approval.
As of October 30, 2008 Harbinger owned approximately 28.8% of the issued and outstanding ordinary shares of Inmarsat, and approximately 49.4% of the issued and outstanding shares of voting stock of SkyTerra. Upon completion of the proposed business combination of SkyTerra and Inmarsat, it is expected that Harbinger would own in excess of 85.0% of the outstanding voting stock of the combined entity.
Boeing Deferred Payment Schedule
On July 3, 2008, MSV entered into an agreement with Boeing to amend its existing contract with respect to its satellite system procurement. The amendment provides for an additional $40 million of construction payment deferrals. The original construction payment deferral was in the amount of $76 million. The amendment provides that the original deferrals and the additional deferrals associated with the construction payments will be due and
SkyTerra and MSV Unit Option Exchange
On August 6, 2008 the Company closed on an offer that had been made to all MSV option holders as of that date, to grant them new options under the SkyTerra Stock Option Plan, generally in exchange for surrender and termination of their MSV options (the "Option Exchange"). All participating US MSV option holders received options in the Company's plan at a ratio of 2.82 SkyTerra options for each MSV option terminated, with an exercise price equal to the exercise price of the MSV options terminated divided by 2.82. All participating Canadian MSV option holders received the right to exchange MSV options for SkyTerra options on the same terms in the future. Sale of all shares subject to the options received upon exchange is subject to restrictions until May 1, 2010, with certain exceptions that could result in earlier termination of the restrictions. Upon the release of these restrictions Canadian MSV option holders participating in the Option Exchange will have three business days to complete the exchange of their respective MSV options for SkyTerra options, or their MSV options will become unexercisable.
Upon consummation of the Option Exchange 3.9 million MSV options held by US MSV option holders were exchanged for 11.0 million SkyTerra options. Additionally, Canadian MSV option holders holding 0.6 million MSV options elected to participate in the Option Exchange, and received rights to receive 1.7 million SkyTerra options if they exchange their respective MSV options for SkyTerra options in the future.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the Company's consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates, particularly judgments with respect to the realizability of long-lived assets including of the cost of the satellite base station capital investment, and estimates relating to the valuation of the investment in TerreStar Networks, valuation of intangible assets, the useful lives of long-lived assets, the valuation and classification of investments, the valuation of the Senior Unsecured Notes and warrants, valuations relating to equity-based compensation, and judgments involved in evaluating impairment, among others, have a material impact on the Company's financial statements. Actual results and outcomes could differ from these estimates and assumptions.
For a more detailed explanation of the judgments made in these areas and a discussion of the Company's accounting estimates and policies, refer to "Critical Accounting Policies" included in Item 7 and "Summary of Significant Accounting Policies" (Note 2) to the Company's consolidated financial statements beginning on page F-26 of the Annual Report on Form 10-K for the year ended December 31, 2007.
Fair Value Inputs
The Company adopted SFAS No. 157, Fair Value Measurements, as of January 1, 2008. See Note 2 to the Condensed Consolidated Financial Statements. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
Investments
Investments include commercial paper, certificates of deposit, municipal bonds and securities issued by government agencies. The classification of investments is determined at the time of purchase and re-evaluated at each balance sheet date. The Company holds investments classified as "held-to-maturity" that are reported at amortized cost. The Company holds investments classified as "available-for-sale" that are reported at fair value, with changes in fair value reported within equity as a component of other comprehensive income. The Company holds no investments that are classified as "trading securities". Interest income is recognized when earned. Realized gains and losses for marketable securities are derived using the specific identification method.
In the event that the amortized cost of an investment exceeds its fair value, the Company evaluates, among other factors, the duration and extent to which the fair value is less than cost, the financial health and business outlook for the investee, and the Company's intent and ability to hold the investment. If a decline in fair value is considered to be other-than-temporary, the cost basis of the individual security is written down to fair value and included in results of operations.
As a result of these market conditions, the Company made adjustments to its cash and investment position in an effort to reduce exposure to principal loss. Specifically, several securities were sold resulting in insignificant realized gains or losses on those securities during the three months ended September 30, 2008. The Company is now willing to dispose of certain other investments prior to maturity. Accordingly, the Company now classifies these particular investments as "available for sale" and they are recorded at their estimated fair market value as of September 30, 2008. No unrealized gain or loss was recognized upon reclassification, as the fair market value of these investments approximated their amortized cost.
As a result of the state of the U.S. credit markets, there was not an active market for certain investments held by the Company at September 30, 2008. The Company evaluated the fair market value of such holdings using relevant and available indicators in order to determine if any of the Company's investments were "other-than-temporarily impaired". In addition, the Company consulted and followed guidance provided by the SEC Office of the Chief Accountant and FASB Staff Clarifications issued on September 30, 2008. Among factors considered by the Company that were expressly included in such guidance were the following:
• Internal assumptions such as expected cash flows were used to measure fair value when relevant market data did not exist.
• Appropriate use of broker quotes. Broker quotes are not necessarily indicative of fair value in an illiquid market.
• Consideration that disorderly transactions are not indicative of fair value.
As result of the Company's analysis it was determined that one commercial paper investment had become "other-than-temporarily impaired" in the amount of $1.6 million and was written down to its estimated fair value, with the impairment charge included in the statement of operations for the three months ended September 30, 2008.
Investment in TerreStar Networks
The Company owns 11.1% of TerreStar Networks (a consolidated subsidiary of TerreStar Corporation) that it accounts for under the cost method. The Company evaluates impairment of such investments in accordance with FSP No. 115-1/124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Accordingly, the Company considers both triggering events and tangible evidence that investments are recoverable within a reasonable period of time, as well as its intent and ability to hold investments that may have become temporarily or otherwise impaired.
On September 12, 2008, the Company entered into a Transfer and Exchange Agreement with TerreStar Corporation. Pursuant to the agreement transferees (not the Company) will have the right until May 15, 2014 to exchange shares of TerreStar Networks for shares of TerreStar Corporation common stock at an exchange ratio of 4.37 shares of TerreStar Corporation common stock per TerreStar Networks share. Upon the first such exchange, the Company has agreed that it will transfer to TerreStar 3,136,428 shares of common stock of TerreStar Global Ltd., a majority-owned subsidiary of TerreStar Corporation, without additional consideration. The Agreement also provides for SkyTerra's waiver of TerreStar Corporation's obligation in the Exchange Agreement among SkyTerra, TerreStar and Motient Ventures Holding Inc., dated May 6, 2006, to use its commercially reasonable efforts to distribute 29,926,074 shares of non-voting common stock of SkyTerra (the "SkyTerra Shares") to TerreStar Corporation's stockholders. The carrying amount of TerreStar Global Ltd., which the Company has agreed to transfer to TerreStar without additional consideration under certain circumstances noted above, is zero.
In connection with the execution of the agreement, TerreStar Corporation transferred 23,626,074 SkyTerra Shares to funds affiliated with Harbinger and 6,300,000 SkyTerra Shares to other purchasers. Pursuant to the agreement, SkyTerra entered into letter agreements with each of the transferees of these SkyTerra Shares that provide for the exchange of their SkyTerra Shares for shares of voting common stock of SkyTerra on a one-for-one basis and for the registration of such shares for resale with the SEC. On September 16, 2008, the transferees other than Harbinger exchanged an aggregate of 6,300,000 SkyTerra Shares for an equal number of shares of SkyTerra voting common stock. Harbinger's exchange in full of its SkyTerra Shares for shares of SkyTerra voting common stock is subject to the grant by the Federal Communications Commission of Harbinger's pending application to
During the three and nine months ended September 30, 2008, the observable quoted market price of TerreStar Corporation common stock decreased. The decline in TerreStar Corporation's stock price indicated there may have been a decline in the fair value of the Company's investment in TerreStar Networks.
Upon the adoption of SFAS No. 157, effective January 1, 2008, the Company evaluated the various methods under which it had previously estimated the fair value of its investment in TerreStar Networks. Based on this assessment, the Company determined that its market based valuation approach (Market Method) that utilizes observable quoted market inputs (Level 1 inputs) and observable other than quoted market inputs (Level 2 inputs), was at a higher level of the fair value hierarchy than other methods it had previously utilized. Accordingly, the Company used the Market Method to perform its assessment of impairment of the investment in TerreStar Networks at March 31, 2008, and June 30, 2008.
To perform its assessment of impairment as of September 30, 2008, the Company updated its approach in light of the Transfer and Exchange Agreement with TerreStar Corporation and the exchange ratio agreed upon that would allow exchange of TerreStar Networks shares for TerreStar Corporation shares that are publicly traded (Exchange Method). The Company believes the previously used Market Method is a lower level in the fair value hierarchy due to the Exchange Method's direct, rather than indirect, link to the publicly traded securities of TerreStar Corporation.
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