EXHIBIT 99.2
INDEX TO FINANCIAL STATEMENTS
TerreStar Networks Inc.
(A Development Stage Company)
Report of Independent Registered Public Accounting Firm T-1
Statements of Operations for the years ended December 31, 2004 and 2003,
for the period February 20, 2002 (inception) through December 31, 2002,
from February 20, 2002 (inception) through December 31, 2004, for the
three months ended March 31, 2005 (unaudited) and 2004 (unaudited) and from
February 20, 2002 (inception) through March 31, 2005 (unaudited) T-2
Balance Sheets as of December 31, 2004, 2003 and March 31, 2005 (unaudited) T-3
Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 2004 and 2003, for the period February 20, 2002 (inception)
through December 31, 2002 and from February 20, 2002 (inception) through
December 31, 2004, for the three months ended March 31, 2005 (unaudited)
and from February 20, 2002 (inception) through March 31, 2005 (unaudited) T-4
Statements of Cash Flows for the years ended December 31, 2004 and 2003,
for the period February 20, 2002 (inception) through December 31, 2002
and from February 20, 2002 (inception) through December 31, 2004, for the
three months ended March 31, 2005 (unaudited) and 2004 (unaudited) and from
February 20, 2002 (inception) through March 31, 2005 (unaudited) T-5
Notes to Financial Statements T-6
T-0
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TerreStar Networks Inc.
We have audited the accompanying balance sheets of TerreStar Networks Inc. (a
development stage company) as of December 31, 2004 and 2003 and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the years ended December 31, 2004 and 2003, for the period February
20, 2002 (inception) through December 31, 2002, and from February 20, 2002
(inception) through December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TerreStar Networks Inc. as of
December 31, 2004 and 2003 and the results of their operations and their cash
flows for the years ended December 31, 2004 and 2003, for the period February
20, 2002 (inception) through December 31, 2002 and from February 20, 2002
(inception) through December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
/s/ Friedman LLP
East Hanover, New Jersey
June 2, 2005
T-1
TerreStar Networks Inc.
(A Development Stage Company)
Statements of Operations
For the Cumulative
Period Cumulative Since
February 20, Since February 20,
For the Years Ended 2002 February 20, For the Three Months Ended 2002
---------------------------- (Inception) 2002 -------------------------- Inception of
through Inception of March 31, March 31, Development
December 31, December 31, December 31, Development 2005 2004 Stage
2004 2003 2002 Stage (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- ----------- ----------- ----------- -----------
REVENUES $ -- $ -- $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
General and administrative 6,305 6,305 1,619 14,229 1,575 1,575 15,804
Operations 1,914,317 2,306,954 1,658,306 5,879,577 1,015,576 428,301 6,895,153
Amortization 15,958 14,724 7,661 38,343 3,990 3,990 42,333
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Costs and Expenses 1,936,580 2,327,983 1,667,586 5,932,149 1,021,141 433,866 6,953,290
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Operating loss (1,936,580) (2,327,983) (1,667,586) (5,932,149) (1,021,141) (433,866) (6,953,290)
Interest income (expense) (3,016) -- -- (3,016) (128,684) -- (131,700)
Write-off of investment in
joint venture -- (2,000,000) -- (2,000,000) -- -- (2,000,000)
Other 280 -- -- 280 -- 280 280
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss $(1,939,316) $(4,327,983) $(1,667,586) $(7,934,885) $(1,149,825) $ (433,586) $(9,084,710)
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
T-2
TerreStar Networks Inc.
(A Development Stage Company)
Balance Sheets
December 31, December 31, March 31, 2005
2004 2003 (Unaudited)
------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 953,218 $ 216,320 $ 381,493
Restricted cash 5,001,151 -- 4,534,931
Other current assets 525 3,807 525
------------ ------------ ------------
Total current assets 5,954,894 220,127 4,916,949
LONG-TERM ASSETS
Intangible assets, net of amortization of
$39,252, $23,294 and $42,333 (unaudited),
respectively 200,122 216,080 196,132
Satellite under construction 1,337,932 850,000 1,837,932
------------ ------------ ------------
Total assets $ 7,492,948 $ 1,286,207 $ 6,951,013
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 109,413 $ 78,668 $ 407,963
Accrued expenses 338,431 783,820 292,486
Due to Mobile Satellite Ventures LP, net -- 3,179,913 --
------------ ------------ ------------
Total current liabilities 447,844 4,042,401 700,449
------------ ------------ ------------
LONG-TERM LIABILITIES:
Notes Payable, including accrued interest thereon 5,004,167 -- 5,166,631
------------ ------------ ------------
Total long-term liabilities 5,004,167 -- 5,166,631
------------ ------------ ------------
Total liabilities 5,452,011 4,042,401 5,867,080
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock; voting, par value $0.001; authorized 50 million
shares; 23,271,515, 23,265,428 and 23,938,487 shares issued
and outstanding at December 31, 2004 and 2003 and March 31,
2005 (unaudited), respectively 23,271 23,265 23,938
Additional paid-in capital 9,952,551 3,216,110 10,144,705
Deficit accumulated during the development stage (7,934,885) (5,995,569) (9,084,710)
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT) 2,040,937 (2,756,194) 1,083,933
------------ ------------ ------------
Total liabilities and stockholders' equity $ 7,492,948 $ 1,286,207 $ 6,951,013
============ ============ ============
The accompanying notes are an integral part of these financial statements.
T-3
TerreStar Networks Inc.
(A Development Stage Company)
Statements of Changes In Stockholders' Equity (Deficit)
Deficit
Accumulated
Common Stock Additional Through
Paid-In Development
Shares Par Value Capital Stage Total
----------- ----------- ----------- ----------- -----------
BALANCE At February 20, 2002
(inception)
Investment By MSV LP 1,000 $ 1 $ 2,999,999 $ -- $ 3,000,000
Contribution of 2GHz license
right by MSV LP 23,264,428 23,264 216,111 -- 239,375
Net loss -- -- -- (1,667,586) (1,667,586)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2002 23,265,428 23,265 3,216,110 (1,667,586) 1,571,789
Net loss -- -- -- (4,327,983) (4,327,983)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2003 23,265,428 23,265 3,216,110 (5,995,569) (2,756,194)
Conversion of amounts due
to MSV LP -- -- 6,732,186 -- 6,732,186
Exercise of stock options 6,087 6 4,255 -- 4,261
Net loss -- -- -- (1,939,316) (1,939,316)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2004 23,271,515 23,271 9,952,551 (7,934,885) 2,040,937
Exercise of warrants issued
to Telecom Venture 666,972 667 142,672 -- 143,339
Stock compensation -- -- 49,482 -- 49,482
Net loss -- -- -- (1,149,825) (1,149,825)
----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 2005
(Unaudited) 23,938,487 $ 23,938 $10,144,705 $(9,084,710) $ 1,083,933
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
T-4
TerreStar Networks Inc.
(A Development Stage Company)
Statements of Cash Flows
Cumulative
Cumulative February 20,
February 20, 2002
For the Period 2002 (Inception of
February 20, (Inception of For the For the Development
2002 Development Three Three Stage)
(inception) Stage) Months Ended Months Ended through
For the Years Ended through through March 31, March 31, March 31,
December 31, December 31, December 31, December 31, 2005 2004 2005
2004 2003 2002 2004 (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- ----------- ----------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,939,316) $(4,327,983) $(1,667,586) $(7,934,885) $(1,149,825) $(433,586) $(9,084,710)
Adjustments to reconcile
net (loss) to net cash (used in)
operating activities:
Depreciation and
amortization 15,958 14,724 7,661 38,343 3,990 3,990 42,333
Write-off of investment
in joint venture -- 2,000,000 -- 2,000,000 -- -- 2,000,000
Stock based compensation
expense -- -- -- -- 49,482 -- 49,482
Changes in assets and
liabilities, net of
acquisitions and dispositions
Accounts receivable-trade -- 1 (1) -- -- (1) --
Other current assets 3,282 (3,282) (525) (525) -- 3,282 (525)
Accounts payable and
accrued expenses (414,644) 16,650 845,838 447,844 252,605 (83,998) 700,449
Note payable accrued interest 4,167 -- -- 4,167 162,464 -- 166,631
Other -- 217 693 910 -- -- 910
----------- ----------- ----------- ----------- ----------- --------- -----------
Net cash (used in) operating
activities (2,330,553) (2,299,673) (813,920) (5,444,146) (681,284) (510,313) (6,125,430)
----------- ----------- ----------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash (5,001,151) -- -- (5,001,151) 466,220 -- (4,534,931)
Payments made in exercise of
joint venture option -- (500,000) (1,500,000) (2,000,000) -- -- (2,000,000)
Additions to satellite under
construction (400,000) (350,000) (500,000) (1,250,000) (500,000) -- (1,750,000)
----------- ----------- ----------- ----------- ----------- --------- -----------
Net cash (used in) investing
activities (5,401,151) (850,000) (2,000,000) (8,251,151) (33,780) -- (8,284,931)
----------- ----------- ----------- ----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan and
security agreement 5,000,000 -- -- 5,000,000 -- -- 5,000,000
Proceeds from due to MSV, LP 3,464,341 -- 3,000,000 6,464,341 -- 293,993 6,464,341
Proceeds from exercise of
stock option 4,261 -- -- 4,261 -- -- 4,261
Proceeds from exercise of
warrants -- -- -- -- 143,339 -- 143,339
Due to Mobile Satellite
Ventures LP, net -- 3,165,872 14,041 3,179,913 -- -- 3,179,913
----------- ----------- ----------- ----------- ----------- --------- -----------
Net cash provided by financing
activities 8,468,602 3,165,872 3,014,041 14,648,515 143,339 293,993 14,791,854
----------- ----------- ----------- ----------- ----------- --------- -----------
Net increase (decrease) in cash
and cash equivalents 736,898 16,199 200,121 953,218 (571,725) (216,320) 381,493
Cash and cash equivalents,
beginning of the period 216,320 200,121 -- -- 953,218 216,320 --
----------- ----------- ----------- ----------- ----------- --------- -----------
Cash and cash equivalents,
end of period $ 953,218 $ 216,320 $ 200,121 $ 953,218 $ 381,493 $ -- $ 381,493
=========== =========== =========== =========== =========== ========= ===========
SUPPLEMENTAL INFORMATION
Cash paid for interest $ -- $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== ========= ===========
Non-Cash Investing and Financing Activities
During 2004 the Company:
Converted $6,732,186 of amounts due to MSV, LP to equity, which
included capitalized interest of $87,932 on amounts advanced by MSV, LP
to fund the satellite under construction project.
During 2002 the Company:
Issued 23,264,428 shares of common stock to MSV, LP in exchange for
contribution of the 2GHz license right valued at $239,374 recorded as
an intangible asset.
The accompanying notes are an integral part of these financial statements.
T-5
TERRESTAR NETWORKS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 1: DEVELOPMENT STAGE AND BUSINESS
On February 20, 2002, Mobile Satellite Venture LP ("MSV") established
TerreStar Networks Inc. ("the Company", "TerreStar", "we" or "our") as a
wholly owned subsidiary. The Company is in the development stage and is
in the early stages of building the necessary communication
infrastructure, including its own satellite, necessary to offer
communications services to individual and corporate customers in the
United States and Canada. Our ability to realize the carrying value of
our assets is dependent on being able to successfully develop business
opportunities related to our right to receive (subject to the
satisfaction of certain regulatory conditions) certain licenses in the 2
GHz band. The Company's operations are subject to significant risks and
uncertainties including technological, competitive, financial,
operational, and regulatory risks associated with the mobile satellite
system and associated terrestrial segment.
On May 11, 2005, Motient Ventures Holding Inc. ("MVH"), a wholly owned
subsidiary of Motient Corporation ("Motient"), purchased 8,190,008
shares of the Company's common stock from the Company for $200 million
pursuant to a Purchase Agreement by and between MVH and the Company. As
a result of this purchase and as of May 11, 2005, Motient owns
approximately 61% of the Company's issued and outstanding common stock.
See Note 10, "Subsequent Events" in the Notes to Financial Statements
for further discussion.
The Company's future capital requirements will depend on, but not be
limited to, the successful and timely completion of its satellite system
construction contract, and the development of certain ground
infrastructure, for use in the 2 GHz band.
Note 2: SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company was incorporated under the laws of the State of Delaware on
February 20, 2002 to serve as a vehicle to develop business
opportunities related to the proposed receipt of certain licenses in the
2 GHz band. Since February 20, 2002, the Company has been in the
development stage, and has not commenced planned principal operations.
The financial statements include the accounts of the Company and are
prepared in accordance with accounting principles generally accepted in
the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
T-6
Notes to Financial Statements
Note 2: SIGNIFICANT ACCOUNTING (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments such as money market
accounts with an original maturity of three months or less.
RESTRICTED CASH
In September 2004, the Company entered into an escrow agreement to
provide for payments under its satellite construction contract (see Note
9). As of December 31, 2004, the amount in escrow was $5.0 million. If
TerreStar terminates the satellite construction contract, the escrow
funds may be returned to TerreStar, subject to the termination liability
under the contract. The cash in escrow as of December 31, 2004 is
reflected as restricted cash on the accompanying balance sheet.
SATELLITE UNDER CONSTRUCTION
Satellites are stated at cost. These costs consist primarily of the cost
of satellite construction and launch, including premiums for launch
insurance and insurance during the period of in-orbit testing, the net
present value of performance incentives expected to be payable to the
satellite manufacturers, costs directly associated with the monitoring
and support of satellite construction and interest costs incurred during
the period of satellite construction. Satellite construction and launch
services are generally procured under long-term contracts that provide
for payments by us over the contract periods. Satellite construction and
launch services costs are capitalized to reflect progress toward
completion, which typically coincides with contract milestone payment
schedules. Insurance premiums related to satellite launches and
subsequent in-orbit testing are capitalized and amortized over the lives
of the related satellites. Insurance premiums associated with in-orbit
operations are expensed as incurred. Performance incentives payable in
future periods are dependent on the continued satisfactory performance
of the satellites in service. Satellites are depreciated and amortized
on a straight-line basis over their estimated useful lives. The
depreciable lives of similar type satellites range from 11 years to 15
years. We will make estimates of the useful lives of our satellites for
depreciation and amortization purposes based upon an analysis of each
satellite's performance, including its orbital design life and its
estimated orbital maneuver life. The orbital design life of a satellite
is the length of time that the manufacturer has contractually committed
that the satellite's hardware will remain operational under normal
operating conditions. In contrast, a satellite's orbital maneuver life
is the length of time the satellite is expected to remain operational as
determined by remaining fuel levels and consumption rates. An in-orbit
satellite generally has an orbital design life ranging from 10 years to
13 years and orbital maneuver life as high as 20 years. The useful lives
of satellites generally exceed the orbital design life and less than the
orbital maneuver life. Although the orbital maneuver life of a satellite
has historically extended beyond their depreciable lives, this trend may
not continue. We will periodically review the remaining estimated useful
lives of our satellites to determine if any revisions to our estimates
are necessary based on the health of the individual satellites. Changes
in our estimate of the useful lives of our satellites could have a
material effect on our financial position or results of operations.
T-7
Notes to Financial Statements
Note 2: SIGNIFICANT ACCOUNTING (CONTINUED)
In the event any satellite is lost as a result of a launch or in-orbit
failure upon the occurrence of the loss we would take a charge to
operations for the carrying value of the satellite. In the event of a
partial failure, we would record an impairment charge to operations upon
the occurrence of the loss if the undiscounted future cash flows were
less than the carrying value of the satellite. We would measure the
impairment charge as the excess of the carrying value of the satellite
over its estimated fair value as determined by the present value of
estimated expected future cash flows using a discount rate commensurate
with the risks involved. We would reduce the charge to operations
resulting from either a complete or a partial failure by the amount of
any insurance proceeds that were either due and payable to or received
by us. We would record any insurance proceeds received in excess of the
carrying value of the satellite as a gain and no impairment loss would
be recognized. In the event the insurance proceeds equal the carrying
value of the satellite, neither a gain nor an impairment loss would be
recognized.
IMPAIRMENT OF LONG-LIVED AND AMORTIZABLE INTANGIBLE ASSETS
We review our long-lived and amortizable intangible assets to assess
whether an impairment has occurred using the guidance established under
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, whenever events or changes in circumstances indicate, in our
judgment, that the carrying amount of an asset may not be recoverable.
The recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of the asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which the
carrying amount of the asset exceeds its fair value.
As of December 31, 2004, there had been no events or changes in
circumstances leading us to believe that a possible impairment to any of
our long-lived and amortizable intangible assets existed as of that
date. In addition, no impairment charges were recorded in the year ended
December 31, 2003 or the period from February 20, 2002 (inception)
through December 31, 2002. The Company's estimates of anticipated cash
flows and the remaining estimated useful lives of long-lived assets
could be reduced significantly in the future. As a result, the carrying
amount of long-lived assets may be reduced in the future.
DEFERRED SATELLITE ORBITAL PERFORMANCE INCENTIVES
We are contractually obligated to make deferred satellite orbital
performance incentive payments over the life of the satellite, provided
the satellite continues to operate in accordance with contractual
specifications. Historically, the satellite manufacturers have earned
substantially all of these payments. Therefore, we will account for
these payments as deferred financing. Consequently, we will capitalize
the present value of these payments as part of the cost of the
satellites and record a corresponding liability to the satellite
manufacturers. These costs will be amortized over the useful lives of
the satellites and the liability is reduced as the payments are made.
T-8
Notes to Financial Statements
Note 2: SIGNIFICANT ACCOUNTING (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintained cash balances at financial
institutions that exceeded federally insured limits as of December 31,
2004. The Company maintains its cash and cash equivalents at
high-credit-quality institutions, and as a result, management believes
that credit risk related to its cash is not significant.
CAPITALIZED INTEREST
The Company's policy is to capitalize interest on expenditures for
satellite under construction projects while such activities are in
progress to bring the satellites to their intended use. Capitalized
interest included in Satellite Under Construction was $87,932 and $0 at
December 31, 2004 and 2003, respectively.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans using the fair value method. The Company has
chosen to account for employee stock-based compensation using the
intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its
related interpretations.
The following illustrates the effect on net loss if the Company had
applied the fair value method of SFAS No. 123:
For the Period
February 20,
2002 For the three months ended
(Inception) --------------------------
For the year ended through March 31, March 31,
December 31 December 31, 2005 2004
2004 2003 2002 (unaudited) (unaudited)
---------- ---------- ---------- ---------- ----------
Net loss, as reported $1,939,316 $4,327,983 $1,667,586 $1,149,825 $ 433,586
Subtract stock-based employee compensation
included in reported net loss -- -- -- (49,482) --
Additional stock-based employee compensation
expense determined under fair value method 63,626 60,531 18,311 50,578 15,906
---------- ---------- ---------- ---------- ----------
Pro forma net loss $2,002,942 $4,388,514 $1,685,897 $1,150,921 $ 449,492
In accordance with SFAS No. 123, the fair value of the options granted
was estimated at the grant date using an option-pricing model with the
following weighted-average assumptions: risk-free interest rates ranging
from 2.7% to 4.6%, no dividends, expected life of the options of five
years, and no volatility.
T-9
Notes to Financial Statements
Note 2: SIGNIFICANT ACCOUNTING (CONTINUED)
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the difference between the financial
statement and income tax basis of assets and liabilities using the
enacted tax rate. SFAS No. 109 requires that the net deferred tax asset
be reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the net
deferred tax asset will not be realized.
REVENUE RECOGNITION
We will recognize revenue primarily from satellite utilization charges
and, to a lesser extent, from providing managed services to our
customers. We will recognize revenue over the period during which
services are provided, as long as collection of the related receivable
is reasonably assured. We will make estimates regarding the likelihood
of collection based upon an evaluation of the customer's
creditworthiness, the customer's payment history and other conditions or
circumstances that may affect the likelihood of payment, such as
political and economic conditions in the country in which the customer
is located. When we have determined that the collection of payments for
satellite utilization or managed services is not reasonably assured at
the time the service is provided, we will defer recognition of the
revenue until such time that collection is believed to be reasonably
assured or the payment is received. We will also maintain an allowance
for doubtful accounts for customers' receivables where the collection of
these receivables is uncertain. If our estimate of the likelihood of
collection is not accurate, we may experience lower revenue or an
increase in our bad debt expense. Upon receipt of payments from
customers in advance of our providing services and amounts that might be
received from customers pursuant to satellite capacity prepayment
options will be recorded in the financial statements as deferred
revenue. These deferred amounts will be recognized as revenue on a
straight-line basis over the agreement terms. Our revenue recognition
policy as described above complies with the criteria set forth in Staff
Accounting Bulletin No. 101, Revenue Recognition, as amended by Staff
Accounting Bulletin No. 104.
COMPREHENSIVE INCOME (LOSS)
The Company has no components of other comprehensive income.
Accordingly, net income equals comprehensive income for all periods.
T-10
Notes to Financial Statements
Note 2: SIGNIFICANT ACCOUNTING (CONTINUED)
RECENT PRONOUNCEMENTS
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN),
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51, which requires the consolidation of
an entity in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership or contractual or other
financial interests in the entity. Generally, an entity is generally
consolidated by an enterprise when the enterprise has a controlling
financial interest in the entity through ownership of a majority voting
interest in the entity. The Company is currently evaluating the impact
of adoption of FIN 46. Adoption of this standard will be required for
the first annual period beginning after December 15, 2004.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which is a revision of SFAS No. 123, supersedes APB Opinion No. 25, and
amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in
SFAS No. 123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no
longer an alternative. The new standard will be effective for the
Company for the year ending December 31, 2006. The impact of the
adoption of SFAS No. 123(R) cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS No. 123(R) in prior periods, the impact of
that standard would have approximated the impact of SFAS No. 123 as
described in the disclosure of pro forma net loss.
Note 3: INTANGIBLE ASSETS
The Company's identifiable intangible assets consist of the Company's
right to receive the 2GHz FCC and Industry Canada spectrum
authorizations of TMI Communications and Company, which is obligated to
transfer these authorizations to any entity that the Company may
designate, subject to the receipt of regulatory (FCC and Industry
Canada) approvals, which may never be obtained.
December 31
2004 2003
---------------------
2 GHz License rights $ 239,374 $ 239,374
---------------------
Accumulated amortization 39,252 23,294
---------------------
Intangible assets, net $ 200,122 $ 216,080
=====================
T-11
Notes to Financial Statements
Note 4: LONG-TERM DEBT
On December 27, 2004 the Company and MSV consummated a Loan and Security
Agreement. Under the terms of the Loan Agreement, which matures on
December 27, 2008, the Company can borrow up to $15,000,000, and use the
proceeds of such loans to make milestone payments under the Company's
satellite construction contract and for certain other purposes, as
defined in the Loan Agreement. Each loan accrues and bears interest from
the closing date, as defined in the Loan Agreement, until paid in full
at a rate of 10% per annum. Commencing on December 27, 2008, the Company
is to pay the principal of, and all accrued interest on, each loan that
is outstanding in 36 monthly installments. As of December 31, 2004, the
Company had borrowed $5,000,000 and had $10,000,000 available to it
under the Loan Agreement. The Loan Agreement provides for, among other
things, the Company's requirement to meet certain affirmative and
negative covenants. See Note 10 "Subsequent Events", in the Notes to
Financial Statements for information regarding cancellation of the Loan
Agreement.
Note 5: STATEMENT OF OPERATIONS DETAILS
General and administrative expenses consisted of the following:
Rent expense of $6,305, $6,305, and $1,619 for the 2004, 2003, and 2002
operating years, respectively. TerreStar has incurred cumulative rent
expense of $14,229 since inception on February 20, 2002 through December
31, 2004.
Operations expense consisted of the following:
For the period Cumulative since
February 20, 2002 February 20,2002
For the Years Ended (inception) through (inception) of
2004 2003 December 31, 2002 Development Stage
------------------------------------------------------------------
Salaries & Wages $ 397,321 $ 418,039 $ 360,046 $ 1,175,406
Bonuses 173,590 195,000 250,000 618,590
Consultants 650,983 670,499 480,431 1,801,913
Legal Expenses 654,912 950,542 509,358 2,114,812
Regulatory Expenses -- 52,018 7,386 59,404
Other 37,511 20,856 51,085 109,452
------------------------------------------------------------------
$1,914,317 $2,306,954 $ 1,658,306 $ 5,879,577
------------------------------------------------------------------
T-12
Notes to Financial Statements
Note 6: 2002 TERRESTAR STOCK INCENTIVE PLAN
TERRESTAR OPTION PLAN
In July 2002, the Board of Directors of TerreStar approved the 2002 TerreStar
Stock Incentive Plan. Options to acquire shares generally vest over a 3-year
period, and the options to acquire shares have a 10-year life. At December 31,
2003 and 2004, and March 31, 2005 (unaudited), 568,304, 1,157,664, and 1,338,044
(unaudited) options, respectively, were exercisable. At December 31, 2003 and
2004 and March 31, 2005 (unaudited), the weighted-average remaining contractual
life for outstanding options was 8.6, 8.0, and 8.52 (unaudited) years,
respectively. The weighted-average fair value of options granted during the
periods ended December 31, 2002, 2003, and 2004 was $.10, $.10, and $0.00 per
unit, respectively. The weighted-average value of shares granted during the
three-month periods ended March 31, 2004 and 2005 (unaudited), was $0.00 and
$1.42, respectively (unaudited). During 2004, the Company promised to grant
208,277 options with an exercise price of $.70 during 2005 to certain executives
of the Company, of which 146,200 were granted in March 2005 (unaudited).
As part of the TerreStar Rights transaction (see Note 9), the Board of Directors
of TerreStar authorized a grant of additional options to employee option holders
of record at December 20, 2004, of approximately 50% of the options outstanding
on that date, which were granted in February 2005. The Company recognized the
cash received of $4,261 during 2004 for the options exercised as minority
interest. During the three-month period ended March 31, 2005, the Company
granted options with exercise prices at less than the estimated fair market
value of the related TerreStar stock on the options' grant date resulting in
stock based compensation of $1,971,412 which will be amortized over the options'
vesting period of 36 months. For the three-month period ended March 31, 2005
(unaudited), the Company recognized compensation expense of $49,481 in the
accompanying statement of operations.
The following summarizes activity in the TerreStar Option Plan:
WEIGHTED-AVERAGE
OPTIONS TO EXERCISE PRICE
ACQUIRE SHARES PER SHARE
-------------------------------------
Options outstanding at December 31, 2001 - $ -
Granted 1,762,567 0.70
-------------------------------------
Options outstanding at December 31, 2002 1,762,567 0.70
Granted 138,773 0.70
Canceled (39,803) 0.70
-------------------------------------
Options outstanding at December 31, 2003 1,861,537 0.70
Granted 535,278 0.66
Canceled (18,990) 0.70
Exercised (6,086) 0.70
-------------------------------------
Options outstanding at December 31, 2004 2,371,739 0.69
Granted (unaudited) 1,398,264 0.27
Canceled (unaudited) (8,277) 0.70
-------------------------------------
Options outstanding at March 31, 2005 (unaudited) 3,761,726 $ 0.54
=====================================
T-13
Notes to Financial Statements
Note 7: RELATED PARTY TRANSACTIONS
During the years ended December 31, 2003, and 2004 the Company received
$3,165,873 and $3,552,274, respectively, of cash and services provided
by its parent company, Mobile Satellite Ventures, LP. The amounts
received by the Company were converted into equity in December 2004.
Please also see Note 4, "Long Term Debt", for information regarding the
Company's Loan and Security Agreement with MSV.
Note 8: INCOME TAXES
There was no income tax benefit reported for the years ended December
31, 2004 and 2003, for the period February 20, 2002 (inception) through
December 31, 2002 and for the period February 20, 2002 (inception)
through December 31, 2004. Due to the Company's history of net operating
losses ("NOLs") since inception, and the uncertainties that affect the
ultimate resolution of the $3,173,954 and $2,398,228 deferred tax asset
arising from such NOLs for the year ended December 31, 2004 and 2003
respectively, the Company recorded a 100% valuation allowance applicable
to such Deferred Tax Asset. The Company will periodically review the
realizability of the deferred tax asset and adjust the related valuation
allowance as needed.
Note 9: COMMITMENTS AND CONTINGENCIES
LEASES
As of December 31, 2004, the Company has no non-cancelable operating
leases. Rental expense, net of sublease income, for the years ended
December 31, 2004 and 2003, for the period February 20, 2002 (inception)
through December 31, 2002 and for the period February 20, 2002
(inception) through December 31, 2004 was $6,305, $6,305, $1,619 and
$14,229, respectively.
LITIGATION AND CLAIMS
The Company is periodically a party to lawsuits and claims in the normal
course of business. While the outcome of the lawsuits and claims against
the Company cannot be predicted with certainty, management believes that
the ultimate resolution of the matters will not have a material adverse
effect on the financial position or results of operations of the
Company.
CONTINGENCIES
From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The
Company recognizes a liability for these contingencies when it is
probable that future expenditures will be made and such expenditures can
be reasonably estimated.
JOINT VENTURE OPTION
During 2002, TerreStar acquired an option to establish a joint venture
with a third party to develop certain opportunities in the 2 GHz band.
The FCC licensed the third party to construct, launch, and operate a
communications system consisting of two geostationary satellites in the
2 GHz band, a communications network, and user terminals. Consideration
for the option consisted of nonrefundable payments made by TerreStar of
$1.0 million during 2002 and $500,000 during 2003. In January 2003,
TerreStar exercised its option to form the joint venture. Under the
terms of the memorandum of agreement, TerreStar contributed an
additional $500,000 to the joint venture upon signing of the joint
venture agreements. However, as a result of the February 2003 FCC order
canceling TMI's 2 GHz license described above, in July 2003 TerreStar
and the third party mutually agreed to terminate the option agreement
and the joint venture and any remaining obligations or liabilities
related to these agreements. As a result, TerreStar wrote off its $2.0
million investment in the joint venture during the year ended December
31, 2003.
SATELLITE CONSTRUCTION CONTRACT
During 2002 and in connection with its contractual obligations to TMI,
TerreStar entered into a contract to purchase a satellite system,
including certain ground infrastructure for use with the 2 GHz band.
TerreStar continues to make payments according to a milestone payment
plan. TerreStar made payments of $500,000 and $350,000 during the years
ended December 31, 2002 and 2003, respectively.
T-14
Notes to Financial Statements
Note 9: COMMITMENTS AND CONTINGENCIES (CONTINUED)
SATELLITE CONSTRUCTION CONTRACT (CONTINUED)
Following the reinstatement of the TMI license in July 2004, the
contract was amended resulting in a reduced milestone payment plan.
TerreStar made payments of $400,000 during the year ended December 31,
2004 related to this contract. Such payments have been capitalized as
satellite under construction in property and equipment in the
accompanying balance sheets. The satellite manufacturer may also be
entitled to certain incentive payments based upon the performance of the
satellite once in operation. If TerreStar terminates the contract, the
manufacturer shall be entitled to payment of a termination liability as
prescribed in the contract. Beginning in 2005, the termination liability
will be equal to amounts that would have otherwise been due on
milestones scheduled within 30 days following notice of termination by
TerreStar. The satellite represents one component of a communications
system that would include ground-switching infrastructure, launch costs,
and insurance. Total cost of this system could exceed $500 million. In
order to finance future payments, TerreStar will be required to obtain
additional debt or equity financing, or may enter into various joint
ventures to share the cost of development. There can be no assurance
that such financing or joint venture opportunities will be available to
TerreStar or available on terms acceptable to TerreStar.
TERRESTAR RIGHTS TRANSACTION
On December 20, 2004, MSV issued rights (the Rights) to receive an
aggregate of 23,265,428 shares of common stock of the Company
representing all of the shares of TerreStar common stock (the TerreStar
Stock), owned by MSV, to the limited partners of MSV, pro rata in
accordance with each limited partner's percentage ownership in MSV. The
Rights will be exchanged into shares of TerreStar Stock automatically in
May 2005. In addition, in connection with this transaction, TerreStar
issued warrants to purchase an aggregate of 666,972 shares of TerreStar
Stock to one of MSV's limited partners. The Warrants have an exercise
price of $0.21491 per share and may be exercised until the second
anniversary of the date of their issuance. Please See Note 10,
"Subsequent Events", for additional information.
Concurrent with these transactions, the Company's Board of Directors
authorized a grant of additional options to employee option holders of
record at December 20, 2004 of approximately 50% of the options
outstanding on that date, which were granted in February 2005.
Note 10: SUBSEQUENT EVENTS
On May 11, 2005, Motient Ventures Holding Inc. ("MVH"), a wholly owned
subsidiary of Motient Corporation ("Motient"), purchased 8,190,008
shares of the Company's common stock from the Company for $200 million
pursuant to a Purchase Agreement by and between MVH and the Company.
$8.7 million of this investment was used to repay amounts outstanding
under the Loan Agreement between MSV and TerreStar. The Loan Agreement
was terminated at the closing of this transaction. As a result of this
purchase and as of May 11, 2005, Motient owns approximately 61% of the
Company's issued and outstanding common stock.
T-15
Notes to Financial Statements
Note 10: SUBSEQUENT EVENTS (CONTINUED)
On May 11, 2005, TerreStar was spun-off by MSV to its limited partners
and, in connection with that spin-off, Motient acquired ownership of
approximately 49% of the issued and outstanding shares of capital stock
of TerreStar. The subsequent stock purchase increased Motient's
ownership to its current 61% level.
Following this acquisition, Christopher Downie, Motient's Executive Vice
President and Chief Operating Officer, and Jared E. Abbruzzese and Shawn
O'Donnell of CTA, Motient's Chief Restructuring Entity, will be among
the seven members of the Board of Directors of TerreStar.
In February and March 2005, TerreStar, pursuant to the 2002 TerreStar
Stock Incentive Plan (the "Plan"), granted options to purchase
approximately 1.4 million shares of its common stock at a price of $0.21
per share to employees of TerreStar and MSV. These option grants were
initially authorized by the TerreStar board of directors in conjunction
with the December 20, 2004 TerreStar rights issuance. These options
generally provide for vesting over three years, and expire ten years
from the date of grant.
The May 11, 2005 spin-off of TerreStar by MSV resulted in a change of
control under the terms of options issued pursuant to the Plan.
Accordingly, such options vested on that date, pursuant to their terms.
However, holders of approximately 85% of the 1.4 million options granted
in February and March 2005 agreed to waive the immediate vesting of
their options, and therefore those options will generally vest according
to the three year vesting schedule provided for in the option grant.
In February 2005, the warrants to purchase 666,972 shares of TerreStar
common stock, issued in connection with the December 2004 rights
issuance, were exercised by their holder.
T-16