S-1/A 1 ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 2006

REGISTRATION NO. 333-130136


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


AMENDMENT NO. 4 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


Hughes Communications, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware   4899   13-3871202

(State or Other Jurisdiction of

Organization or Incorporation)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

11717 Exploration Lane

Germantown, Maryland 20876

(301) 428-5500

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)


Dean A. Manson

Vice President, General Counsel and Secretary

Hughes Communications, Inc.

11717 Exploration Lane

Germantown, Maryland 20876

(301) 428-5500

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)


With copies to:

Gregory A. Fernicola, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036-6522

(212) 735-3000


Approximate Date of Commencement of Proposed Sale to the Public:  As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  x

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.   ¨


The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to the said Section 8(a), may determine.



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EXPLANATORY NOTE

 

This registration statement contains an information statement/prospectus relating to the distribution of our common stock by SkyTerra Communications, Inc. in a spin-off transaction to certain of its security holders (the “Distribution Information Statement/Prospectus”), together with a separate prospectus relating to a concurrent rights offering by us (the “Rights Offering Prospectus”). The complete Distribution Information Statement/Prospectus follows immediately. Following the Distribution Information Statement/Prospectus are alternate pages for the Rights Offering Prospectus, including:

 

    the front and back cover pages;

 

    pages for the “Summary” section, summarizing the rights offering;

 

    pages containing questions and answers about the rights offering;

 

    pages containing risk factors applicable only to the rights offering;

 

    a section containing information regarding the use of the proceeds of the rights offering;

 

    a section containing information regarding the dilution caused by the rights offering;

 

    pages containing a description of the rights offering; and

 

    pages describing material U.S. federal income tax consequences of the rights offering.

 

Complete and separate copies of the final versions of each of the Distribution Information Statement/Prospectus and the Rights Offering Prospectus will be filed with the Securities and Exchange Commission in accordance with Rule 424 under the Securities Act of 1933.

 

The distribution of our common stock to the public stockholders of SkyTerra Communications, Inc. is being registered under the Securities Act of 1933. The Distribution Information Statement/Prospectus is also being delivered to our controlling stockholders affiliated with Apollo Advisors IV L.P. who own, in addition to common stock of SkyTerra Communications, Inc., preferred stock and warrants which contain contractual provisions that entitle them to receive shares in the distribution to the common stockholders of SkyTerra Communications, Inc.


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The information in this information statement/prospectus is not complete and may be changed. We may not distribute these securities until the registration statement filed with the Securities and Exchange Commission is effective. This information statement/prospectus is not an offer to sell these securities and it is not an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated February 10, 2006

 

INFORMATION STATEMENT/PROSPECTUS

 

10,596,792 Shares

 

Hughes Communications, Inc.

 

Common Stock

 


 

SkyTerra Communications, Inc., or SkyTerra, a Delaware corporation, is distributing at no charge to holders of shares of its common stock, non-voting common stock, preferred stock and Series 1-A and 2-A warrants all of our outstanding shares of common stock in a spin-off transaction.

 

All of the shares of our common stock held by SkyTerra immediately prior to the distribution will be distributed to SkyTerra’s holders of record as of the close of business on February 13, 2006. Each holder will receive one-half of one share of our common stock for every share of SkyTerra common or non-voting common stock held on the record date (or, in the case of the warrants and preferred stock, in accordance with their terms, one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise thereof as of the record date). The distribution will occur at 5:00 p.m., New York City time, on ·, 2006. SkyTerra stockholders and warrant holders will not be required to pay for the shares of our common stock received in the distribution, or to surrender or exchange SkyTerra stock or warrants in order to receive our common stock in the distribution.

 

Prior to the distribution, there has been no public market for our common stock. Following the distribution, our common stock will be traded in the over-the-counter market and will be quoted on the OTC Bulletin Board.

 


 

For a discussion of certain factors that should be considered by recipients of our common stock, see “ Risk Factors” beginning on page 16.

 


 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this information statement/prospectus. Any representation to the contrary is a criminal offense.

 


 

The date of this information statement/prospectus is                     , 2006


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TABLE OF CONTENTS

 

Summary

   1

Questions and Answers About the Distribution

   13

Risk Factors

   16

Special Note Regarding Forward-Looking Statements

   32

The HNS Acquisition

   33

Dividend Policy

   34

Capitalization of Hughes Communications (Accounting Successor to SkyTerra)

   35

Selected Historical Consolidated Financial Data of SkyTerra (Accounting Predecessor to Hughes Communications)

   36

Pro Forma Condensed Consolidated Financial Statements of Hughes Communications (Accounting Successor to SkyTerra)

   39

Management’s Discussion and Analysis of Financial Condition and Results of Operations of SkyTerra (Accounting Predecessor to Hughes Communications)

   48

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Hughes Networks Systems

   66

The Distribution

   93

The Rights Offering

   96

Business

   97

Management

   123

Director and Executive Compensation

   126

Security Ownership of Certain Beneficial Owners and Management

   136

Certain Relationships and Related Party Transactions

   139

Description of Capital Stock

   145

Shares Eligible for Future Sale

   149

Material U.S. Federal Income Tax Consequences

   150

Legal Matters

   151

Experts

   151

Where You Can Find More Information

   151

Glossary

   152

Index to Financial Statements

   F-1

 

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SUMMARY

 

This summary highlights information contained elsewhere in this document. You should read this entire document carefully, including the section entitled “Risk Factors” and our financial statements and the related notes included elsewhere in this document. Unless otherwise indicated or the context requires otherwise, the terms “Hughes Communications”, the “Company,” “we,” “us” and “our” refer to Hughes Communications, Inc., formerly known as SkyTerra Holdings, Inc., together with its subsidiaries.

 

Overview

 

We operate our business principally through Hughes Network Systems, LLC, or HNS, which is a leading provider of advanced satellite based networks and services for businesses, governments and consumers.

 

We were formed as a wholly owned subsidiary of SkyTerra Communications, Inc., or SkyTerra, in 2005. At the time, in addition to owning 50% of the voting, or Class A, membership interests of HNS and serving as its managing member, SkyTerra operated through Electronic System Products, Inc., or ESP, formerly a product development and engineering services firm, now focused on maximizing the license revenues from its existing intellectual property portfolio; AfriHUB LLC, or AfriHUB, which provides a limited amount of satellite based Internet services through exclusive partnerships with certain Nigerian based universities while also providing technical training in the Nigerian market; and the Mobile Satellite Ventures, LP, or the MSV Joint Venture, a joint venture which provides mobile digital voice and data communications via satellite. On December 31, 2005, pursuant to a separation agreement, SkyTerra contributed to us:

 

    its interests in HNS and we became HNS’ managing member;

 

    its interests in ESP, AfriHUB and certain minority investments including Edmund Holdings, Inc. and Data Synapse, Inc.; and

 

    cash and short-term investments.

 

See “Certain Relationships and Related Party Transactions—Separation Agreement.”

 

SkyTerra retained its interest in the MSV Joint Venture, its stake in TerreStar Networks, Inc., or TerreStar, and $12.5 million in cash, the balance of which will be transferred to us upon a change of control of SkyTerra.

 

On January 1, 2006, we consummated the purchase, or HNS Acquisition, from DTV Network Systems, Inc., or DTV Networks, a subsidiary of the DIRECTV Group, Inc., or DIRECTV, of the remaining Class A membership interests of HNS for a purchase price of $100.0 million. As a result of the HNS Acquisition, we now own 100% of the Class A membership interests of HNS. The HNS Acquisition was funded by a loan from certain of SkyTerra’s controlling stockholders, various investment vehicles that are affiliated with Apollo Advisors IV L.P., or the Apollo Stockholders. See “—Apollo Loan” and “The HNS Acquisition.”

 

The distribution is the method by which SkyTerra and Hughes Communications will be separated into two publicly owned companies. SkyTerra currently owns all of the outstanding shares of our common stock and is distributing those shares to its common, non-voting common and preferred stockholders and its Series 1-A and 2-A warrant holders. Following the distribution, SkyTerra will own no shares of our capital stock. We will be a separate publicly owned company operating the businesses transferred to us under the separation agreement. See “The Distribution.” Although SkyTerra will not own any of our capital stock following the distribution, SkyTerra’s controlling stockholders, the Apollo Stockholders, also will be our controlling stockholders. See “Risk Factors—The Apollo Stockholders will beneficially own a majority of our voting stock.”

 

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LOGO

LOGO

 

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Our Business

 

The management and administration of HNS is our principal business. HNS is the world’s leading provider of satellite-based communications networks and services to both the enterprise and consumer markets. According to the 2005 annual VSAT industry report prepared by Communications Systems Limited, or COMSYS, HNS had a worldwide market share of 55% in 2004 based on the number of terminals shipped. HNS’ invention of small satellite dishes, generally 1.8 meters or less wide, commonly known as very small aperture terminals, or VSATs, over 20 years ago enabled it to provide large enterprises highly reliable, end-to-end communications with guaranteed quality of service regardless of the number of sites or their geographic location. HNS’ networks are used for a variety of applications such as Intranet and Internet access, voice services, connectivity to suppliers, franchisees and customers, credit authorization, inventory management, content delivery and video distribution. HNS often customizes the applications for particular markets. HNS currently serves more than 200 large companies, many of them in the Fortune 1000, mainly in businesses which have numerous widely dispersed operating units, for example gas service stations, automotive dealerships and retailers. HNS has leveraged its experience with such customers and adapted its technologies to expand into other growing market segments such as smaller companies, other business users and residential. HNS is currently the largest satellite broadband Internet access provider to consumers in North America, with approximately 216,000 subscribers as of September 30, 2005.

 

HNS is a leading satellite network provider for enterprises that require consistent, high-quality broadband connectivity across every site, regardless of location. HNS provides large enterprises globally with a complete turnkey solution, both hardware and communications service. In the expanding small business and small office/home office markets, HNS distinguishes itself by packaging services normally reserved for large enterprises into a comprehensive solution. We believe that HNS’ solutions are consistently more reliable and cost-effective over time across a range of enterprise applications compared with terrestrial alternatives. The combination of HNS’ market position, record of technological leadership and innovation, and the contractual nature of its business and history of high renewal rates gives us high revenue visibility. As of September 30, 2005, HNS had a revenue backlog of approximately $489.3 million (which we define as our expected future revenue under HNS’ customer contracts that are non-cancelable).

 

As part of its continuous drive for less costly and more efficient technological solutions, HNS plans to launch its next-generation SPACEWAY satellite in late 2006 or early 2007 and introduce service in North America on SPACEWAY’s network in 2007. With SPACEWAY, HNS will be able to offer faster communication rates and reduce its operating costs substantially. HNS intends to leverage SPACEWAY’s increased communication rates and enhanced functionality to grow its market penetration in the rapidly expanding North American small business and small office/home office markets, which have historically been serviced by terrestrial alternatives, to further increase its subscriber base. By owning its own satellite, HNS will reduce its need to lease third party satellite transponder capacity, thereby reducing costs as new and renewing customers migrate onto its SPACEWAY satellite.

 

HNS’ VSAT Market

 

Historically, HNS’ market was built on the need of large enterprises for low-cost data communication over geographically dispersed sites with mission critical reliability standards, with particular applications such as inventory control and credit card authorizations. HNS’ market has grown as hardware and service costs have declined and Internet use has expanded. Today, HNS’ market extends from the largest enterprises to smaller businesses and individual consumers.

 

Enterprise. HNS’ Enterprise market consists of large enterprises, small businesses and small office/home office customers. Many large enterprise customers in HNS’ North American Enterprise business are Fortune

 

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1000 companies with geographically dispersed operations that need to be interconnected. Representative customers include Wal-Mart Stores, Inc., ExxonMobil Corporation, Shell, Chevron Corporation, Volkswagen AG and Tesco Stores Limited, who collectively accounted for approximately 6% of HNS’ 2004 revenues. HNS’ typical small business customers tend to have between one and 100 sites while its small office/home office customers typically have one or several sites.

 

Consumer. HNS’ VSAT Consumer market consists of consumers in North America who desire high-speed Internet access but typically are not served by either DSL or cable. Northern Sky Research estimated that there were approximately 12 million households in North America with no DSL or cable coverage at the end of 2003. As of September 30, 2005, HNS had approximately 216,000 satellite broadband Internet access consumer subscribers.

 

HNS’ Other Markets

 

HNS has further leveraged its existing VSAT technology expertise to develop communications equipment for other end markets. HNS is able to serve these markets efficiently as it shares with its core VSAT business common infrastructure such as engineering and research and development.

 

Mobile Satellite. This market consists of various operators who offer mobile satellite-based voice and data services. HNS develops and supplies turnkey networking and terminal systems to these operators, typically through large multi-year contracts. Representative customers include Thuraya, Inmarsat and ICO, who collectively accounted for approximately 9% of HNS’ 2004 revenues.

 

Carrier Networks. This market consists of cellular mobile operators and alternative telecommunications providers otherwise known as emerging competitive local exchange carriers, or CLECs. HNS supplies microwave-based networking equipment to cellular mobile operators for transporting their data from cellular telephone sites to switching centers. Representative customers include Nokia, T-Mobile and XO Communications, who collectively accounted for approximately 1% of HNS’ 2004 revenues.

 

HNS’ Services and Products

 

HNS provides a variety of satellite-based network equipment, systems and broadband services. In its principal market of North America, HNS typically provides a bundled offering of hardware and communication services so that its revenue is derived from both periodic hardware sales and recurring monthly service fees. In other parts of the world, HNS may provide either the bundled service or hardware only.

 

Services. HNS’ service revenue is derived from the provision of a variety of VSAT services and network solutions as follows:

 

    two-way, always-on, high-speed Internet access;

 

    virtual private networks, or VPNs, that provide highly secure, remote network solutions that support point-of-sale transactions and inventory management applications;

 

    the delivery of high-quality, fullscreen, full-motion video and audio;

 

    hosted applications including online payments, online learning, and internet telephony; and

 

    satellite backup for terrestrial networks.

 

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HNS differentiates itself by providing a one-stop turnkey suite of these bundled services that include network design, implementation planning, terrestrial backhaul provisioning, rollout and installation, ongoing network operations, help desk and onsite maintenance. Network services also include program management, installation management, network and application engineering services, network operations, field maintenance and customer care.

 

Network equipment. HNS’ hardware revenue is derived from the sale or lease of VSAT equipment, consisting of terminals and other hardware. In 2004, HNS shipped approximately 193,000 VSAT terminals globally, supplied equipment for 25 new central hub sites and generated $401.8 million in total hardware sales. This hardware is either sold under separate equipment supply contracts where customers are responsible for operating their networks, or is packaged into services contracts where the customer pays a recurring fee for a fixed term for use of HNS’ hardware and for its network services. In 2004, approximately 51% of HNS’ equipment sales were bundled with a services contract.

 

Separation Agreement

 

In preparation for the distribution, on December 31, 2005, SkyTerra contributed to us, pursuant to a separation agreement, all of its assets and liabilities other than those associated with the MSV Joint Venture and Terrestar. Included in the transfer were the membership interests in HNS owned by it at that time, its interests in ESP, AfriHUB, the minority investments referred to above and all of its cash excluding $12.5 million. See “Certain Relationships and Related Party Transactions—Separation Agreement.”

 

The HNS Acquisition

 

On January 1, 2006, we consummated the purchase from DTV Networks of the remaining voting, or Class A, membership interests of HNS that were not contributed to us by SkyTerra under the separation agreement for a purchase price of $100.0 million. As a result of this acquisition, we now own 100% of the Class A membership interests of HNS.

 

Apollo Loan

 

On January 1, 2006, in order to fund the HNS Acquisition, we borrowed $100.0 million from certain of the Apollo Stockholders. The loan bears interest at a rate of 8% per annum and has a final maturity date of January 1, 2007. Pursuant to the note purchase agreement governing the terms of the loan, following the distribution, we are required to use our best efforts to consummate the rights offering described below. The Apollo Stockholders that are party to the loan have agreed to exercise their rights (including their over-subscription privileges) to purchase all of the shares of common stock allocated to them, as well as those not subscribed for by other stockholders, in the rights offering, up to the total unpaid principal and interest on the loan. The portion of the loan necessary to purchase all of the shares allocated to such Apollo Stockholders will automatically convert into common stock in the rights offering based on the rights offering subscription price. See “—The Rights Offering.” The principal and interest under the loan that is not converted in the rights offering will be repaid in cash from proceeds from the rights offering. The loan is secured by a security interest in the cash proceeds of the rights offering that we receive from stockholders other than the Apollo Stockholders.

 

The Rights Offering

 

Immediately following the distribution by SkyTerra of our common stock in the spin-off, we are distributing at no charge to the holders of our common stock non-transferable subscription rights to purchase up to an aggregate of 7,843,141 shares of our common stock at a cash subscription price to be set by our board of

 

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directors. We currently expect the price to be set at $12.75 per share and we have assumed this to be the price for the purposes of this document. The rights offering is being made to raise equity in order to repay the loan from the Apollo Stockholders in connection with the HNS Acquisition. The Apollo Stockholders have agreed to exercise their rights (including their over-subscription privileges) so that they purchase all of the shares allocated to them, as well as those not subscribed for by other stockholders, in the rights offering, up to the maximum amount of the loan, plus accrued and unpaid interest. The portion of the loan necessary to purchase all of the shares allocated to such Apollo Stockholders will automatically convert into common stock in the rights offering based on the rights offering subscription price. Therefore, we are assured of selling all 7,843,141 shares and receiving gross proceeds of $100.0 million. Immediately following the distribution and prior to the rights offering, the Apollo Stockholders will beneficially own approximately 67% of our outstanding common stock. If no other stockholders exercise their subscription rights in the rights offering, after giving effect to the Apollo Stockholders’ exercise of their over-subscription privilege pursuant to the purchase agreement governing the terms of the loan, the Apollo Stockholders will beneficially own approximately 81% of our outstanding common stock following the rights offering. If all subscription rights holders fully exercise their subscription rights in the rights offering, the Apollo Stockholders’ will beneficially own approximately 67% of our outstanding common stock following the rights offering.

 

Risk Factors

 

Our business, operations and financial condition are subject to various risks and uncertainties. Holders of our common stock should carefully consider the following, as well as the more detailed discussion of risk factors and other information included herein:

 

    the network communications industry is highly competitive and regulated, and we and HNS may be unsuccessful in competing effectively against other terrestrial and satellite-based network providers or comply with all applicable regulations;

 

    the failure to adequately anticipate HNS’ need for satellite capacity or HNS’ inability to obtain satellite capacity could harm its results of operations;

 

    HNS’ failure to successfully launch its SPACEWAY satellite in late 2006 or early 2007 and implement related services would result in HNS not realizing the anticipated benefits from SPACEWAY and HNS’ financial condition and results of operations would be adversely affected;

 

    HNS and SkyTerra each have a history of operating losses;

 

    HNS is highly leveraged, with total indebtedness of approximately $383.2 million as of September 30, 2005;

 

    HNS’ failure to comply with applicable export controls, including the International Traffic in Arms Regulations, or with the terms of applicable consent agreements resulting from prior violations thereof, could result in further monetary penalties, a suspension or revocation of HNS’ export privileges, or other negative consequences; and

 

    we will have obligations to SkyTerra pursuant to the separation agreement.

 

Corporate Information

 

We were formed as a Delaware corporation in June 2005 under the name SkyTerra HNS Holdings, Inc. Our principal executive offices are located at 11717 Exploration Lane, Germantown, Maryland 20876. Our telephone number is (301) 428-5500.

 

Our website is www.hughes.com. Information contained on our website is not incorporated by reference herein, and you should not consider information contained on our website as part of this document.

 

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The Distribution

 

Distributing Company

SkyTerra Communications, Inc. Immediately after the distribution, SkyTerra will own no shares of our capital stock. We will operate as a separate publicly owned corporation.

 

Common Stock to be Distributed

Approximately 10,596,792 shares of our common stock, based on the number of shares of common stock, shares of non-voting common stock, shares of preferred stock and Series 1-A and 2-A warrants of SkyTerra expected to be outstanding on the record date. The other warrants outstanding to acquire SkyTerra common stock do not provide the right to receive dividends or distributions and, therefore, will not participate in the distribution.

 

Distribution Ratio

One-half of one share of our common stock for every share of SkyTerra common stock owned by SkyTerra common or non-voting common stockholders of record on the record date (or, in the case of SkyTerra’s preferred stock and Series 1-A and 2-A warrants, in accordance with their terms, one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise of such preferred stock and warrants held as of the record date).

 

Fractional Share Interests

Fractional shares will not be distributed. Fractional shares will be aggregated and, after the distribution, sold in the public market by the distribution agent and the aggregate net cash proceeds will be distributed ratably to those stockholders of record otherwise entitled to fractional interests. See “The Distribution—Manner of Effecting the Distribution.”

 

Record Date

February 13, 2006.

 

Distribution Date

·, 2006. The distribution agent will mail share certificates commencing on the distribution date or as soon as practicable thereafter.

 

Dividend Policy

We have no present intention to pay any dividends on our common stock.

 

Treatment of Existing SkyTerra Options

Pursuant to SkyTerra’s 1998 Long Term Incentive Plan, SkyTerra’s compensation committee has indicated that holders of stock options issued under the plan who are current members of SkyTerra’s management and board of directors, as well as a consultant and former directors who were involved with SkyTerra’s acquisition of HNS, will receive an option to purchase one share of our common stock for each option to purchase two shares of SkyTerra common stock that they hold. The issuance of such options to purchase our common stock will be in lieu of a larger adjustment to the exercise price of the SkyTerra options that such holders would have been

 

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otherwise entitled had they not received options to purchase our common stock. A reduction in the exercise price (or in some cases, an increase in the number of shares) is expected to be the manner in which all other SkyTerra options outstanding under the plan will be adjusted. We expect to issue options to purchase 432,496 shares of our common stock to holders of SkyTerra options under the 2006 Equity and Incentive Plan.

 

Expected Grant of Options to Our Senior Executives

Following the distribution, we expect that our compensation committee will grant vested options to purchase an aggregate of approximately 140,000 shares of our common stock under our 2006 Equity and Incentive Plan, consisting of 20,000 shares to six of our executive officers and a consultant. Such executive officers include our chief executive officer and president and each of our executive vice presidents. Each option is expected to be exercisable for a period of less than 15 days following the date of grant, and the exercise price of each option is expected to be $10.35 per share, an approximate 20% discount to the subscription price in the rights offering.

 

Material U.S. Federal Income Tax Consequences of the Distribution

The receipt by you of our common stock in the distribution will generally be taxable to you. For a more detailed discussion see “Material U.S. Federal Income Tax Consequences.”

 

Distribution Agent

American Stock Transfer & Trust Company.

 

Transfer Agent and Registrar for the Common Stock

American Stock Transfer & Trust Company.

 

For additional information concerning the distribution, see “The Distribution,” beginning on page 93.

 

For a discussion of certain factors that should be considered by recipients of our common stock, see “Risk Factors” beginning on page 16.

 

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Summary Historical Consolidated Financial Data of SkyTerra

 

(Accounting Predecessor to Hughes Communications)

 

The summary historical financial data of SkyTerra (accounting predecessor to us) is derived from the audited and unaudited consolidated financial statements of SkyTerra and is set forth here because, notwithstanding the legal form of the distribution, we will be considered the divesting entity and treated as the “accounting successor” to SkyTerra for financial reporting purposes in accordance with Emerging Issues Task Force, or EITF, Issue No. 02-11, “Accounting for Reverse Spin-offs,” due to, among other things, (i) the businesses transferred to us generated all of SkyTerra’s consolidated revenues for the year ended December 31, 2004 and for the nine months ended September 30, 2005 and constitute a majority of the book value of SkyTerra’s assets as of September 30, 2005 and (ii) the businesses transferred to us include SkyTerra’s discontinued operating subsidiaries and all of the assets and liabilities relating to such subsidiaries. As such, the financial information presented in the following summary for SkyTerra (accounting predecessor to us) reflects financial information that previously has been filed with the SEC by SkyTerra. When the distribution occurs, we will report the historical results of operations (subject to certain adjustments) of the assets of which SkyTerra retains ownership and control in discontinued operations in accordance with the provisions of Statement of Financial Accounting Standard, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Pursuant to SFAS No. 144, this presentation is not permitted until the date of the distribution.

 

SkyTerra’s summary historical consolidated balance sheet data as of December 31, 2004 and 2003 and the historical summary consolidated statement of operations data for the years ended December 31, 2004, 2003 and 2002 have been derived from SkyTerra’s consolidated financial statements, which have been audited by Deloitte & Touche LLP, independent registered public accounting firm. The historical summary consolidated balance sheet data as of September 30, 2005 and the summary consolidated statement of operations data for the nine months ended September 30, 2005 and 2004 have been derived from SkyTerra’s unaudited financial statements and, in the opinion of our management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods indicated. The results for periods of less than a full year are not necessarily indicative of the results to be expected for any interim period or for a full year.

 

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The summary historical consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of SkyTerra (as Accounting Predecessor to Hughes Communications)” and SkyTerra’s consolidated financial statements and the related notes thereto included elsewhere in this document.

 

     Nine Months Ended
September 30,


    Years Ended December 31,

 
     2005

    2004

    2004

    2003

    2002

 
     (in thousands, except share data)  

Consolidated statements of operations data:

                                        

Revenues

   $ 661     $ 1,778     $ 2,127     $ 699     $ —    

Operating expenses

     (7,610 )     (8,202 )     (13,982 )     (7,646 )     (6,513 )
    


 


 


 


 


Loss from operations

     (6,949 )     (6,424 )     (11,855 )     (6,947 )     (6,513 )

Interest income, net

     1,131       9,490       10,548       6,304       5,602  

Equity in earnings of Hughes Network Systems, LLC

     12,887       —         —         —         —    

Equity in loss of Mobile Satellite Ventures LP

     (7,519 )     —         (1,020 )     —         —    

Loss on investments in affiliates

     (1,211 )     (972 )     (1,336 )     (404 )     (385 )

Other income (expense), net

     941       20,841       21,045       244       (14,716 )

Minority interest

     1,531       (631 )     (216 )     (1,126 )     (998 )
    


 


 


 


 


Income (Loss) from continuing operations before taxes

     811       22,304       17,166       (1,929 )     (17,010 )

Income tax benefit

     —         —         —         —         350  
    


 


 


 


 


Income (Loss) from continuing operations

     811       22,304       17,166       (1,929 )     (16,660 )

Gain from discontinued operations

     845       —         —         1,211       12,632  
    


 


 


 


 


Net income (loss)

     1,656       22,304       17,166       (718 )     (4,028 )

Cumulative dividends and accretion of preferred stock to liquidation value

     (7,477 )     (7,426 )     (9,918 )     (9,687 )     (10,937 )
    


 


 


 


 


Net (loss) income attributable to common stockholders

   $ (5,821 )   $ 14,878     $ 7,248     $ (10,405 )   $ (14,965 )
    


 


 


 


 


Basic (loss) earnings per common share:

                                        

Continuing operations

   $ (0.38 )   $ 0.99     $ 0.48     $ (0.76 )   $ (2.32 )

Discontinued operations

     0.05       —         —         0.08       1.06  
    


 


 


 


 


Net (loss) earnings per common share

   $ (0.33 )   $ 0.99     $ 0.48     $ (0.68 )   $ (1.26 )
    


 


 


 


 


Diluted (loss) earnings per common share:

                                        

Continuing operations

   $ (0.38 )   $ 0.95     $ 0.46     $ (0.76 )   $ (2.32 )

Discontinued operations

     0.05       —         —         0.08       1.06  
    


 


 


 


 


Net (loss) earnings per common share

   $ (0.33 )   $ 0.95     $ 0.46     $ (0.68 )   $ (1.26 )
    


 


 


 


 


Basic weighted average common shares outstanding

     17,581,661       15,062,714       15,115,895       15,341,518       11,865,291  
    


 


 


 


 


Diluted weighted average common shares outstanding

     17,581,661       15,713,479       15,837,370       15,341,518       11,865,291  
    


 


 


 


 


 

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     September 30,

   December 31,

 
     2005

   2004

   2003

 
     (in thousands)  

Consolidated balance sheet data:

                      

Cash, cash equivalents, and short-term investments

   $ 33,729    $ 94,507    $ 28,692  

Investment in Hughes Network Systems, LLC

     68,047      —        —    

Investment in Mobile Satellite Ventures LP

     44,411      50,098      —    

Notes receivable, net

     —        —        65,138  

Investments in affiliates

     2,549      3,361      2,769  

Total assets

     152,645      154,570      98,099  

Total liabilities

     4,537      10,512      6,066  

Minority interest

     8,808      9,974      12,467  

Series A redeemable convertible preferred stock, net

     92,002      88,706      80,182  

Stockholders’ equity (deficit)

     47,298      45,378      (616 )

 

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Summary Unaudited Pro Forma Consolidated Financial Data of Hughes Communications

(Accounting Successor to SkyTerra)

 

Our summary unaudited pro forma condensed consolidated financial data set forth below is derived from our unaudited pro forma condensed consolidated financial statements included elsewhere in this document.

 

The unaudited pro forma consolidated statement of operations data reflects our (as accounting successor to SkyTerra) results of operations for the nine months ended September 30, 2005 and the year ended December 31, 2004 assuming the following occurred on January 1, 2004: (i) the sale of our ownership interests in AfriHUB, (ii) the distribution and related transactions, (iii) the acquisition of 50% of the Class A membership interests of HNS from a subsidiary of DIRECTV on April 22, 2005, (iv) the HNS Acquisition, (v) the loan from certain of the Apollo Stockholders in connection with the HNS Acquisition, (vi) the rights offering, assuming the amount raised is $100.0 million and (vii) the repayment of the loan from such Apollo Stockholders with the proceeds from the rights offering. The following unaudited pro forma consolidated balance sheet data presents our (as accounting successor to SkyTerra) financial position assuming that the following occurred on September 30, 2005: (i) the sale of our ownership interests in AfriHUB, (ii) the distribution and related transactions, (iii) the HNS Acquisition, (iv) the loan from such Apollo Stockholders in connection with the HNS Acquisition, (v) the rights offering, assuming the amount raised is $100.0 million and (vi) the repayment of the loan from such Apollo Stockholders with the proceeds from the rights offering. The unaudited pro forma consolidated financial data does not purport to represent what our results of operations or financial condition would actually have been had the distribution and other transactions, as applicable, in fact occurred as of such date or to project our results of operations for any future period or as of any future date. Further, the unaudited pro forma consolidated financial data does not purport to represent what our results of operations or financial condition would actually have been had we operated as a separate public company.

 

    

Nine Months Ended
September 30,

2005


  

Year Ended

December 31,

2004


 
     (in thousands, except share data)  

Pro forma statement of operations data:

               

Revenues

   $ 579,221    $ 791,467  

Income (Loss) from continuing operations

   $ 5,550    $ (1,367,296 )

Earnings (Loss) per common share:

               

Basic

   $ 0.30    $ (79.37 )

Diluted

   $ 0.30    $ (79.37 )

Weighted average common shares outstanding:

               

Basic

     18,371,809      17,227,937  

Diluted

     18,809,994      17,227,937  

 

     September 30,
     2005

     (in thousands)

Pro forma balance sheet data:

      

Cash, cash equivalents and short-term investments

   $ 144,757

Current assets

     458,080

Total assets

     767,961

Current liabilities

     200,763

Long-term debt

     355,667

Total liabilities

     571,118

Minority interest

     6,052

Stockholders’ equity

     190,791

 

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QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION

 

Q: What is the distribution?

 

A: The distribution is the method by which SkyTerra will be separated into two publicly owned companies: (1) Hughes Communications, which consists of, among other things, the assets, liabilities and operations associated with the HNS, ESP and AfriHUB businesses and certain minority investments in entities including Edmunds Holdings, Inc., Data Synapse, Inc. and Hughes Systique Corporation, along with all of SkyTerra’s cash as of the distribution date, excluding $12.5 million, and certain other liabilities expressly allocated to us and (2) SkyTerra, which consists of the assets and liabilities associated with SkyTerra’s interest in the MSV Joint Venture and its stake in TerreStar, along with $12.5 million in cash. Upon a change of control of SkyTerra, including in connection with a consolidation of the ownership of the MSV Joint Venture and TerreStar, its remaining cash will be transferred to us.

 

  To effect the distribution, SkyTerra will distribute to each of its stockholders one-half of one share of our common stock for each share of SkyTerra common or non-voting common stock held as of the close of business on February 13, 2006 (or, in the case of SkyTerra’s preferred stock and Series 1-A and 2-A warrants, in accordance with their terms, one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise of such preferred stock and warrants held as of the close of business on February 13, 2006). The other warrants outstanding to acquire SkyTerra common stock do not provide the right to receive dividends or distributions and, therefore, will not participate in the distribution. Immediately after the distribution, SkyTerra’s stockholders, since they will become our stockholders, will continue to have an indirect interest in all of SkyTerra’s current businesses, but they will own them through their ownership in each of us and SkyTerra, for so long as they hold both SkyTerra’s and our stock.

 

Q: Why is SkyTerra separating its businesses?

 

A: SkyTerra believes that the separation of its interests in HNS and the MSV Joint Venture and TerreStar will enhance stockholder value by enabling each business to pursue objectives appropriate for their specific needs. In addition, SkyTerra believes that each business will have greater access to capital, as investors interested solely in one of the businesses will have the opportunity to invest in that specific business, while investors interested in both business could invest in each separately. By contrast, today investors interested in only one of SkyTerra’s businesses may not invest at all.

 

  We expect to focus on managing and growing HNS’ position in the Enterprise and Consumer VSAT markets, as well as exploring other complementary opportunities. By contrast, SkyTerra is actively pursuing a business combination with other members of the MSV Joint Venture and other TerreStar stockholders that would, if consummated, result in control of the MSV Joint Venture and TerreStar residing in a single entity, enabling the MSV Joint Venture and TerreStar to better execute their strategies to roll out mobile satellite system networks with an ancillary terrestrial component, or ATC, and offer users affordable and reliable voice and high-speed data communications service from virtually anywhere in North America. To that end, both prior to and since September 22, 2005, when SkyTerra executed a non-binding letter of intent with Motient Corporation, or Motient, TMI Communications and Company, or TMI, and the other partners in the MSV Joint Venture and other stockholders in TerreStar, SkyTerra has been in discussions that would result in the consolidation of the ownership of the MSV Joint Venture and TerreStar. These discussions have included a potential merger of SkyTerra with and into Motient and, more recently, a variety of other structures.

 

Q: Is the distribution conditional?

 

A: No.

 

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Q: What restructuring occurred prior to the distribution?

 

A: Prior to the distribution, SkyTerra transferred all of its assets, liabilities and operations other than those associated with the MSV Joint Venture and TerreStar to us, so that:

 

    the assets, liabilities and operations associated with the HNS, ESP and AfriHUB businesses and certain minority investments in entities including Edmunds Holdings, Inc., Data Synapse, Inc. and Hughes Systique Corporation, along with all of SkyTerra’s cash as of the distribution date, excluding $12.5 million, and certain other liabilities expressly allocated to us, are ours; and

 

    the assets and liabilities associated with SkyTerra’s interest in the MSV Joint Venture and its stake in TerreStar remain under the ownership and control of SkyTerra, along with $12.5 million in cash. Upon a change of control of SkyTerra, its remaining cash will be transferred to us.

 

Q: What will I receive in the distribution?

 

A: For every one share of SkyTerra common or non-voting common stock that you hold at the close of business on February 13, 2006, the record date, you will receive one-half of one share of our common stock (or, if you are a holder of SkyTerra preferred stock or Series 1-A and 2-A warrants, in accordance with their terms, you will receive one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise of such preferred stock or warrants held on the record date). For example, if you own 100 shares of SkyTerra common stock, you will receive 50 shares of our common stock.

 

  Fractional shares will not be distributed. Fractional shares will be aggregated and, after the distribution, sold in the public market by the distribution agent and the aggregate net cash proceeds will be distributed ratably to those holders of record otherwise entitled to fractional interests. See “The Distribution—Manner of Effecting the Distribution.”

 

Q: What will happen to my existing SkyTerra common stock as a result of the distribution?

 

A: Immediately after the distribution, you will own our common stock as well as continue to own the SkyTerra securities that you currently own. SkyTerra’s common stock will continue to trade on the OTC Bulletin Board under the symbol “SKYT.”

 

  After the distribution, SkyTerra will continue to own interests in the MSV Joint Venture and TerreStar. Both prior to and since September 22, 2005, when SkyTerra executed a non-binding letter of intent with Motient, TMI and the other partners in the MSV Joint Venture and the other stockholders of TerreStar, SkyTerra has been in discussions that would result in the consolidation of the ownership of the MSV Joint Venture and TerreStar. These discussions have included a potential merger of SkyTerra with and into Motient and, more recently, a variety of other structures. If any such transaction is consummated, you will receive consideration for your shares of SkyTerra common stock as determined upon the signing of definitive documentation.

 

Q: Will I be taxed on the shares of Hughes Communications common stock that I receive in the distribution?

 

A: The receipt by you of our common stock in the distribution will generally be taxable to you. For a more detailed discussion see “Material U.S. Federal Income Tax Consequences.”

 

Q: What do I have to do to participate in the distribution?

 

A: Nothing, except own shares of SkyTerra common stock, non-voting common stock, preferred stock or Series 1-A or 2-A warrants on the record date. Because the distribution of our common stock is a dividend, no stockholder vote is required. Following the distribution, each holder of record on the record date will receive a stock certificate for the whole number of shares of our common stock such holder received in the distribution.

 

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Q: When will the distribution occur?

 

A: The distribution will be completed on or around ·, 2006, the distribution date.

 

Q: Where will Hughes Communications common stock be quoted?

 

A: We expect that our common stock will be quoted on the OTC Bulletin Board. In order for our common stock to be eligible to be traded on the OTC Bulletin Board we will need to make filings pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and be sponsored by a broker-dealer who is a member of the National Association of Securities Dealers, Inc.

 

Q: What will the relationship between Hughes Communications and SkyTerra be after the distribution?

 

A: After the distribution, SkyTerra will not own any of our capital stock; we will not own any of SkyTerra’s capital stock; and we and SkyTerra will be separate publicly owned companies. Although SkyTerra will not own any of our capital stock after the distribution, SkyTerra’s controlling stockholders, the Apollo Stockholders, will be our controlling stockholders. See “Risk Factors—The Apollo Stockholders will beneficially own a majority of our voting stock.”

 

We have entered into a separation agreement with SkyTerra. The separation agreement effected, on December 31, 2005, the transfer, by way of contribution, from SkyTerra to us of the assets related to our business, and the assumption by us of certain liabilities and will govern the relationship between SkyTerra and us after the distribution. Under the separation agreement, SkyTerra will provide us with use of its facilities, including information technology and communications equipment and services, at such premises, from January 1, 2006 until a change of control of SkyTerra. In the future, we also expect to utilize HNS’ facilities. The separation agreement also contains agreements relating to indemnification and access to information. In addition, SkyTerra has agreed to provide us with the consulting services of its officers, not to exceed an aggregate of 200 hours per month, for a monthly fee of $25,000, which services may be terminated by either party at any time with or without cause by providing 10 business days notice to the non-terminating party. We have also entered into a tax sharing agreement with SkyTerra, under which we generally agree to be responsible for, and to indemnify SkyTerra and its subsidiaries against, all tax liabilities imposed on or attributable to (i) us and any of our subsidiaries relating to all taxable periods and (ii) SkyTerra and any of its subsidiaries for all taxable periods or portions thereof ending on or prior to a change of control of SkyTerra, in each case, after taking into account any tax attributes of SkyTerra or any of its subsidiaries that are available to offset such tax liabilities. Notwithstanding the foregoing, we are not responsible for any taxes relating to the MSV Joint Venture, TerreStar or a change of control of SkyTerra. Additionally, under the tax sharing agreement, SkyTerra is responsible for, and indemnifies us and our subsidiaries against, all tax liabilities imposed on or attributable to the MSV Joint Venture and TerreStar relating to all taxable periods, SkyTerra and any of its subsidiaries relating to all taxable periods or portions thereof beginning and ending after a change of control, and any change of control of SkyTerra. The tax sharing agreement also generally provides for the preparing and filing of tax returns and the handling, settling and contesting of tax liabilities for all taxable periods. See “Certain Relationships and Related Party Transactions.”

 

Q: What is the accounting treatment for the spin-off?

 

A: Despite the fact that all of the shares of common stock are being distributed by SkyTerra to its stock and certain warrant holders, for accounting purposes, we will be considered the divesting entity due to, among other things, (i) the businesses transferred to us generated all of SkyTerra’s consolidated revenues for the year ended December 31, 2004 and for the nine months ended September 30, 2005 and constitute a majority of SkyTerra’s assets as of September 30, 2005 and (ii) the businesses transferred to us include SkyTerra’s discontinued operating subsidiaries and all of the assets and liabilities relating to such subsidiaries. As a result, we will be the “accounting successor” to SkyTerra and have presented the historical financial information of SkyTerra as our financial information in this document. See “Unaudited Pro Forma Consolidated Financial Statements of Hughes Communications (Accounting Successor to SkyTerra).”

 

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RISK FACTORS

 

You should carefully consider the risks described below in addition to all other information provided to you in this document. Any of the following risks could materially and adversely affect our business, result of operations and financial condition.

 

Risks Related to the Business

 

The enterprise network communications market is highly competitive. HNS may be unsuccessful in competing effectively against other terrestrial and satellite-based network providers in its Enterprise business.

 

HNS operates in a highly competitive network communications industry in the sale and lease of both its products and its services. HNS’ industry is characterized by competitive pressures to provide enhanced functionality for the same or lower price with each new generation of technology. HNS’ Enterprise business faces competition from providers of terrestrial-based networks (such as DSL, cable modem service and internet-based virtual private networks, or VPNs), which may have advantages over satellite networks for certain customer applications. Terrestrial-based networks are offered by telecommunications carriers and other large companies, many of which have substantially greater financial resources and greater name recognition than HNS does. The costs of a satellite network may exceed those of a terrestrial-based network, especially in areas that have experienced significant DSL and cable Internet build-out. It may become more difficult for HNS to compete with terrestrial providers as the number of these areas increase and the cost of their network and hardware services declines. HNS also competes for enterprise clients with other satellite network providers, satellite providers that are targeting the small business and small office/home office markets, and smaller independent systems integrators on procurement projects.

 

The consumer network communications market is highly competitive. HNS may be unsuccessful in competing effectively against DSL and cable service providers in its Consumer business.

 

HNS faces competition for its North American Consumer satellite Internet subscribers primarily from DSL and cable Internet service providers. Also, other satellite and wireless broadband companies have launched or are planning the launch of consumer satellite Internet access services that would compete with HNS in North America. Some of these competitors may offer consumer services and hardware at lower prices than HNS’. HNS anticipates increased competition with the entrance of these new competitors into its market and the increasing build-out and lowering cost of DSL and cable Internet access in North America. Terrestrial alternatives do not require HNS’ “external dish” which may limit customer acceptance of its products.

 

If HNS is unable to develop, introduce and market new products, applications and services on a cost effective and timely basis, or if HNS is unable to sell its new products and services to existing and new customers, HNS’ business could be adversely affected.

 

The network communications market is characterized by rapid technological changes, frequent new product introductions and evolving industry standards. If HNS fails to develop new technology and keep pace with significant industry technological changes, HNS’ existing products and technology could be rendered obsolete. Products in HNS’ industry are generally characterized by short life cycles because of technological innovation, such as increasing data rates, and declining prices. To remain competitive in the network communications market, HNS must be able to apply financial and technical resources to develop and introduce new products, applications and services, as well as enhancements to its existing products, applications and services. Even if HNS keeps up with technological innovation, it may not meet the demands of the network communications market. For example, HNS’ large enterprise customers may only choose to renew services with it at substantially lower prices or for a decreased level of service. Many of HNS’ large enterprise customers have existing networks available to them and may opt to find alternatives to its VSAT services or may renew with HNS solely as a

 

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backup network. If HNS is unable to respond to technological advances on a cost-effective and timely basis, or if its products or applications are not accepted by the market, then HNS’ business, financial condition and results of operations would be adversely affected.

 

The need to introduce and upgrade products requires large expenditures on engineering, research and development. As a stand-alone entity, HNS may not be able to devote the same amount of resources to this development effort compared to prior periods when it was a part of DIRECTV. This may make it more difficult to make the technological advances in its products necessary to compete against rival products and technologies.

 

Continued negative trends and factors affecting the telecommunications industry specifically and the economy in general may result in reduced demand and pricing pressure on HNS’ products and services.

 

Negative trends and factors affecting the telecommunications industry specifically and the economy in general over the past several years have negatively affected HNS’ results of operations. The telecommunications sector has been facing significant challenges resulting from excess capacity, new technologies and intense price competition. As a result of the build-out of capacity by telecommunications companies in the late 1990s, currently there is excess network capacity. This capacity, combined with the failure of many competitors in the telecommunications sector, has contributed to price reductions by terrestrial and satellite network competitors in response to soft market conditions. In addition, weak economic conditions in the last recession resulted in reduced capital expenditures, reluctance to commit to long-term capital outlays and longer sales processes for network procurements by HNS’ customers. These factors have not abated in the recovery. Finally, an overall trend toward industry consolidation and rationalization among HNS’ customers, competitors and suppliers can affect its business, especially if any of the sectors HNS services or the countries or regions that HNS does business in are affected. Any future weakness in the economy or the telecommunications industry could affect HNS through reduced demand for, and pricing pressure on, its products and services, leading to a reduction in revenues and a material adverse effect on HNS’ business and results of operations.

 

Satellite failures or degradations in satellite performance could affect HNS’ business, financial condition and results of operations.

 

HNS leases satellite transponder capacity from fixed satellite service, or FSS, providers in order to send and receive data communications to and from its VSAT networks. Satellites are subject to in-orbit risks including malfunctions, commonly referred to as anomalies, and collisions with meteoroids, decommissioned spacecraft or other space debris. Anomalies occur as a result of various factors, such as satellite manufacturing errors, problems with the power systems or control systems of the satellites and general failures resulting from operating satellites in the harsh space environment.

 

Any single anomaly or series of anomalies affecting the satellites on which HNS leases transponder capacity could materially adversely affect its operations and revenues and its relationships with current customers, as well as HNS’ ability to attract new customers for its satellite services. Anomalies may also reduce the expected useful life of a satellite, thereby creating additional expenses due to the need to provide replacement or backup capacity and potentially reducing revenues if service is interrupted on the satellites HNS utilizes. HNS may not be able to obtain backup capacity at similar prices, or at all. See “—The failure to adequately anticipate HNS’ need for satellite capacity or HNS’ inability to obtain satellite capacity could harm its results of operations.” In the event of a satellite failure, HNS’ services may be unavailable for several days to several weeks while backup in-orbit satellites are repositioned and services are moved or while HNS repositions its customers’ antennas to alternative satellites. HNS experienced one of these situations in late 2004 with one satellite on which it leases transponder capacity for service in North America. More recently, in August 2005, a satellite on which HNS leases transponder capacity to service certain customers in Europe experienced an outage lasting approximately nine hours. HNS’ European service provider has tested the satellite’s functionality and it appears normal although further anomalies are possible. Any relocation to an alternative satellite will require prior regulatory approval, which may not be obtained, or obtained in a timely manner. In addition, the entities from which HNS leases

 

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transponder capacity could be severely affected by anomalies affecting their satellites, which could result in disruption to the services they provide to HNS.

 

Any failure on HNS’ part to perform its VSAT service contracts or provide satellite broadband access as a result of satellite failures would result in a loss of revenue despite continued obligations under HNS’ leasing arrangements, possible cancellation of HNS’ long-term contracts, inability to continue with its subscription based customers, expenses to reposition customer antennas to alternative satellites and damage to HNS’ reputation which could negatively affect its ability to retain existing customers or gain new business. The cancellation of long-term contracts due to service disruptions is an exception to the generally non-cancelable nature of HNS’ contracts and such cancellation would reduce HNS’ revenue backlog previously described in this document.

 

The failure to adequately anticipate HNS’ need for satellite capacity or HNS’ inability to obtain satellite capacity could harm its results of operations.

 

HNS has made substantial contractual commitments for satellite capacity based on its existing customer contracts and backlog as well as anticipated future business. If future demand does not meet its expectations, HNS will be committed to maintain excess satellite capacity for which it will have no or insufficient revenues to cover its costs, having a negative impact on its margins and results of operations. For example, in 2002, HNS took a one time charge of $7.0 million in connection with the renegotiation of a contract related to excess transponder capacity. HNS’ transponder leases are generally for three to five years and different leases cover satellites with coverage of different areas or other different features, so HNS cannot quickly or easily adjust its capacity payments to changes in demand. If HNS only purchases satellite capacity based on existing contracts and bookings, capacity for certain types of coverage in the future may be unavailable to it and HNS may not be able to satisfy certain needs of its customers, resulting in a loss of possible new business. At present, until launch and operation of additional satellites, there is limited availability of capacity on the Ku-band frequencies in North America. If HNS is not able to renew its capacity leases, if HNS’ needs for capacity increase prior to new capacity becoming available or if capacity is unavailable due to any problems of the fixed satellite service providers, HNS’ business and results of operation would suffer.

 

HNS’ networks and those of its third party service providers may be vulnerable to security risks.

 

We expect the secure transmission of confidential information over public networks to continue to be a critical element of HNS’ operations. HNS’ networks and those of its third party service providers and its customers may be vulnerable to unauthorized access, computer viruses and other security problems. Persons who circumvent security measures could wrongfully use information on the network or cause interruptions or malfunctions in HNS’ operations, any of which could have a material adverse effect on HNS’ and our business, financial condition and operating results. HNS may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although HNS intends to continue to implement industry-standard security measures, these measures may prove to be inadequate and result in system failures and delays that could lower network operations center availability and have a material adverse effect on HNS’ business, financial condition and operating results.

 

HNS faces new risks associated with its SPACEWAY satellite.

 

HNS currently plans to launch its SPACEWAY satellite in late 2006 or early 2007 and introduce service in 2007. In addition to the competitive risks for the satellite network services mentioned above, if HNS is unable to successfully launch and implement its SPACEWAY satellite as a result of any of the following risks, it will be unable to realize the anticipated benefits from its SPACEWAY satellite and its financial condition and results of operations will be adversely affected:

 

   

Cost and schedule risks. The cost of completing HNS’ SPACEWAY satellite may be more than anticipated and there may be delays in completing the satellite within the expected timeframe. In connection with the completion, launch and launch insurance of the SPACEWAY satellite, HNS may be required to spend an amount of cash in excess of the approximately $135.0 million which it has

 

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currently budgeted and set aside for such purpose. The construction and launch of satellites are often subject to delays, including satellite and launch vehicle construction delays, cost overuns, periodic unavailability of reliable launch opportunities, and delays in obtaining regulatory approvals. A significant delay in the delivery of SPACEWAY could materially adversely affect the marketing plan for service enabled by the satellite and would adversely affect HNS’ anticipated revenues and cash flows. If the remaining SPACEWAY construction schedule is not met, there may be even further delays because there can be no assurance that a launch opportunity will be available at the time the satellite is ready to be launched and HNS may not be able to obtain or maintain regulatory authority or International Telecommunication Union, or ITU, priority necessary to implement SPACEWAY as proposed.

 

    Regulatory risks. HNS currently does not have a license to launch or operate its SPACEWAY satellite and there are risks associated with obtaining required regulatory authorizations for SPACEWAY. HNS will need to obtain a license to launch and operate the SPACEWAY satellite prior to doing so. There are several ITU filings for orbital locations which may be used for the SPACEWAY satellite. The ITU filing used to launch and operate the SPACEWAY satellite will subject HNS to the licensing jurisdiction of the administration that made the particular ITU filing on its behalf. HNS’ SPACEWAY satellite will also be subject to the frequency registration process of the ITU and to the various national communications authorities of the countries in which it will provide services using SPACEWAY. The ITU filings that HNS may use for SPACEWAY have not yet been fully coordinated with other ITU filings although coordination meetings have commenced. A number of licensing administrations have “ITU priority” over such filings by virtue of their having made earlier ITU submissions for networks that could experience interference from the operation of the SPACEWAY satellite. Radio frequency coordination with those other administrations therefore may be required prior to the operation of the SPACEWAY satellite. ITU coordination activities may require a satellite system operator to reduce power, avoid operating on certain frequencies, relocate its satellite to another orbital location or otherwise modify planned or existing operations. There can be no assurance that HNS will be able to successfully coordinate its satellites to the extent it is required to do so, and any modifications it makes in the course of coordination, or any inability to successfully coordinate, may materially adversely affect its ability to generate revenue. This could significantly limit the services that could be provided over the SPACEWAY satellite. The SPACEWAY satellite is primarily intended to serve North America. The United States and the regulatory authorities of other nations HNS seeks to serve must authorize the use of the SPACEWAY satellite and/or frequencies in their jurisdictions and HNS has not yet applied for or received any such authority. Finally, HNS will have to satisfy the licensing conditions imposed by the administration whose ITU filings it uses.

 

    Launch risks. There are risks associated with the launch of satellites, including launch failure, damage or destruction during launch and improper orbital placement. Launch failures result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take up to 30 months, and obtain other launch opportunities. Only certain launch vehicles can lift and place into orbit spacecraft in the mass range of the SPACEWAY satellite, which further limits the launch opportunities for HNS’ SPACEWAY satellite. The overall historical loss rate in the satellite industry for all launches of commercial satellites in fixed orbits in the last five years is estimated by some industry participants to be 5% but may be higher.

 

    Insurance risks. HNS intends to seek launch and in-orbit insurance for its SPACEWAY satellite but may not be able to obtain insurance on reasonable economic terms or at all. If HNS is able to obtain insurance, it will not likely cover the full cost of constructing and launching SPACEWAY, nor will it cover business interruptions or similar losses.

 

    Novel design. HNS’ SPACEWAY satellite employs a complex and novel design, intended for higher-speed data rates and greater bandwidth per network site. If the enhanced features of the satellite design do not function to their specifications, HNS may not be able to offer the functionality or throughput of transmission service that is expected for SPACEWAY.

 

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    Business plan. HNS’ SPACEWAY business plan may be unsuccessful and HNS may not be able to achieve the cost savings that we expect from the SPACEWAY satellite. A failure to attract the planned customers in a sufficient number would result in HNS’ inability to realize the cost savings that we expect to be achieved from the anticipated lower costs of bandwidth associated with the capacity of SPACEWAY. In addition, HNS will incur startup losses associated with the launch and operation of SPACEWAY until it acquires a sufficient number of customers.

 

    In-orbit risks. HNS’ SPACEWAY satellite will be subject to similar potential satellite failures or performance degradations as other satellites. In-orbit risks similar to those described above under “—Satellite failures or degradations in satellite performance could affect HNS’ business, financial condition and results of operations” will apply to HNS’ SPACEWAY satellite. To the extent there is an anomaly or other in-orbit failure with respect to its SPACEWAY satellite, HNS will not have a replacement satellite or backup transponder capacity and would have to identify and lease alternative satellite capacity that may not be available on economic terms or at all. Additionally, HNS could be required to repoint the antennas of its customers, which could require new or modified licenses from regulatory authorities.

 

The separation from DIRECTV has required HNS to incur additional costs to operate as a stand-alone entity and we and HNS face risks associated with the separation and the HNS Acquisition.

 

HNS is no longer able to rely on DIRECTV’s financial support and its creditworthiness. DIRECTV often guaranteed HNS’ obligations to customers or provided backup letters of credit or other similar support, and the need to provide its own letters of credit will limit the availability of HNS’ revolving credit facility. Some customers may not allow the release of DIRECTV from these guarantee obligations or view the lack of continued DIRECTV financial support as a negative factor in deciding whether to choose HNS’ products over its competitors’ products. In addition, HNS has agreed to indemnify DIRECTV in the event that DIRECTV is required to make any payments under these guarantee or other credit support obligations. Any of these events could have a significant adverse effect on HNS’ financial condition and results of operations.

 

HNS has only recently had to begin providing for certain services, including its own tax advisory services, treasury/cash management operations, risk management, employee benefits and business insurance. Previously, these services were provided, at least in part, by DIRECTV. In addition, we and HNS must implement financial and disclosure control procedures and corporate governance practices that enable us to comply, on a stand alone basis, with the Sarbanes-Oxley Act of 2002 and related Securities and Exchange Commission, or the SEC, rules. For example, we and HNS will need to further develop accounting and financial capabilities, including the establishment of an internal audit function and development of documentation related to internal control policies and procedures. Failure to quickly establish the necessary controls and procedures would make it difficult to comply with SEC rules and regulations with respect to internal control and financial reporting. Further, the actual costs of providing these services could exceed our expectations, which could have an adverse effect on our and HNS’ respective financial conditions and results of operations.

 

HNS may face difficulties in obtaining regulatory approvals for its provision of telecommunications services, and HNS may face changes in regulation, each of which could adversely affect its operations.

 

The provision of telecommunications services is highly regulated. HNS is required to obtain approvals from national and local authorities in connection with most of the services that it provides. As a provider of communications services in the United States, HNS is subject to the regulatory authority of the United States, primarily the Federal Communications Commission, or the FCC. HNS is subject to the export control laws, sanctions and regulations of the United States with respect to the export of equipment and services. Certain aspects of its business are subject to state and local regulation. In addition, HNS is subject to regulation by the national communications authorities of other countries in which HNS, and under certain circumstances its distributors provide service.

 

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While the governmental authorizations for HNS’ current business generally have not been difficult to obtain in a timely manner, the need to obtain particular authorizations in the future may delay HNS’ provision of current and new services. Moreover, the imposition by a governmental entity of conditions on its authorizations, or the failure to obtain authorizations necessary to launch and operate satellites or provide satellite service, could have a material adverse effect on HNS’ ability to generate revenue and conduct its business as currently planned. Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing authorizations.

 

Future changes to the regulations under which HNS operates could make it difficult for HNS to obtain or maintain authorizations, increase its costs or make it easier or less expensive for its competitors to compete with HNS. See “Business—Government Regulations.”

 

HNS’ international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect its operations.

 

HNS must comply with all applicable export control laws and regulations of the United States and other countries. United States laws and regulations applicable to HNS include the Arms Export Control Act, the International Traffic in Arms Regulations, or ITAR, the Export Administration Regulations and the trade sanctions laws and regulations administered by the Office of Foreign Assets Control of the United States Department of the Treasury, or OFAC. The export of satellite hardware, services and technical information with military or dual-use applications to non-United States persons is regulated by the United States Department of State’s Directorate of Defense Trade Controls under ITAR. The United States Department of Commerce’s Bureau of Industry and Security also regulates most of HNS’ international activities under the Export Administration Regulations. In addition, HNS is subject to the Foreign Corrupt Practices Act, or FCPA, that, generally, bars bribes or unreasonable gifts to foreign governments or officials.

 

Following a June 2004 voluntary disclosure by DIRECTV and DTV Networks, DIRECTV and DTV Networks entered into a consent agreement, which applies to HNS, with the U.S. Department of State in January 2005 regarding alleged violations of the ITAR. This consent agreement addresses exports of equipment and technology related to the VSAT business primarily to China but also to several other countries. As part of this agreement, DIRECTV paid a $4.0 million fine and one of HNS’ subsidiaries was debarred from conducting certain international business. HNS is now eligible to seek reinstatement and intends to do so in the near future. Also as part of the same consent agreement, a civil penalty of $1.0 million was assessed against HNS, which it is required to use for enhancing compliance measures to avoid future infractions. This amount will be applied by HNS to its compliance program over a three-year period. As a result of the voluntary disclosure and consent agreement, HNS is currently unable to perform its obligations under certain contracts in China and Korea addressed by the consent agreement and, if ultimately unable to perform, HNS may be liable for certain damages of up to approximately $5.0 million as a result of its non-performance. With respect to one such contract, HNS received notice in November 2005 that one of its customers in China filed a demand for arbitration with the International Center for Dispute Resolution, a division of the American Arbitration Association. The January 2005 consent agreement supplemented another consent agreement of DIRECTV in March 2003, arising out of separate violations of ITAR. Further violations of laws or regulations may result in significant additional sanctions including fines, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of HNS’ international business. A future violation of ITAR or the other regulations enumerated above could materially adversely affect HNS’ business, financial condition and results of operations.

 

HNS’ future success depends on its ability to retain its key employees.

 

HNS is dependent on the services of its senior management team to remain competitive in its industry. The loss of one or more members of its senior management team could have an adverse effect on HNS until qualified replacements are found. There can be no assurances that these individuals could quickly be replaced with persons

 

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of equal experience and capabilities. In addition, technological innovation depends, to a significant extent, on the work of technically skilled employees. Competition for executive, managerial and skilled personnel in HNS’ industry is intense. It is expected that HNS will face continued increases in compensation costs in order to attract and retain senior executives, managers and skilled employees, especially if the current job economy continues to improve. HNS may not be able to retain its existing senior management, fill new positions or vacancies created by expansion or turnover or attract or retain the management and personnel necessary to develop and market its products. HNS does not maintain key man life insurance on any of these individuals.

 

HNS’ lengthy sales cycles could harm its results of operations if these sales are delayed or do not occur.

 

The length of time between the date of initial contact with a potential customer and the execution of a contract with the potential customer may be up to two years, particularly for complex procurements of HNS’ VSAT systems. During any given sales cycle, HNS may expend resources in advance of the expected revenue from these contracts, resulting in an adverse effect on its operating results if the sale does not occur and the opportunity cost of having foregone alternative business prospects.

 

Because HNS depends on being awarded large-scale contracts in competitive bidding processes, losing a modest number of bids could have a significant adverse effect on its operating results.

 

In 2004, approximately 63% of HNS’ sales revenue was derived from large-scale VSAT network contracts that were awarded to it following competitive bidding. These large-scale contracts can involve the installation of over 10,000 VSATs. The number of major procurements for VSAT-based networks in any given year is limited and the competition is intense. Losing a modest number of such bids each year could have a significant adverse effect on HNS’ operating results.

 

HNS’ foreign operations expose it to risks and restrictions not present in its domestic operations.

 

HNS’ operations outside North America accounted for 31.7% and 31.1% of its revenue for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively, and HNS’ foreign operations are expected to continue to represent a significant portion of its business. HNS has operations in Brazil, China, Germany, India, Indonesia, Italy, Mexico, the Russian Federation, South Africa, the United Arab Emirates and the United Kingdom, among other nations, and over the last 15 years has sold products in over 100 countries. Foreign operations involve varying degrees of risks and uncertainties inherent in doing business abroad. Such risks include:

 

    Complications in complying with restrictions on foreign ownership and investment and limitations on repatriation. HNS may not be permitted to own its operations in some countries and may have to enter into partnership or joint venture relationships. Many foreign legal regimes restrict its repatriation of earnings to the United States from its subsidiaries and joint venture entities. HNS may also be limited in the ability to distribute or access its assets by the governing documents pertaining to such entities. In such event, HNS will not have access to the cash flow and assets of its joint ventures.

 

    Difficulties in following a variety of foreign laws and regulations, such as those relating to data content retention, privacy and employee welfare. HNS’ international operations are subject to the laws of many different jurisdictions that may differ significantly from United States law. For example, local political, moral or intellectual property law may hold HNS responsible for the data that is transmitted over its network by its clients. Also, other nations have more stringent employee welfare laws that guarantee perquisites that HNS must offer. Compliance with these laws may lead to increased operations costs, loss of business opportunities or violations that result in fines or other penalties. See “Business—Legal Proceedings.”

 

    HNS faces significant competition in its international markets. Outside North America, HNS has traditionally competed for VSAT hardware and services sales primarily in Europe, Brazil, India and China and focused only on hardware sales in other regions. In Europe, HNS faces intense competition which is not expected to abate in the near future.

 

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    Changes in exchange rates between foreign currencies and the United States dollar. HNS conducts its business and incurs costs in the local currency of a number of the countries in which it operates. Accordingly, its results of operations are reported in the relevant local currency and then translated to United States dollars at the applicable currency exchange rate for inclusion in its financial statements. Because HNS’ foreign subsidiaries and joint ventures operate in foreign currencies, fluctuations in currency exchange rates have affected, and may in the future affect, the value of profits earned on international sales. In addition, HNS operates its business in countries that historically have been and may continue to be susceptible to recessions or currency devaluation, including Argentina and Indonesia in recent years.

 

    Greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation or war. As HNS conducts operations throughout the world, it could be subject to regional or national economic downturns or instability, labor or political disturbances or conflicts of various sizes. Any of these disruptions could detrimentally affect HNS’ sales in the affected region or country or lead to damage to, or expropriation of, its property or danger to its personnel.

 

    Competition with large or state-owned enterprises and/or regulations that effectively limit HNS’ operations and favor local competitors. Many of the countries in which HNS conducts business have traditionally had state owned or state granted monopolies on telecommunications services that favor an incumbent service provider. HNS faces competition from these favored and entrenched companies in countries that have not deregulated. The slower pace of deregulation in these countries, particularly in Asia and Latin America, has adversely affected the growth of HNS’ business in these regions.

 

    Customer credit risks. Customer credit risks are exacerbated in foreign operations because there is often little information available about the credit histories of customers in the foreign countries in which HNS operates.

 

HNS is dependent upon suppliers of components, manufacturing outsourcing, installation and customer service, and its results of operations may be materially affected if any of these third party providers fails to appropriately deliver the contracted goods or services.

 

HNS is dependent upon the third party products and services provided to it, including the following:

 

    Components. A limited number of suppliers manufacture some of the key components required to build HNS’ VSATs. There can be no assurance of the continuous availability of key components and HNS’ ability to forecast its component requirements sufficiently in advance, which may have a detrimental effect on supply. If HNS was required to change certain suppliers for any reason, it would experience a delay in manufacturing its products if another supplier was not able to meet its requirements on a timely basis. In addition, if HNS is unable to obtain the necessary volumes of components on favorable terms or prices on a timely basis, it may be unable to produce its products at competitive prices.

 

    Manufacturing outsourcing. While HNS develops and manufactures prototypes for its products, HNS uses contract manufacturers to produce a significant portion of its hardware. If these contract manufacturers fail to provide products that meet HNS’ specifications in a timely manner, then its customer relationships may be harmed.

 

    Installation and customer support. Each of HNS’ North American and its international operations utilize a network of third party installers to deploy its hardware. In addition, a portion of HNS’ customer support and management is provided by offshore call centers. Since HNS provides customized services for its customers that are essential to their operations, a decline in levels of service or attention to the needs of its customers or the occurrence of negligent and careless acts will adversely affect HNS’ reputation, renewal rates and ability to win new business.

 

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HNS’ failure to develop, obtain or protect its intellectual property rights could adversely affect its future performance and growth.

 

HNS’ success depends on its ability to develop and protect its proprietary rights to the technologies and inventions used in its products and services, including proprietary VSAT technology and related products and services. HNS relies on a combination of United States and foreign patent, trademark, copyright and trade secret laws as well as licenses, nondisclosure, confidentiality and other contractual restrictions to protect certain aspects of its business. HNS has registered trademarks and patents, and has pending trademark and patent applications in the United States and a number of foreign countries. However, its patent and trademark applications may not be allowed by the applicable governmental authorities to issue as patents or register as trademarks at all, or in a form that will be advantageous to HNS. In addition, in some instances HNS may not have registered important patent and trademark rights in these and other countries. In addition, the laws of some countries do not protect and enforce proprietary rights to the same extent as do the laws of the United States. Accordingly, HNS might not be able to protect its proprietary products and technologies against unauthorized third party copying or use, which could negatively affect its competitive position. HNS may fail to recognize opportunities to provide, maintain or enforce intellectual property protection for its business.

 

Furthermore, HNS’ intellectual property may prove inadequate to protect its proprietary rights, may be misappropriated by others or may diminish in value over time. Competitors may be able to freely make use of HNS’ patented technology after its patents expire or may challenge the validity, enforceability or scope of its patents, trademarks or trade secrets. Competitors also may independently develop products or services that are substantially equivalent or superior to HNS’ technology. It may be possible for third parties to reverse-engineer, otherwise obtain, copy, and use information that HNS regards as proprietary. If HNS is unable to protect its products and services through the enforcement of intellectual property rights, HNS’ ability to compete based on its current market advantages may be harmed. If HNS fails to prevent substantial unauthorized use of its trade secrets, HNS risks the loss of those intellectual property rights and whatever competitive advantage they provide HNS.

 

Claims that HNS’ products and services infringe upon the intellectual property rights of others could increase its costs and reduce its sales, which would adversely affect its revenue.

 

HNS has in the past received, and may in the future receive, communications from third parties claiming that it or its products infringe upon the intellectual property rights of others. Litigation may be necessary to determine the validity and scope of third-party rights or to defend against claims of infringement. Litigation may also be necessary to enforce HNS’ intellectual property rights or to defend against claims that HNS’ intellectual property rights are invalid or unenforceable. Such litigation, regardless of the outcome, could result in substantial costs and diversion of resources and could have a material adverse effect on HNS’ business, financial condition and results of operations. It is expected that HNS will be increasingly subject to such claims as the number of products and competitors in its industry grows.

 

Many entities, including some of HNS’ competitors, have or may in the future obtain patents and other intellectual property rights that cover or affect products or services related to those that HNS currently offers or may offer in the future. In general, if a court determines that one or more of HNS’ services or products infringes on valid and enforceable intellectual property owned by others, HNS may be liable for money damages and may be required to cease developing or marketing those services and products, unless it obtains licenses from the owners of the intellectual property or redesign those services and products in such a way as to avoid infringing the intellectual property rights. If a third party holds intellectual property rights, it may not allow HNS to use its intellectual property at any price, or on terms acceptable to HNS, which could materially adversely affect its competitive position. In addition, HNS’ patents, trademarks and other proprietary rights may be subject to various attacks claiming they are invalid or unenforceable. These attacks might invalidate, render unenforceable or otherwise limit the scope of the protection that HNS’ patents, trademarks and other rights afford. If HNS loses the use of a product or brand name, its efforts spent building that brand may be lost and HNS will have to rebuild

 

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a brand for that product, which it may or may not be able to do. Even if HNS prevails in a patent infringement suit, there is no assurance that third parties will not be able to design around its patents, which could harm HNS’ competitive position.

 

HNS may not be aware of all intellectual property rights that its services or products may potentially infringe. Further, without lengthy litigation, it is often not possible to determine definitively whether a claim of infringement is valid. HNS cannot estimate the extent to which it may be required in the future to obtain intellectual property licenses or the availability and cost of any such licenses. Those costs, and their impact on HNS’ earnings, could be material. Damages in patent infringement cases may also include treble damages in certain circumstances. To the extent that HNS is required to pay royalties to third parties to whom it is not currently making payments, these increased costs of doing business could materially adversely affect HNS’ operating results. In addition, under some of its agreements with customers, HNS is not permitted to use all or some of the intellectual property developed for that customer for other customers and in other cases, HNS has agreed not to provide similar services to their competitors. In addition, HNS’ service agreements with its customers generally provide that it will defend and indemnify them for claims against them relating to its alleged infringement of third party intellectual property rights with respect to products and services HNS provides.

 

If HNS is unable to license technology from third parties on satisfactory terms, its developmental costs could increase and HNS may not be able to deploy its products and services in a timely manner.

 

HNS depends, in part, on technology that it licenses from third parties on a non-exclusive basis and integrates into its products and service offerings. Licenses for third-party technology that HNS uses in its current products may be terminated or not renewed, and HNS may be unable to license third-party technology necessary for such products in the future. Furthermore, HNS may be unable to renegotiate acceptable third-party license terms to reflect changes in its pricing models. Changes to or the loss of a third-party license could lead to an increase in the costs of licensing or inoperability of products or network services. In addition, technology licensed from third parties may have undetected errors that impair the functionality or prevent the successful integration of HNS’ products or services. As a result of any such changes or loss, HNS may need to incur additional development costs to ensure continued performance of its products or suffer delays until replacement technology, if available, can be obtained and integrated.

 

If HNS’ products contain defects, it could be subject to significant costs to correct such defects and its product and network service contracts could be delayed or cancelled, which could expose HNS to significant liability and significantly reduce its revenues.

 

HNS’ products and the networks it deploys are highly complex, and some of them may contain defects when first introduced or when new versions or enhancements are released, despite extensive testing and its quality control procedures. In addition, many of HNS’ product and network services are designed to interface with its customers’ existing networks, each of which has different specifications and utilizes multiple protocol standards. HNS’ products and services must interoperate with the other products and services within its customers’ networks as well as with future products and services that might be added to these networks to meet HNS’ customers’ requirements. The occurrence of any defects, errors or failures in its products or network services could result in incurrence of significant costs to correct such defects, cancellation of orders, a reduction in revenue backlog, product returns, diversion of HNS’ resources, legal actions by its customers or its customers’ end users, including for damages caused by a defective product, the issuance of credits to customers and other losses to HNS or to its customers or end users. If its products and network services do not perform their intended function, customer installations could be delayed or orders for its products and services could be cancelled, which could significantly reduce HNS’ revenues. Any of these occurrences could also result in the loss of or delay in market acceptance of HNS’ products and services and loss of sales, which would harm its reputation, its business and adversely affect its revenues and profitability. In addition, HNS’ insurance would not cover the cost of correcting significant errors, defects, design errors or security problems.

 

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DIRECTV may compete with HNS in certain sectors and subject to certain conditions and, after April 22, 2006, will retain one of HNS’ marketing brand names.

 

While HNS has entered into a non-competition agreement with DIRECTV, DIRECTV has retained the right to compete with HNS in selling data services to consumers at all times and may compete with it in all areas after the five-year term of the non-competition agreement, which commenced on April 22, 2005. In addition, while the non-competition agreement restricts DIRECTV from using its two SPACEWAY satellites for data service offerings that would directly compete with HNS, DIRECTV is not limited in such use if the video capability of its SPACEWAY satellites are not otherwise capable of commercial operations. Moreover, DIRECTV is not restricted from competing with HNS’ business if such data services are incidental to DIRECTV’s provision of a video service to an enterprise customer and are an integral part of such video service or are available as an optional add-on to such video service. In any event, DIRECTV may compete with HNS after the non-competition agreement expires on April 22, 2010.

 

In addition, the rights to the DIRECWAY® brand name and any related trademark rights are being retained by DIRECTV. HNS has agreed to stop using the DIRECWAY® brand name and related trademark rights by April 22, 2006. As a result, HNS will need to develop a new brand name for its current VSAT products which will generate additional sales and marketing and general and administrative costs. HNS cannot yet estimate the cost of such efforts, but it may be material and may lead to lessened customer identification for its products. It cannot be determined what effect, if any, that a new brand name will have on HNS’ sales and marketing efforts.

 

Risks Related to HNS’ Indebtedness

 

HNS’ high level of indebtedness could adversely affect its ability to raise additional capital to fund its operations and could limit its ability to react to changes in the economy or its industry.

 

HNS is significantly leveraged and its total indebtedness is approximately $383.2 million as of September 30, 2005. HNS’ substantial degree of leverage could have important consequences for you, including the following:

 

    it may limit HNS’ ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;

 

    a substantial portion of HNS’ cash flows from operations will be dedicated to the payment of principal and interest on its indebtedness and will not be available for other purposes, including its operations, capital expenditures, investments in new technologies and future business opportunities;

 

    the debt service requirements of HNS’ indebtedness could make it more difficult for it to satisfy its financial obligations;

 

    borrowings under HNS’ credit facilities bear interest at a variable rate, exposing it to the risk of increased interest rates;

 

    it may limit HNS’ ability to adjust to changing market conditions and place it at a competitive disadvantage compared to its competitors that have less debt or more financial resources; and

 

    HNS may be vulnerable in a downturn in general economic conditions or in its business, or it may be unable to carry out capital spending that is important to its growth.

 

Covenants in HNS’ debt agreements will restrict HNS’ and our business in many ways.

 

HNS’ debt agreements contain various covenants that limit HNS’ ability and/or certain of its subsidiaries’ ability to, among other things:

 

    incur, assume or guarantee additional indebtedness;

 

    issue redeemable stock and preferred stock;

 

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    incur liens;

 

    pay dividends or distributions or redeem or repurchase capital stock;

 

    prepay, redeem or repurchase debt;

 

    make loans and investments;

 

    enter into agreements that restrict distributions from its subsidiaries;

 

    sell assets and capital stock of our subsidiaries;

 

    enter into certain transactions with affiliates;

 

    consolidate or merge with or into, or sell substantially all of our assets to, another person; and

 

    enter into new lines of business.

 

In addition, HNS’ credit facilities contain restrictive covenants and require it to maintain specified financial ratios and satisfy other financial condition tests. HNS’ ability to meet those financial ratios and tests can be affected by events beyond HNS’ and our control, and no assurance can be given that HNS will meet those tests. A breach of any of these covenants could result in a default under HNS’ credit facilities. Upon the occurrence of an event of default under HNS’ credit facilities, the lenders could elect to declare all amounts outstanding under its credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If HNS were unable to repay those amounts, the lenders under its credit facilities could proceed against the collateral that secures that indebtedness. HNS has pledged a significant portion of its assets as collateral under the credit facilities. In addition, we have pledged all of our membership interests of HNS as collateral under HNS’ credit facilities. If the lenders under HNS’ revolving credit facility accelerate the repayment of borrowings, no assurance can be given that HNS will have sufficient assets to repay its credit facilities and other indebtedness.

 

We are a holding company and the inability of our subsidiaries to pay distributions or dividends or transfer funds or other assets to us would harm our ability to pay future dividends.

 

We are a holding company. Our principal assets are membership interests of HNS and cash. Although we do not currently intend to pay dividends on our shares of common stock for the foreseeable future (see “Risks Relating to Our Common Stock Generally—We do not intend to pay dividends on shares of our common stock in the foreseeable future”), in the event that we wished to pay dividends, we would be primarily reliant on distributions or dividends from our subsidiaries to pay such dividends. The ability of HNS to pay us distributions or transfer funds or other assets is subject to the terms of HNS’ debt agreements which contain covenants which, among other things, limit the ability of HNS and certain of its subsidiaries to pay dividends or distributions or redeem or repurchase capital stock. Such limitations could harm our ability to pay future dividends, if any.

 

Risks Related to the HNS Acquisition

 

If we fail to complete the rights offering, we will have substantial debt.

 

In order to fund the HNS Acquisition, we will borrow $100.0 million from certain of the Apollo Stockholders. See “HNS Acquisition—The Apollo Loan.” Immediately following the distribution, we are conducting the rights offering, as described in “The Rights Offering,” in order to repay the loan from such Apollo Stockholders. If we fail to complete the rights offering, we will have a substantial level of indebtedness to repay under the loan from such Apollo Stockholders. Our substantial level of indebtedness could have important consequences to you, including the following:

 

    our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes for either us or HNS may be impaired;

 

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    we must use a substantial portion of our cash flow from operations to make debt service payments on the loan from such Apollo Stockholders, which will reduce the funds available to us for other purposes such as potential acquisitions and capital expenditures for either us or HNS;

 

    we may have to sell assets in order to make payments on our indebtedness before we are able to achieve maximum value for such assets, or refinance such indebtedness on terms less favorable to us; and

 

    we are more vulnerable to general economic downturns and adverse developments in our business.

 

Risks Related to the Distribution and Separation from SkyTerra

 

Our historical consolidated and pro forma financial information is not necessarily representative of the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.

 

The historical consolidated and pro forma financial information included herein does not reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company during the periods presented or those we will achieve in the future. This is primarily a result of the following factors:

 

    Our historical consolidated financial information reflects certain businesses that will not be included in our company following the completion of this offering. For a description of the components of our historical consolidated financial information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of SkyTerra (Accounting Predecessor to Hughes Communications),” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Hughes Network Systems” and our consolidated financial statements included elsewhere in this document.

 

    The pro forma financial information presented herein gives effect to several significant transactions that have been or will be implemented prior to the completion of the distribution, including the transfers of certain assets from SkyTerra to us on December 31, 2005 and the consummation of the HNS Acquisition on January 1, 2006. The unaudited pro forma information gives effect to the transactions as if each had occurred as of January 1, 2004, in the case of earnings information, and September 30, 2005, in the case of financial position information. This pro forma financial information is based upon available information and assumptions that we believe are reasonable. However, this pro forma financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had those transactions occurred as of those dates, nor what they may be in the future.

 

We may incur significant liability to SkyTerra pursuant to the indemnification provisions of the separation agreement.

 

The separation agreement provides that we will indemnify SkyTerra and its affiliates against potential losses based on, arising out of or resulting from:

 

    the ownership or the operation of the assets or properties transferred to us under the separation agreement, and the operation or conduct of the business of, including contracts entered into and any activities engaged in by, us, whether in the past or future;

 

    any other activities we engage in;

 

    any guaranty, keepwell, of or by SkyTerra provided to any parties with respect to any of our actual or contingent obligations;

 

    certain claims for violations of federal securities laws that could arise out of or relate to the business of SkyTerra, provided that any claims based on this indemnity are initiated prior to one year following a change of control of SkyTerra and that we are not indemnifying SkyTerra in respect of matters in respect of which it has expressly indemnified us or for violations which result from information provided to SkyTerra by the MSV Joint Venture or TerreStar;

 

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    any breach by us of the separation agreement or any other agreement between us and SkyTerra;

 

    any failure by us to honor any of the liabilities assumed by us under the separation agreement; or

 

    other matters described in the separation agreement.

 

The transitional and separation arrangements with SkyTerra are not the result of arm’s-length negotiations.

 

We currently have, and after the distribution will continue to have, contractual arrangements which require us to provide transitional services and shared arrangements to SkyTerra and under which we agree to indemnify SkyTerra, and SkyTerra agrees to indemnify us, for specified matters in the context of the separation resulting from the distribution. These agreements were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of the distribution. Accordingly, the terms of these agreements may be less advantageous to, or more burdensome on, us than the terms which would have resulted had the negotiations been arm’s-length.

 

Risks Relating to Our Common Stock Generally

 

There may be a limited public market for our common stock, our stock price may experience volatility and our common stock will be quoted on the OTC Bulletin Board, which limits the liquidity and could negatively affect the value of our common stock.

 

An active trading market for our common stock may not develop as a result of the distribution or be sustained in the future. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of particular companies. Changes in earnings estimates by analysts, if any, and economic and other external factors may have a significant effect on the market price of our common stock. Fluctuations or decreases in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock. Further, price quotations for our common stock will be available on the OTC Bulletin Board following the distribution. Generally, quotation on the OTC Bulletin Board will render our common stock less liquid than stocks listed on national securities exchanges. This lack of liquidity may adversely affect our ability to raise capital through future equity financing.

 

HNS has a history of losses and may incur losses in the future, which could materially reduce the market price of our stock.

 

For the three years ended December 31, 2002, 2003 and 2004, HNS has generated net losses of $208.1 million, $157.0 million and $1,433.5 million, respectively. Although HNS achieved profitability in the nine months ended September 30, 2005, HNS may not sustain profitability in future periods. Failure to maintain profitability at HNS may materially impact HNS’ ability to service its indebtedness or fund future growth opportunities and may otherwise reduce the market price of our common stock.

 

Fluctuations in our operating results could adversely affect the trading price of our common stock.

 

Our operating results may fluctuate as a result of a variety of factors, many of which are outside of our control, including:

 

    risks and uncertainties affecting the current and proposed business of HNS and the broadband satellite industry;

 

    increased competition in the broadband satellite industry;

 

    competition in the VSAT business; and

 

    general economic conditions.

 

As a result of these possible fluctuations, period-to-period comparisons of our financial results may not be reliable indicators of future performance.

 

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Future sales of our shares could depress the market price of our common stock.

 

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after the distribution or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

Upon completion of the distribution, 10,596,792 shares of our common stock will be outstanding. In addition, 7,843,141 shares of our common stock will be issued upon the exercise of rights in the rights offering. By virtue of the registration statement of which this document is a part, all such shares will be freely tradable without restriction under the Securities Act except for any such shares held at any time by any of our “affiliates,” as such term is defined under Rule 144 promulgated under the Securities Act. See “Shares Eligible for Future Sale.” In connection with the distribution, holders of stock options to purchase shares of SkyTerra’s common stock will receive stock options to purchase our common stock under the 2006 Equity and Incentive Plan. See “Director and Executive Compensation—2006 Equity and Incentive Plan.” In addition, shortly following the distribution, we expect to terminate the HNS bonus unit plan and issue options to purchase approximately 865,000 shares of our common stock under the 2006 Equity and Incentive Plan, in lieu of the existing bonus units. The exercise price of such options will be the closing price of our common stock on the date of grant. Upon completion of the distribution, we intend to file one or more registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for issuance under our 2006 Equity and Incentive Plan. Any such Form S-8 registration statement will automatically become effective upon filing. Accordingly, shares of common stock registered under any such registration statement and issued upon exercise of such stock options will be available for sale in the open market, unless such shares of common stock are subject to vesting restrictions.

 

We may have to issue additional shares of our common stock to satisfy the Class B membership interests of HNS, which upon January 1, 2007, the one year anniversary of the HNS Acquisition, may be exchanged for our common stock, subject to our Board’s authorization, with the number of shares of our common stock to be issued upon such exchange based upon the fair market value of such vested Class B membership interest divided by the value of our common stock at the time of such exchange.

 

We do not intend to pay dividends on shares of our common stock in the foreseeable future.

 

We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future.

 

Provisions in our charter documents and Delaware law may delay or prevent our acquisition by a third party.

 

Our certificate of incorporation and by-laws will contain several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors. These provisions include, among other things, advance notice for raising business or making nominations at meetings of stockholders and “blank check” preferred stock. Blank check preferred stock enables our board of directors, without stockholder approval, to designate and issue additional series of preferred stock with such special dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities with no limitations on conversion, as our board of directors may determine, including rights to dividends and proceeds in a liquidation that are senior to the common stock. In addition, our board may issue additional shares of common stock without any further vote or action by our common stockholders, which would have the effect of diluting common stockholders. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting common stock. In addition, the Delaware General Corporation Law contains provisions that could make it more difficult for a third party to acquire control of our company.

 

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Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from assisting HNS and our other businesses in revenue-generating activities to compliance activities, which could harm our business prospects.

 

The Apollo Stockholders will beneficially own a majority of our voting stock.

 

Following the distribution, although SkyTerra will no longer own any of our common stock, the Apollo Stockholders who control SkyTerra will own an aggregate of 7,044,642 shares, or approximately 67%, of our outstanding common stock. In addition, to the extent that the Apollo Stockholders exercise their over-subscription privileges in accordance with the purchase agreement governing the loan from certain of the Apollo Stockholders, the number and percentage of our shares of outstanding common stock owned by the Apollo Stockholders will be higher. For example, if no other stockholders participate in the rights offering, the Apollo Stockholders will own an aggregate of 14,887,783 shares, or approximately 81%, of our outstanding common stock upon the completion of the rights offering. Therefore, the Apollo Stockholders will have control over our management and policies, such as the election of our directors, the appointment of new management and the approval of any other action requiring the approval of our stockholders, including any amendments to our certificate of incorporation and mergers or sales of all or substantially all of our assets. In addition, the level of the Apollo Stockholders’ ownership of our shares of common stock and these rights could have the effect of discouraging or impeding an unsolicited acquisition proposal.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements that involve risks and uncertainties, including statements regarding our capital needs, business strategy, expectations and intentions. We urge you to consider that statements that use the terms “believe,” “do not believe,” “anticipate,” “expect,” “plan,” “estimate,” “strive,” “intend” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and because our business is subject to numerous risks, uncertainties and risk factors, our actual results could differ materially from those anticipated in the forward-looking statements. All forward-looking statements speak only as of the date of this document. Actual results will most likely differ from those reflected in these statements, and the differences could be substantial. We disclaim any obligation to update these statements, or disclose any difference between our 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. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this document are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. You should read carefully the factors described in the section entitled “Risk Factors” of this document for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements.

 

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THE HNS ACQUISITION

 

On January 1, 2006, we consummated the purchase of the remaining Class A membership interests in HNS that were not contributed to us by SkyTerra for a purchase price of $100.0 million in cash. Accordingly, we now own 100% of such Class A membership interests of HNS.

 

In order to fund the HNS Acquisition, we borrowed the necessary funds from certain of the Apollo Stockholders, as described below in “—The Apollo Loan.” Immediately following the distribution, we are conducting the rights offering, as described in “The Rights Offering” below, in order to repay the loan from such Apollo Stockholders.

 

In connection with the closing of the transaction, the parties to the membership interest purchase agreement entered into agreements governing certain relationships between and among the parties after the closing. Such agreements include the modification and/or termination of certain prior agreements between and among the parties, including:

 

    amending certain provisions of SkyTerra’s original purchase agreement with HNS and DTV Networks to accelerate the expiration of certain representations and warranties made by DTV Networks in connection with that agreement;

 

    terminating an investor rights agreement in connection with that original purchase agreement pursuant to which, among other covenants, SkyTerra and DTV Networks agreed to limit the transferability of the Class A membership interests and HNS granted SkyTerra and DTV Networks public offering registration rights; and

 

    amending the Advertising and Marketing Support Agreement, pursuant to which, affiliates of DTV Networks provided HNS with discounted advertising costs for its Direcway services.

 

The Apollo Loan

 

On January 1, 2006, in order to fund the HNS Acquisition, we borrowed $100.0 million from certain of the Apollo Stockholders that, following the distribution, will be our majority stockholders. The loan bears interest at a rate of 8% per annum and has a final maturity date of January 1, 2007. Pursuant to the note purchase agreement governing the terms of the loan, following the distribution, we are required to use our best efforts to consummate the rights offering so as to generate sufficient proceeds to repay the loan. The Apollo Stockholders that are party to the loan have agreed to exercise their rights (including their over-subscription privileges) to purchase all of the shares of common stock allocated to them, as well as those not subscribed for by other stockholders, in the rights offering, up to the total unpaid principal and interest on the loan. The portion of the loan necessary to purchase all of the shares allocated to the Apollo Stockholders will automatically convert into common stock in the rights offering based on the rights offering subscription price. See “The Rights Offering.” The principal and interest under the loan that is not converted in the rights offering will be repaid in cash from proceeds from the rights offering. The loan is secured by a security interest in the cash proceeds of the rights offering that we receive from stockholders other than Apollo.

 

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DIVIDEND POLICY

 

We have not declared any cash dividends on our common stock and have no present intention to pay dividends in the foreseeable future. Any determination to pay dividends will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, legal requirements and other factors as the board of directors deems relevant. In addition, HNS’ debt agreements limit HNS’ ability to pay dividends or transfer funds or other assets to us, thereby limiting our ability to pay dividends. We may in the future become subject to debt instruments or other agreements that further limit our ability to pay dividends.

 

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CAPITALIZATION OF HUGHES COMMUNICATIONS (ACCOUNTING SUCCESSOR TO SKYTERRA)

 

The following table sets forth the unaudited historical capitalization of SkyTerra as of September 30, 2005 and our (as accounting successor to SkyTerra) unaudited pro forma capitalization as of September 30, 2005, as adjusted to give pro forma effect to (i) the sale of our ownership interests in AfriHUB, (ii) the distribution and related transactions, (iii) the HNS Acquisition, (iv) the loan from certain of the Apollo Stockholders in connection with the HNS Acquisition, (v) the rights offering, assuming the amount raised is $100.0 million and (vi) the repayment of the loan from such Apollo Stockholders with the proceeds of the rights offering, in each case, as if they had occurred on September 30, 2005.

 

The table should be read in conjunction with “Selected Historical Consolidated Financial Data of SkyTerra (Accounting Predecessor to Hughes Communications),” “Pro Forma Condensed Consolidated Financial Statements of Hughes Communications (Accounting Successor to SkyTerra),” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of SkyTerra (Accounting Predecessor to Hughes Communications)” and SkyTerra’s consolidated financial statements and related notes thereto included elsewhere in this document.

 

The table excludes:

 

    shares of common stock issuable upon the exercise of options to purchase shares of our common stock to be issued to certain of our officers and employees upon completion of the distribution. See “Director and Executive Compensation—2006 Equity and Incentive Plan;” and

 

    shares of common stock reserved for future grants under our director, officer and employee stock option plans.

 

     As of September 30, 2005

 
             Historical        

            Pro Forma        

 
     (in thousands, except share data)  

Short-term borrowings and current portion of long-term debt

   $ 228     $ 34,403  
    


 


Long-term debt:

                

Long-term debt, less current portion

   $ —       $ 355,667  
    


 


Minority Interest

     8,808       6,052  
    


 


Series A redeemable convertible preferred stock, net of unamortized discount of $29,293

     92,002       —    
    


 


Stockholders’ equity:

                

Preferred stock, $0.01 par value, 10,000,000 authorized shares, 1,199,007 shares issued and outstanding as Series A redeemable convertible preferred stock, historical; and $0.001 par value, 1,000,000 authorized shares, no shares issued and outstanding, pro forma

     —         —    

Common stock, $0.01 par value, 200,000,000 authorized shares, 8,717,309 shares issued and outstanding, historical; and $0.001 par value, 64,000,000 authorized shares, 18,439,933 shares issued and outstanding, pro forma

     87       18  

Non-voting common stock, $0.01 par value; 100,000,000 authorized shares, 8,990,212 shares issued and outstanding, historical; and no shares authorized, pro forma

     90       —    

Additional paid-in capital

     475,736       619,281  

Accumulated other comprehensive income

     349       349  

Accumulated deficit

     (428,964 )     (428,857 )
    


 


Total stockholders’ equity

     47,298       190,791  
    


 


Total capitalization

   $ 148,108     $ 552,510  
    


 


 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SKYTERRA (ACCOUNTING PREDECESSOR TO HUGHES COMMUNICATIONS)

 

The following table sets forth selected historical consolidated financial data for SkyTerra (accounting predecessor to us) and is set forth here because, notwithstanding the legal form of the distribution, we will be considered the divesting entity and treated as the “accounting successor” to SkyTerra for financial reporting purposes in accordance with EITF Issue No. 02-11, “Accounting for Reverse Spin-offs,” due to, among other things, (i) the businesses transferred to us generated all of SkyTerra’s consolidated revenues for the year ended December 31, 2004 and for the nine months ended September 30, 2005 and constitute a majority of the book value of SkyTerra’s assets as of September 30, 2005 and (ii) the businesses transferred to us include SkyTerra’s discontinued operating subsidiaries and all of the assets and liabilities relating to such subsidiaries. As such, the financial information presented in the following summary for SkyTerra (accounting predecessor to us) reflects financial information that previously has been filed with the SEC by SkyTerra. When the distribution occurs, we will report the historical results of operations (subject to certain adjustments) of the assets remaining at SkyTerra in discontinued operations in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Pursuant to SFAS No. 144, this presentation is not permitted until the date of the distribution.

 

The consolidated statement of operations data for the three years ended December 31, 2004, 2003 and 2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 set forth below are derived from the audited consolidated financial statements of SkyTerra included elsewhere in this document. The consolidated statement of operations data for the years ended December 31, 2001 and 2000 and the consolidated balance sheet data as of December 31, 2002, 2001 and 2000 set forth below are derived from the audited consolidated financial statements of SkyTerra not included in this document. The consolidated statement of income data for the nine months ended September 30, 2005 and 2004 and the consolidated balance sheet data as of September 30, 2005 are derived from the unaudited consolidated financial statements of SkyTerra included elsewhere in this document and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position and results of operations as of the dates and for the periods indicated. The results for periods of less than a full year are not necessarily indicative of the results to be expected for any interim period or for a full year.

 

The selected historical consolidated financial data is not necessarily indicative of the results of operations or financial position that would have occurred if we had been a separate, independent company during the periods presented, nor is it indicative of our future performance. This historical data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of SkyTerra (Accounting Predecessor to Hughes Communications)” and SkyTerra’s consolidated financial statements and related notes thereto included elsewhere in this document.

 

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     Nine Months Ended
September 30,


    Years Ended December 31,

 
     2005

    2004

    2004

    2003

    2002

    2001

    2000

 
     (in thousands, except share data)  

Combined statements of operations data:

                                                        

Revenues

   $ 661     $ 1,778     $ 2,127     $ 699     $ —       $ 1,906     $ 8,284  

Operating expenses

     (7,610 )     (8,202 )     (13,982 )     (7,646 )     (6,513 )     (25,551 )     (73,049 )
    


 


 


 


 


 


 


Loss from operations

     (6,949 )     (6,424 )     (11,855 )     (6,947 )     (6,513 )     (23,645 )     (64,765 )

Interest income, net

     1,131       9,490       10,548       6,304       5,602       9,189       10,182  

Equity in earnings of Hughes Network Systems, LLC

     12,887       —         —         —         —         —         —    

Equity in loss of Mobile Satellite Ventures LP

     (7,519 )     —         (1,020 )     —         —         —         —    

Loss on investments in affiliates

     (1,211 )     (972 )     (1,336 )     (404 )     (385 )     (54,633 )     (11,102 )

Other income (expense), net

     941       20,841       21,045       244       (14,716 )     (22,239 )     (205 )

Minority interest

     1,531       (631 )     (216 )     (1,126 )     (998 )     (97 )     —    
    


 


 


 


 


 


 


Income (Loss) from continuing operations before taxes

     811       22,304       17,166       (1,929 )     (17,010 )     (91,425 )     (65,890 )

Income tax benefit

     —         —         —         —         350       —         —    
    


 


 


 


 


 


 


Income (Loss) from continuing operations

     811       22,304       17,166       (1,929 )     (16,660 )     (91,425 )     (65,890 )

Gain (Loss) from discontinued operations

     845       —         —         1,211       12,632       (118,919 )     (62,532 )
    


 


 


 


 


 


 


Net income (loss)

     1,656       22,304       17,166       (718 )     (4,028 )     (210,344 )     (128,422 )

Cumulative dividends and accretion of preferred stock to liquidation value

     (7,477 )     (7,426 )     (9,918 )     (9,687 )     (10,937 )     (11,937 )     (22,718 )
    


 


 


 


 


 


 


Net (loss) income attributable to common stockholders

   $ (5,821 )   $ 14,878     $ 7,248     $ (10,405 )   $ (14,965 )   $ (222,281 )   $ (151,140 )
    


 


 


 


 


 


 


Basic (loss) earnings per common share:

                                                        

Continuing operations

   $ (0.38 )   $ 0.99     $ 0.48     $ (0.76 )   $ (2.32 )   $ (16.21 )   $ (16.57 )

Discontinued operations

     0.05       —         —         0.08       1.06       (18.66 )     (11.69 )
    


 


 


 


 


 


 


Net (loss) earnings per common share

   $ (0.33 )   $ 0.99     $ 0.48     $ (0.68 )   $ (1.26 )   $ (34.87 )   $ (28.26 )
    


 


 


 


 


 


 


Diluted (loss) earnings per common share:

                                                        

Continuing operations

   $ (0.38 )   $ 0.95     $ 0.46     $ (0.76 )   $ (2.32 )   $ (16.21 )   $ (16.57 )

Discontinued operations

     0.05       —         —         0.08       1.06       (18.66 )     (11.69 )
    


 


 


 


 


 


 


Net (loss) earnings per common share

   $ (0.33 )   $ 0.95     $ 0.46     $ (0.68 )   $ (1.26 )   $ (34.87 )   $ (28.26 )
    


 


 


 


 


 


 


Basic weighted average common shares outstanding

     17,581,661       15,062,714       15,115,895       15,341,518       11,865,291       6,374,020       5,348,895  
    


 


 


 


 


 


 


Diluted weighted average common shares outstanding

     17,581,661       15,713,479       15,837,370       15,341,518       11,865,291       6,374,020       5,348,895  
    


 


 


 


 


 


 


 

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September 30,

2005


   December 31,

        2004

   2003

    2002

   2001

   2000

     (in thousands)

Consolidated balance sheet data:

                                          

Cash, cash equivalents, and short-term investments

   $ 33,729    $ 94,507    $ 28,692     $ 39,492    $ 16,807    $ 157,483

Investment in Hughes Network Systems, LLC

     68,047      —        —         —        —        —  

Investment in Mobile Satellite Ventures LP

     44,411      50,098      —         —        —        —  

Investment in XM Satellite Radio

     —        —        —         —        91,800      —  

Notes receivable, net

     —        —        65,138       56,823      50,486      —  

Investments in affiliates

     2,549      3,361      2,769       2,343      2,600      48,016

Total assets

     152,645      154,570      98,099       100,346      163,716      317,491

Total liabilities

     4,537      10,512      6,066       7,715      24,757      40,761

Minority interest

     8,808      9,974      12,467       11,334      10,097      —  

Series A redeemable convertible preferred stock, net

     92,002      88,706      80,182       70,495      59,558      47,621

Stockholders’ equity (deficit)

     47,298      45,378      (616 )     10,802      69,304      229,109

 

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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HUGHES COMMUNICATIONS (ACCOUNTING SUCCESSOR TO SKYTERRA)

 

The following unaudited pro forma condensed consolidated statement of operations presents our (as accounting successor to SkyTerra) results of operations for the nine months ended September 30, 2005 and the year ended December 31, 2004 assuming the following occurred on January 1, 2004: (i) the sale of our ownership interests in AfriHUB, (ii) the distribution and related transactions, (iii) the acquisition of 50% of the Class A membership interests of HNS from DTV Networks on April 22, 2005, (iv) the HNS Acquisition, (v) the loan from certain of the Apollo Stockholders in connection with the HNS Acquisition, (vi) the rights offering, assuming the amount raised is $100.0 million and (vii) the repayment of the loan from such Apollo Stockholders with the proceeds from the rights offering. The following unaudited pro forma condensed consolidated balance sheet presents our (as accounting successor to SkyTerra) financial position assuming that the following occurred on September 30, 2005: (i) the sale of our ownership interests in AfriHUB, (ii) the distribution and related transactions, (iii) the HNS Acquisition, (iv) the sale of the loan from such Apollo Stockholders in connection with the HNS Acquisition, (v) the rights offering, assuming the amount raised is $100.0 million and (vi) the repayment of the loan from such Apollo Stockholders with the proceeds from the rights offering.

 

Notwithstanding the legal form of the distribution, we will be considered the divesting entity and treated as the “accounting successor” to SkyTerra for financial reporting purposes in accordance with EITF Issue No. 02-11, “Accounting for Reverse Spin-offs,” due to, among other things, (i) the businesses transferred to us generated all of SkyTerra’s consolidated revenues for the year ended December 31, 2004 and for the nine months ended September 30, 2005 and constitute a majority of the book value of SkyTerra’s assets as of September 30, 2005 and (ii) the businesses transferred to us include SkyTerra’s discontinued operating subsidiaries and all of the assets and liabilities relating to such subsidiaries. The distribution of SkyTerra will be accounted for pursuant to Accounting Principles Board, or APB, Opinion No. 29, “Accounting for Non-monetary Transactions.” Accordingly, the distribution will be accounted for based upon the recorded amounts of the net assets to be divested. We will charge directly to equity as a dividend the historical cost carrying amount of the net assets remaining at SkyTerra after reduction, if appropriate, for any indicated impairment of value. We currently believe there is no indicated impairment of value of the net assets of which SkyTerra retains ownership and control. Furthermore, when the distribution transaction occurs, we will report the historical results of operations (subject to certain adjustments) of the assets of which SkyTerra retains ownership and control in discontinued operations in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Pursuant to SFAS No. 144, such presentation is not allowed until the date of the distribution.

 

For purposes of, among other things, governing certain of the ongoing relations between us and SkyTerra as a result of the distribution, as well as to allocate certain tax and other liabilities arising prior to the distribution, the companies have entered into various agreements, including a separation agreement and tax sharing agreement. Summaries of these agreements are set forth elsewhere in this document.

 

The unaudited pro forma condensed consolidated financial statements include allocations of the purchase price in connection with the HNS Acquisition. These allocations are based on preliminary estimates of the fair value of the assets acquired and liabilities assumed, available information and management assumptions and may be revised as additional information becomes available. The final purchase price allocation is dependent on the finalization of asset and liability valuations. This final valuation will be based on the actual net tangible and intangible assets that exist on the closing date of the HNS Acquisition. Any adjustments to the fair value assigned to the assets and liabilities could result in a change to the unaudited pro forma condensed consolidated financial statements.

 

The unaudited pro forma condensed consolidated financial statements set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of SkyTerra (Accounting Predecessor to Hughes Communications),” “Management’s Discussion and Analysis of

 

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Financial Condition and Results of Operations of Hughes Network Systems,” the consolidated financial statements of SkyTerra and the related notes thereto and the combined consolidated financial statements of HNS and the related notes thereto included elsewhere in this document. The unaudited pro forma condensed consolidated financial statements do not purport to represent what our results of operations or financial condition would actually have been had the distribution and other transactions, as applicable, in fact occurred as of such date or to project our results of operations for any future period or as of any future date. Further, the unaudited pro forma condensed consolidated financial statements do not purport to represent what our results of operations or financial condition would actually have been had we operated as a separate public company.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF HUGHES COMMUNICATIONS (ACCOUNTING SUCCESSOR TO SKYTERRA)

 

    Year Ended December 31, 2004

 
   

SkyTerra

Historical


   

Discontinued

Operation

Adjustments (1)


    Subtotal

   

Distribution

Adjustments


    Subtotal

   

HNS

Historical


   

Acquisition

Adjustments


    Subtotal

   

Rights

Offering

Adjustments


   

Hughes

Communications

Pro Forma


 
    (in thousands, except share data)  

Revenues

                                                                               

Services

  $ 2,127     $ (10 )   $ 2,117     $ —       $ 2,117     $ 387,591     $ —       $ 389,708     $ —       $ 389,708  

Hardware sales

    —         —         —         —         —         401,759       —         401,759       —         401,759  
   


 


 


 


 


 


 


 


 


 


Total revenues

    2,127       (10 )     2,117       —         2,117       789,350       —         791,467       —         791,467  
   


 


 


 


 


 


 


 


 


 


Operating costs and expenses:

                                                                               

Cost of services

    2,072       (37 )     2,035       —         2,035       290,469       (575 )(5)     274,435       —         274,435  
                                                      (15,494 )(6)                        
                                                      (2,000 )(7)                        

Cost of hardware products sold

    —         —         —         —         —         322,507       (1,251 )(5)     286,070       —         286,070  
                                                      (35,699 )(6)                        
                                                      513 (8)                        

Research and development

    —         —         —         —         —         71,733       (1,515 )(5)     54,952       —         54,952  
                                                      (15,266 )(6)                        

Sales and marketing

    —         —         —         —         —         72,564       (195 )(5)     71,542       —         71,542  
                                                      (827 )(6)                        

General and administrative (12)(13)

    11,155       (1,683 )     9,472       (457 )(2)     9,015       85,538       (2,972 )(5)     88,560       —         88,560  
                                                      (3,021 )(6)                        

Restructuring costs

    —         —         —         —         —         10,993       —         10,993       —         10,993  

SPACEWAY impairment provision

    —         —         —         —         —         1,217,745       —         1,217,745       —         1,217,745  

Asset impairment provision

    755       (755 )     —         —         —         150,300       —         150,300       —         150,300  
   


 


 


 


 


 


 


 


 


 


Total operating costs and expenses

    13,982       (2,475 )     11,507       (457 )     11,050       2,221,849       (78,302 )     2,154,597       —         2,154,597  
   


 


 


 


 


 


 


 


 


 


Operating (loss) income

    (11,855 )     2,465       (9,390 )     457       (8,933 )     (1,432,499 )     78,302       (1,363,130 )     —         (1,363,130 )

Interest income (expense), net

    10,548       —         10,548       (5,552 )(2)     4,996       (7,466 )     (35,871 )(9)     (38,341 )     8,000 (10)     (30,341 )

Equity in loss of Mobile Satellite Ventures LP

    (1,020 )     —         (1,020 )     1,020 (2)     —         —         —         —         —         —    

Loss on investment in affiliates

    (1,336 )     —         (1,336 )     —         (1,336 )     —         —         (1,336 )     —         (1,336 )

Other income, net

    21,045       (15 )     21,030       —         21,030       6,481       —         27,511       —         27,511  

Minority interest

    (216 )     (594 )     (810 )     810 (2)     —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


Income (Loss) from continuing operations before income taxes

    17,166       1,856       19,022       (3,265 )     15,757       (1,433,484 )     42,431       (1,375,296 )     8,000       (1,367,296 )

Income tax expense (14)

    —         —         —         —         —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


Income (Loss) from continuing operations

    17,166       1,856       19,022       (3,265 )     15,757       (1,433,484 )     42,431       (1,375,296 )     8,000       (1,367,296 )

Cumulative dividends and accretion of convertible preferred stock to liquidation value

    (9,918 )     —         (9,918 )     9,918 (3)     —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


Income (Loss) from continuing operations attributable to common stockholders

  $ 7,248     $ 1,856     $ 9,104     $ 6,653     $ 15,757     $ (1,433,484 )   $ 42,431     $ (1,375,296 )   $ 8,000     $ (1,367,296 )
   


 


 


 


 


 


 


 


 


 


Basic earnings (loss) from continuing operations per common share

  $ 0.48             $ 0.60             $ 1.68                     $ (146.55 )           $ (79.37 )
   


         


         


                 


         


Basic weighted average common shares outstanding

    15,115,895               15,115,895       (5,731,099 )(4)     9,384,796                       9,384,796       7,843,141 (11)     17,227,937  
   


         


 


 


                 


 


 


Diluted earnings (loss) from continuing operations per common share

  $ 0.46             $ 0.57             $ 1.62                     $ (146.55 )           $ (79.37 )
   


         


         


                 


         


Diluted weighted average common shares outstanding

    15,837,370               15,837,370       (6,091,836 )(4)     9,745,534                       9,384,796       7,843,141 (11)     17,227,937  
   


         


 


 


                 


 


 


 

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Table of Contents

(1) In December 2005, SkyTerra made a decision to discontinue operating AfriHUB and entered into a letter of intent to sell our interests in AfriHUB for a promissory note with a principal amount of approximately $0.2 million and a maturity date one year following the execution of definitive documentation. The determination to discontinue operating this business represents the disposal of a business segment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adjustment reflects the elimination of the operating results of AfriHUB from continuing operations.
(2) Adjustment reflects elimination of historical income and expenses of SkyTerra related to its interest in the MSV Joint Venture and TerreStar.
(3) Adjustment reflects elimination of the $9.9 million of dividends and accretion related to SkyTerra’s Series A redeemable convertible preferred stock. The Series A redeemable convertible preferred stock will not be included in our capitalization following the distribution.
(4) Adjustment reflects the elimination of the historical capital stock of SkyTerra and the issuance of one-half of one share of our common stock for every share of SkyTerra common stock (or, in the case of SkyTerra’s preferred stock and Series 1-A and 2-A warrants, in accordance with their terms, one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise of such preferred stock and warrants held).
(5) Adjustment reflects elimination of rent and certain other direct costs associated with facilities retained by DIRECTV following the April 2005 acquisition by SkyTerra of 50% of the Class A membership interests of HNS.
(6) Adjustment reflects the decrease in depreciation and amortization expense which resulted from the application of purchase accounting in connection with the HNS Acquisition.
(7) Adjustment reflects amortization of $2.0 million of the liability for unfavorable satellite capacity leases held by HNS which was recorded in connection with the application of purchase accounting as a result of the HNS Acquisition.
(8) Prior to the April 2005 acquisition, DIRECTV issued letters of credit to support certain contractual obligations of HNS. Following the April 2005 acquisition, HNS replaced certain of these letters of credit with new letters of credit issued under its revolving credit facility. The adjustment reflects the incremental fees related to letters of credit issued under HNS’ revolving credit facility. As these letters of credit primarily support certain property and equipment used in the production of HNS’ hardware, the fees associated with the letters of credit have been classified as cost of hardware products sold.
(9) Reflects the following adjustments to interest income (expense), net (in thousands):

 

Interest expense on the term indebtedness and revolving credit facility (a)

   $ (27,040 )

Interest expense on the Promissory Notes (b)

     (8,000 )

Amortization of debt issuance costs (c)

     (1,454 )

Interest expense on debt repaid by DIRECTV (d)

     623  
    


     $ (35,871 )
    


 

  (a) In connection with the April 2005 acquisition, HNS obtained a first lien credit facility of $275.0 million, a second lien credit facility of $50.0 million and a revolving credit facility of $50.0 million. The adjustment reflects the net change in interest expense had HNS obtained the credit facilities on January 1, 2004. The pro forma interest expense was calculated using an interest rate of 7.625% on the first lien credit facility, 11.875% on the second lien credit facility and a 0.50% commitment fee on the revolving credit facility, reflecting the rates in effect as of September 30, 2005.
  (b) Adjustment reflects interest expense accrued at 8.0% per annum on the $100.0 million loan from certain of the Apollo Stockholders.
  (c) Adjustment reflects amortization of capitalized debt issuance costs of $10.5 million over the term of the credit facilities obtained in April 2005.
  (d) Adjustment reflects elimination of interest expense relating to debt repaid by DIRECTV in connection with the April 2005 acquisition.

 

(10) Adjustment reflects elimination of interest expense related to the loan from certain of the Apollo Stockholders. The portion of the loan necessary to purchase all of the shares subscribed for by such Apollo Stockholders in the rights offering shall convert to shares of our common stock based on the subscription price in the rights offering. Any unpaid principal and interest following such conversion will repaid with proceeds from the rights offering.
(11) In order to repay the loan from certain of the Apollo Stockholders, we intend to consummate a rights offering as soon as practicable following the distribution. Such Apollo Stockholders have agreed to exercise their rights (including their over-subscription privileges) so they purchase all of the shares allocated to them, as well as those not subscribed for by other stockholders, in the rights offering, up to the maximum amount of the outstanding principal and interest under the loan from such Apollo Stockholders. The portion of the loan necessary to purchase all of the shares allocated to the Apollo Stockholders will automatically convert into common stock in the rights offering based on the rights offering subscription price. Accordingly, we are assured of selling all 7,843,141 shares in the rights offering.
(12) Shortly following the distribution, we expect to terminate the HNS bonus unit plan and issue options to purchase approximately 865,000 shares of our common stock under the 2006 Equity and Incentive Plan, in lieu of the existing bonus units. The exercise price of such options will be the closing price of our common stock on the date of grant. The other terms of such options will be determined by the compensation committee of our board of directors prior to the grant date. In connection with these option issuances, we will recognize compensation expense over the vesting period equal to the fair value of the options on the grant date using an option pricing model. However, the amount of the compensation expense cannot be predicted at this time as it will depend on the specific terms of the options.
(13) Shortly following the distribution, we expect that our compensation committee will grant vested options to purchase an aggregate of approximately 140,000 shares of our common stock under the 2006 Equity and Incentive Plan, consisting of 20,000 shares to six of our executive officers and a consultant. Such executive officers include our chief executive officer and president and each of our executive vice presidents. Each option is expected to be exercisable for a period of less than 15 days following the date of grant, and the exercise price of each option is expected to be $10.35 per share, an approximate 20% discount to the subscription price in the rights offering. In connection with this option issuance, we will recognize compensation expense on the date of grant equal to the fair value of the options using an option pricing model. Assuming the closing price of our common stock on the date of grant is the $12.75 subscription price in the rights offering, we would recognize compensation expense of approximately $0.3 million relating to the option grant. However, the exact amount of the compensation expense cannot be predicted at this time as it will depend on the actual closing price of our common stock on the date of grant.
(14) For Federal income tax purposes, SkyTerra has unused net operating loss carryforwards, approximately $135.3 million of which are attributable to the businesses being transferred to us in the distribution. Subject to the utilization of a portion of these net operating loss carryforwards to offset any gain resulting from the distribution, we expect to have these net operating losses available to us following the distribution. Accordingly, no provision for income taxes has been recorded in the pro forma condensed consolidated statement of operations.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS OF HUGHES COMMUNICATIONS

(ACCOUNTING SUCCESSOR TO SKYTERRA)

 

    Nine Months Ended September 30, 2005

 
    SkyTerra
Historical


    Discontinued
Operation
Adjustments (1)


    Subtotal

    Distribution
Adjustments


    Subtotal

    HNS
Historical


    Acquisition
Adjustments


    Subtotal

   

Rights

Offering

Adjustments


   

Hughes

Communications

Pro Forma


 
    (in thousands, except share data)  

Revenues

                                                                               

Services

  $ 661     $ (218 )   $ 443     $ —       $ 443     $ 311,933     $ —       $ 312,376     $ —       $ 312,376  

Hardware sales

    —         —         —         —         —         266,845       —         266,845       —         266,845  
   


 


 


 


 


 


 


 


 


 


Total revenues

    661       (218 )     443       —         443       578,778       —         579,221       —         579,221  
   


 


 


 


 


 


 


 


 


 


Operating costs and expenses:

                                                                               

Cost of services

    445       (166 )     279       —         279       221,587       (380 )(5)     222,022       —         222,022  
                                                      1,036 (6)                        
                                                      (500 )(7)                        

Cost of hardware products sold

    —         —         —         —         —         206,002       (537 )(5)     189,102       —         189,102  
                                                      (16,523 )(6)                        
                                                      160 (8)                        

Research and development

    —         —         —         —         —         31,745       (841 )(5)     34,971       —         34,971  
                                                      4,067 (6)                        

Sales and marketing

    —         —         —         —         —         58,021       (108 )(5)     57,991       —         57,991  
                                                      78 (6)                        

General and administrative (15)(16)

    6,744       (987 )     5,757       (188 )(2)     5,569       43,665       (1,450 )(9)     47,784       —         47,784  

Asset impairment provision

    421       (421 )     —         —         —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


Total operating costs and expenses

    7,610       (1,574 )     6,036       (188 )     5,848       561,020       (14,998 )     551,870       —         551,870  
   


 


 


 


 


 


 


 


 


 


Operating (loss) income

    (6,949 )     1,356       (5,593 )     188       (5,405 )     17,758       14,998       27,351       —         27,351  

Interest income (expense), net

    1,131       —         1,131       —         1,131       (15,787 )     (14,702 )(10)     (29,358 )     6,000 (13)     (23,358 )

Equity in earnings of Hughes Network Systems, LLC

    12,887       —         12,887       —         12,887       —         (12,887 )(11)     —         —         —    

Equity in loss of Mobile Satellite Ventures LP

    (7,519 )     —         (7,519 )     7,519 (2)     —         —         —         —         —         —    

Loss on investment in affiliates

    (1,211 )     —         (1,211 )     —         (1,211 )     —         —         (1,211 )     —         (1,211 )

Other income (expense), net

    941       (283 )     658       —         658       2,550       (440 )(12)     2,768       —         2,768  

Minority interest

    1,531       —         1,531       (1,531 )(2)     —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


Income (Loss) from continuing operations before income taxes

    811       1,073       1,884       6,176       8,060       4,521       (13,031 )     (450 )     6,000       5,550  

Income tax expense (17)

    —         —         —         —         —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


Income (Loss) from continuing operations

    811       1,073       1,884       6,176       8,060       4,521       (13,031 )     (450 )     6,000       5,550  

Cumulative dividends and accretion of convertible preferred stock to liquidation value

    (7,477 )     —         (7,477 )     7,477 (3)     —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


(Loss) Income from continuing operations attributable to common stockholders

  $ (6,666 )   $ 1,073     $ (5,593 )   $ 13,653     $ 8,060     $ 4,521     $ (13,031 )   $ (450 )   $ 6,000     $ 5,550  
   


 


 


 


 


 


 


 


 


 


Basic (loss) earnings from continuing operations per common share

  $ (0.38 )           $ (0.32 )           $ 0.77                     $ (0.04 )           $ 0.30  
   


         


         


                 


         


Basic weighted average common shares outstanding

    17,581,661               17,581,661       (7,052,993 )(4)     10,528,668                       10,528,668       7,843,141  (14)     18,371,809  
   


         


 


 


                 


 


 


Diluted (loss) earnings from continuing operations per common share

  $ (0.38 )           $ (0.32 )           $ 0.73                     $ (0.04 )           $ 0.30  
   


         


         


                 


         


Diluted weighted average common shares outstanding

    17,581,661               17,581,661       (6,614,808 )(4)     10,966,853                       10,966,853       7,843,141  (14)     18,809,994  
   


         


 


 


                 


 


 


 

43


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(1) In December 2005, SkyTerra made a decision to discontinue operating AfriHUB and entered into a letter of intent to sell our interests in AfriHUB for a promissory note with a principal amount of approximately $0.2 million and a maturity date one year following the execution of definitive documentation. The determination to discontinue operating this business represents the disposal of a business segment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adjustment reflects the elimination of the operating results of AfriHUB from continuing operations.
(2) Adjustment reflects elimination of historical income and expenses of SkyTerra related to its interest in the MSV Joint Venture and TerreStar.
(3) Adjustment reflects elimination of the $7.5 million of dividends and accretion related to SkyTerra’s Series A redeemable convertible preferred stock. The Series A redeemable convertible preferred stock will not be included in our capitalization following the distribution.
(4) Adjustment reflects the elimination of the historical capital stock of SkyTerra and the issuance of one-half of one share of our common stock for every share of SkyTerra common stock (or, in the case of SkyTerra’s preferred stock and Series 1-A and 2-A warrants, in accordance with their terms, one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise of such preferred stock and warrants held).
(5) Adjustment reflects elimination of rent and certain other direct costs associated with facilities retained by DIRECTV following the April 2005 acquisition by SkyTerra of 50% of the Class A membership interests of HNS. Together with the facility cost adjustment in general and administrative expense (see footnote (9) below), the total facility adjustment amounts to $2.4 million.
(6) Adjustment reflects the decrease in depreciation and amortization expense which resulted from the application of purchase accounting in connection with the HNS Acquisition. Together with the depreciation and amortization adjustment in general and administrative expense (see footnote (9) below), the total depreciation and amortization adjustment amounts to $11.1 million.
(7) Adjustment reflects amortization of $0.5 million of the liability for unfavorable satellite capacity leases held by HNS which was recorded in connection with the application of purchase accounting as a result of the HNS Acquisition.
(8) Prior to the April 2005 acquisition, DIRECTV issued letters of credit to support certain contractual obligations of HNS. Following the April 2005 acquisition, HNS replaced certain of these letters of credit with new letters of credit issued under its revolving credit facility. The adjustment reflects the incremental fees related to letters of credit issued under HNS’ revolving credit facility. As these letters of credit primarily support certain property and equipment used in the production of HNS’ hardware, the fees associated with the letters of credit have been classified as cost of hardware products sold.
(9) Reflects the following adjustments to general and administrative expense (in thousands):

 

Terminated debt offering costs (a)

   $ (770 )

Facilities costs (b)

     (497 )

SkyTerra management fee (c)

     (440 )

Depreciation and amortization expense (d)

     257  
    


     $ (1,450 )
    


 

  (a) Adjustment reflects elimination of legal and other advisory fees incurred by HNS in connection with a contemplated offering of senior debt securities to fund, in part, the purchase of its assets from DTV Networks. Following the termination of the contemplated debt offering, HNS obtained the credit facilities described below in footnote (10).
  (b) Adjustment reflects the elimination of rent and certain other direct costs included in general and administrative expense associated with facilities retained by DIRECTV following the April 2005 acquisition.
  (c) Adjustment reflects elimination of the $0.4 million management fee paid by HNS to SkyTerra following the April 2005 acquisition.
  (d) Adjustment reflects the decrease in depreciation and amortization expense which resulted from the application of purchase accounting in connection with the HNS Acquisition.

 

(10) Reflects the following adjustments to interest income (expense), net (in thousands):

 

Interest expense on the term indebtedness and revolving credit facility (a)

   $ (9,627 )

Interest expense on the Promissory Notes (b)

     (6,000 )

Amortization of debt issuance costs (c)

     (424 )

Interest expense adjustment resulting from purchase accounting (d)

     1,271  

Interest expense on debt repaid by DIRECTV (e)

     78  
    


     $ (14,702 )
    


 

  (a) In connection with the April 2005 acquisition, HNS obtained a first lien credit facility of $275.0 million, a second lien credit facility of $50.0 million and a revolving credit facility of $50.0 million. The adjustment reflects the net change in interest expense had HNS obtained the credit facilities on January 1, 2004. The pro forma interest expense was calculated using an interest rate of 7.625% on the first lien credit facility, 11.875% on the second lien credit facility and a 0.50% commitment fee on the revolving credit facility, reflecting the rates in effect as of September 30, 2005.
  (b) Adjustment reflects interest expense accrued at 8% per annum on the $100.0 million loan from certain of the Apollo Stockholders.
  (c) Adjustment reflects amortization of capitalized debt issuance costs of $10.5 million over the term of the credit facilities obtained in April 2005.
  (d) Adjustment reflects the decrease in interest expense which resulted from the application of purchase accounting in connection with the HNS Acquisition.
  (e) Adjustment reflects elimination of interest expense relating to debt repaid by DIRECTV in connection with the April 2005 acquisition.

 

(11) Adjustment reflects the elimination of the $12.9 of equity in earnings of HNS relating to SkyTerra’s proportionate share of the net income of HNS, subject to certain adjustments (primarily the amortization of the excess of SkyTerra’s proportionate share of HNS’ net assets over SkyTerra’s carrying amount on the date of April 2005 acquisition). Prior to the HNS Acquisition, SkyTerra accounts for its interest in HNS under the equity method in accordance with Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” as HNS is a variable interest entity and SkyTerra is not the primary beneficiary. Following the closing of the HNS Acquisition, our consolidated financial statements will include the accounts of HNS.
(12) Adjustment reflects elimination of the $0.4 million management fee paid by HNS to SkyTerra following the April 2005 acquisition.

 

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Table of Contents
(13) Adjustment reflects elimination of interest expense related to the loan from certain of the Apollo Stockholders. The portion of the loan necessary to purchase all of the shares subscribed for by such Apollo Stockholders in the rights offering shall convert to share of our common stock based on the subscription price in the rights offering. Any unpaid principal and interest following such conversion will be repaid with proceeds from the rights offering.
(14) In order to repay the loan from certain of the Apollo Stockholders, we intend to consummate a rights offering as soon as practicable following the distribution. Such Apollo Stockholders have agreed to exercise their rights (including their over-subscription privileges) so they purchase all of the shares allocated to them, as well as those not subscribed for by other stockholders, in the rights offering, up to the maximum amount of the outstanding principal and interest under the loan. The portion of the loan necessary to purchase all of the shares allocated to the Apollo Stockholders will automatically convert into common stock in the rights offering based on the rights offering subscription price. Accordingly, we are assured of selling all 7,843,141 shares in the rights offering.
(15) Shortly following the distribution, we expect to terminate the HNS bonus unit plan and issue options to purchase approximately 865,000 shares of our common stock under the 2006 Equity and Incentive Plan, in lieu of the existing bonus units. The exercise price of such options will be the closing price of our common stock on the date of grant. The other terms of such options will be determined by the compensation committee of our board of directors prior to the grant date. In connection with these option issuances, we will recognize compensation expense over the vesting period equal to the fair value of the options on the grant date using an option pricing model. However, the amount of the compensation expense cannot be predicted at this time as it will depend on the specific terms of the options. HNS recognized compensation expense of less than $0.1 million during the nine months ended September 30, 2005 relating to the bonus units.
(16) Shortly following the distribution, we expect that our compensation committee will grant vested options to purchase an aggregate of approximately 140,000 shares of our common stock under the 2006 Equity and Incentive Plan, consisting of 20,000 shares to six of our executive officers and a consultant. Such executive officers include our chief executive officer and president and each of our executive vice presidents. Each option is expected to be exercisable for a period of less than 15 days following the date of grant, and the exercise price of each option is expected to be $10.35 per share, an approximate 20% discount to the subscription price in the rights offering. In connection with this option issuance, we will recognize compensation expense on the date of grant equal to the fair value of the options using an option pricing model. Assuming the closing price of our common stock on the date of grant is the $12.75 subscription price in the rights offering, we would recognize compensation expense of approximately $0.3 million relating to the option grant. However, the exact amount of the compensation expense cannot be predicted at this time as it will depend on the actual closing price of our common stock on the date of grant.
(17) For Federal income tax purposes, SkyTerra has unused net operating loss carryforwards, approximately $135.3 million of which are attributable to the businesses being transferred to us in the distribution. Subject to the utilization of a portion of these net operating loss carryforwards to offset any gain resulting from the distribution, we expect to have these net operating losses available to us following the distribution. Accordingly, no provision for income taxes has been recorded in the pro forma condensed consolidated statement of operations.

 

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Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET OF HUGHES COMMUNICATIONS

(ACCOUNTING SUCCESSOR TO SKYTERRA)

 

    September 30, 2005

 
   

SkyTerra

Historical


   

Discontinued

Operation

Adjustments(1)


    Subtotal

   

Distribution

Adjustments


    Subtotal

   

HNS

Historical


   

Acquisition

Adjustments


    Subtotal

   

Rights

Offering

Adjustments


    Hughes
Communications
Pro Forma


 
    (in thousands)  
Assets                                                                                

Current assets:

                                                                               

Cash and cash equivalents

  $ 23,231     $ (280 )   $ 22,951     $ (12,500 )(2)   $ 10,407     $ 121,334     $ (10,000 )(4)   $ 121,241     $ (500 )(11)   $ 120,741  
                              (44 )(2)                     100,000 (5)                        
                                                      (100,500 )(6)                        

Short-term investments

    10,498       —         10,498       —         10,498       13,518       —         24,016       —         24,016  
   


 


 


 


 


 


 


 


 


 


Total cash, cash equivalents and short-term investments

    33,729       (280 )     33,449       (12,544 )     20,905       134,852       (10,500 )     145,257       (500 )     144,757  

Accounts receivable, net

    69       —         69       —         69       180,205       —         180,274       —         180,274  

Inventories

    —         —         —         —         —         88,266       —         88,266               88,266  

Prepaid expenses and other current assets

    1,509       (59 )     1,450       —         1,450       43,333       —         44,783       —         44,783  
   


 


 


 


 


 


 


 


 


 


Total current assets

    35,307       (339 )     34,968       (12,544 )     22,424       446,656       (10,500 )     458,580       (500 )     458,080  

Investment in Hughes Network Systems, LLC

    68,047       —         68,047       —         68,047       —         (68,047 )(7)     —         —         —    

Investment in Mobile Satellite Ventures LP

    44,411       —         44,411       (44,411 )(2)     —         —         —         —         —         —    

Investments in affiliates

    1,631       —         1,631       —         1,631       —         —         1,631       —         1,631  

Restricted cash

    3,060       —         3,060       —         3,060       —         —         3,060       —         3,060  

Property and equipment, net

    69       (49 )     20       —         20       233,023       (11,915 )(8)     221,128       —         221,128  

Capitalized software costs, net

    —         —         —         —         —         10,345       13,008 (8)     23,353       —         23,353  

Intangible assets

    —         —         —         —         —         —         28,993 (8)     28,993       —         28,993  

Other assets

    120       (13 )     107       —         107       31,609       —         31,716       —         31,716  
   


 


 


 


 


 


 


 


 


 


Total assets

  $ 152,645     $ (401 )   $ 152,244     $ (56,955 )   $ 95,289     $ 721,633     $ (48,461 )   $ 768,461     $ (500 )   $ 767,961  
   


 


 


 


 


 


 


 


 


 


Liabilities and Stockholders’ Equity                                                                                

Current liabilities:

                                                                               

Accounts payable

  $ 2,714     $ (190 )   $ 2,524     $ (31 )(2)   $ 2,493     $ 55,701     $ —       $ 58,194     $ —       $ 58,194  

Accrued liabilities

    1,595       (90 )     1,505       —         1,505       103,997       2,500 (8)     108,002       —         108,002  

Short-term borrowings

    228       (228 )     —         —         —         32,159       2,244 (8)     34,403       —         34,403  

Due to affiliates

    —         —         —         —         —         10,164       (10,000 )(4)     100,164       (100,000 )(10)     164  
                                                      100,000 (5)                        
   


 


 


 


 


 


 


 


 


 


Total current liabilities

    4,537       (508 )     4,029       (31 )     3,998       202,021       94,744       300,763       (100,000 )     200,763  

Long-term debt

    —         —         —         —         —         351,018       4,649 (8)     355,667       —         355,667  

Due to affiliates—long term

    —         —         —         —         —         8,967       —         8,967       —         8,967  

Other long-term liabilities

    —         —         —         —         —         5,721       —         5,721       —         5,721  
   


 


 


 


 


 


 


 


 


 


Total liabilities

    4,537       (508 )     4,029       (31 )     3,998       567,727       99,393       671,118       (100,000 )     571,118  
   


 


 


 


 


 


 


 


 


 


Minority interest

    8,808       —         8,808       (8,808 )(2)     —         6,052       —         6,052       —         6,052  
   


 


 


 


 


 


 


 


 


 


Series A preferred stock

    92,002       —         92,002       (92,002 )(3)     —         —         —         —         —         —    
   


 


 


 


 


 


 


 


 


 


Stockholders’ equity:

                                                                               

Common stock

    87       —         87       (76 )(3)     11       —         —         11       7 (10)     18  

Non-voting common stock

    90       —         90       (90 )(3)     —         —         —         —         —         —    

Membership interests

    —         —         —         —         —         154,818       (154,818 )(9)     —         —         —    

Additional paid in capital

    475,736       —         475,736       (48,116 )(2)     519,788       —         —         519,788       99,993 (10)     619,281  
                              92,168 (3)                                     (500 )(11)        

Accumulated other comprehensive income

    349       —         349       —         349       (6,964 )     6,964 (9)     349       —         349  

Accumulated deficit

    (428,964 )     107       (428,857 )     —         (428,857 )     —         —         (428,857 )     —         (428,857 )
   


 


 


 


 


 


 


 


 


 


Total stockholders’ equity

    47,298       107       47,405       43,886       91,291       147,854       (147,854 )     91,291       99,500       190,791  
   


 


 


 


 


 


 


 


 


 


Total liabilities and stockholders’ equity

  $ 152,645     $ (401 )   $ 152,244     $ (56,955 )   $ 95,289     $ 721,633     $ (48,461 )   $ 768,461     $ (500 )   $ 767,961  
   


 


 


 


 


 


 


 


 


 


 

46


Table of Contents

(1) In December 2005, SkyTerra made a decision to discontinue operating AfriHUB and entered into a letter of intent to sell our interests in AfriHUB for a promissory note with a principal amount of approximately $0.2 million and a maturity date one year following the execution of definitive documentation. The determination to discontinue operating this business represents the disposal of a business segment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adjustment reflects the elimination of the financial position of AfriHUB.
(2) Adjustment reflects the elimination of the net assets which will remain with SkyTerra. On the date of distribution, SkyTerra will retain $12.5 million of cash. Upon a change in control of SkyTerra, including the consummation of the planned merger with Motient, SkyTerra’s remaining cash balance on the date of such change in control will be transferred to us.
(3) Adjustment reflects the elimination of the historical capital stock of SkyTerra and the issuance of our common stock to the holders of SkyTerra capital stock, preferred stock and Series 1-A and 2-A warrants. Adjustment also reflects the change in par value of common stock from $0.01 per share to $0.001 per share for us.
(4) Adjustment reflects the $10.0 million payment by HNS to DTV Networks to resolve working capital and other purchase price adjustments in connection with the April 2005 acquisition.
(5) Adjustment reflects issuance of the $100.0 million loan from certain of the Apollo Stockholders in connection with the HNS Acquisition.
(6) Adjustment reflects the $100.0 million purchase price in connection with the HNS Acquisition and an estimated $0.5 million of legal and other advisory fees incurred related to the HNS Acquisition.
(7) Adjustment reflects the elimination of the $68.0 million historical investment in HNS which is comprised of (i) the $50.0 million of cash and 300,000 shares of SkyTerra common stock which were paid to DTV Networks in connection with the April 2005 acquisition of 50% of the Class A membership interests of HNS and (ii) $12.9 of equity in earnings of HNS relating to SkyTerra’s proportionate share of the net income of HNS, subject to certain adjustments (primarily the amortization of the excess of SkyTerra’s proportionate share of HNS’ net assets over SkyTerra’s carrying amount on the date of April 2005 acquisition). Prior to the HNS Acquisition, SkyTerra accounts for its interest in HNS under the equity method in accordance with Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” as HNS is a variable interest entity and SkyTerra is not the primary beneficiary. Following the closing of the HNS Acquisition, our consolidated financial statements will include the accounts of HNS.
(8) We will account for the HNS Acquisition under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” The pro forma financial statements reflect the “push-down” of the $168.6 million aggregate basis in our Class A membership interests of HNS which consists of (i) the $50.0 million of cash and 300,000 shares of SkyTerra common stock which were paid to DTV Networks in connection with the April 2005 acquisition of 50% of the Class A membership interests, (ii) the $12.9 million of equity in earnings of HNS following the April 2005 acquisition through September 30, 2005, (iii) the $100.0 million of cash paid in connection with the HNS Acquisition and (iv) the $0.5 million of estimated legal and other advisory fees incurred related to the HNS Acquisition. Based on our preliminary estimates, the fair value of the acquired tangible and identifiable intangible assets and liabilities exceeds the aggregate basis in our Class A membership interests of HNS, resulting in approximately $368.3 million of negative goodwill. The principal factor contributing to the negative goodwill is the difference between the negotiated arm’s length purchase prices for our Class A membership interests, as determined in the negotiations with DTV Networks, and our preliminary estimate of the fair value of the acquired assets and liabilities. Accordingly, the $168.6 million aggregate basis has been allocated to the acquired assets and liabilities of HNS based on their relative estimated fair value, net of the allocation of negative goodwill to certain long-lived assets. The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final evaluation of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. The following table presents the preliminary allocation:

 

     Estimated
Fair Value


   Allocation
of Negative
Goodwill


     HNS
Pro Forma


   HNS
Historical


   Adjustment

 
     (in thousands)  

Assets:

                                      

Current assets

   $ 446,656    $ —        $ 446,656    $ 446,656    $ —    

Property and equipment, net

     523,768      (302,660 )      221,108      233,023      (11,915 )

Capitalized software costs, net

     50,000      (26,647 )      23,353      10,345      13,008  

Intangible assets (a)

     68,000      (39,007 )      28,993      —        28,993  

Other assets

     31,609      —          31,609      31,609      —    
    

  


  

  

  


Total assets

     1,120,033      (368,314 )      751,719      721,633      30,086  
    

  


  

  

  


Liabilities:

                                      

Accrued liabilities (b)

     106,497      —          106,497      103,997      2,500  

Short-term borrowings (c)

     34,403      —          34,403      32,159      2,244  

Other current liabilities

     65,865      —          65,865      65,865      —    

Long-term debt (c)

     355,667      —          355,667      351,018      4,649  

Other long-term liabilities

     14,688      —          14,688      14,688      —    
    

  


  

  

  


Total liabilities

     577,120      —          577,120      567,727      9,393  

Minority interest

     6,052      —          6,052      6,052      —    
    

  


  

  

  


Net assets

   $ 536,861    $ (368,314 )    $ 168,547    $ 147,854    $ 20,693  
    

  


  

  

  


 

  (a) The identifiable intangible assets consist of patented technologies, customer contracts, customer relationships and trademarks. These intangibles assets will be amortized over useful lives ranging from five to ten years.
  (b) Adjustment reflects a liability related to unfavorable satellite capacity leases held by HNS. This liability will be amortized to cost of services through the expiration of the leases on December 31, 2006.
  (c) Adjustment reflects an excess of the fair value of certain of HNS’ VSAT hardware financing arrangements over the carrying value of such arrangements. The incremental carrying amount of short-term borrowings and long-term debt will be reduced over the remaining life of the financing arrangements by a portion of each payment to the lender.

 

(9) Adjustment reflects the elimination of the historical owners’ equity of HNS as a result of the HNS Acquisition.
(10) Certain of the Apollo Stockholders have agreed to exercise their rights (including their over-subscription privileges) so they purchase all of the shares allocated to them, as well those not subscribed for by other stockholders, in the rights offering, up to the maximum amount of the outstanding principal and interest under the loan. The adjustment reflects the elimination of the loan from such Apollo Stockholders through the issuance of shares in the rights offering.
(11) Adjustment reflects the $0.5 million of estimated legal and other advisory fees and expenses to be incurred related to the rights offerings.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SKYTERRA

(ACCOUNTING PREDECESSOR TO HUGHES COMMUNICATIONS)

 

The following discussion and analysis of financial condition and results of operations are based upon financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America and should each be read together with SkyTerra’s consolidated financial statements and the notes to those financial statements included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our (as accounting successor to SkyTerra) actual results could differ materially from those anticipated due to various factors discussed under “Special Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this document. Furthermore, for periods following the closing of the HNS Acquisition, we will include the financial position and operating results of HNS in our consolidated financial statements. See “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations Of Hughes Network Systems.”

 

Overview

 

SkyTerra historically operated its business through a group of complementary companies in the telecommunications industry, including:

 

    the MSV Joint Venture, a joint venture which provides mobile digital voice and data communications services via satellite;

 

    Hughes Network Systems, LLC, a leading provider of broadband satellite networks and services to the enterprise market and satellite internet access to the North American consumer market. Since April 2005, when SkyTerra completed the acquisition of 50% of the Class A membership interests of HNS, it has served as the managing member of HNS. In January 2006, SkyTerra, through us, acquired the remaining 50% of the Class A membership interest of HNS;

 

    Electronic System Products, Inc., formerly a product development and engineering services firm, now focused on maximizing the license revenues from its existing intellectual property portfolio; and

 

    AfriHUB, LLC, which provides a limited amount of satellite based Internet services through exclusive partnerships with certain Nigerian based universities while also providing technical training in the Nigerian market. In December 2005, SkyTerra entered into a letter of intent to sell its interests in AfriHUB.

 

SkyTerra has provided corporate resources, strategic direction, transactional assistance and financial support to enable each of these companies to focus on and exploit opportunities within their lines of business.

 

In November 2004, the FCC granted the MSV Joint Venture’s application to operate an ancillary terrestrial component (“ATC”) in the L-Band, subject to certain conditions. This authorization was the first license for ATC operation granted by the FCC, allowing the MSV Joint Venture to commence terrestrial operations by offering an ATC with its commercial service. In February 2005, the FCC issued an order (the “February 2005 Order”) which set forth new rules for the deployment and operation of an ATC and provided the MSV Joint Venture with substantial additional flexibility in its system implementation. Furthermore, the February 2005 Order allows the MSV Joint Venture to significantly lower the cost of deploying an ATC and increases the capacity of the MSS/ATC hybrid system. This additional flexibility provided by the FCC’s decision is expected to allow the MSV Joint Venture to offer users affordable and reliable voice and high-speed data communications service through devices, including mobile phones, from virtually anywhere on the North American continent. In addition, the service will operate inside of buildings and throughout urban environments, which is currently not possible with mobile satellite systems due to terrain blockage from buildings and other urban structures that interrupt a satellite signal’s path.

 

As a result of the FCC’s authorizations, the value of SkyTerra’s stake in the MSV Joint Venture has significantly increased; however, even with ATC authority, the ability of the MSV Joint Venture to succeed is

 

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subject to significant risks and uncertainties, including the ability of the MSV Joint Venture to raise the capital necessary for the implementation of the next generation satellite system including ATC or to identify and reach an agreement with one or more strategic partners. Additional risks include the ability of the MSV Joint Venture to attract and retain customers, the increased potential competition from other satellite and wireless service providers, as well as the uncertainty with respect to the outcome of the court challenges to the FCC’s ATC orders.

 

During 2004, SkyTerra’s consolidated revenues were primarily derived from fees generated from services performed by ESP. During the fourth quarter of 2004, ESP experienced a significant decline in demand for its services, including from its existing customers. This decline resulted from the decreased amount of outsourced development and engineering services contracted for by is traditional customer base. As a result, in January 2005, ESP reduced its workforce from 21 employees to four employees to compensate for the reduced cash inflows. ESP subsequently reduced its headcount to two employees and is still performing services for a limited number of clients. However, ESP is no longer seeking new client engagements. Instead, ESP is focusing on maximizing the licensing revenue from its intellectual property portfolio and is expected to continue those efforts following the distribution.

 

In April 2004, SkyTerra acquired a controlling interest in AfriHUB. AfriHUB’s plan was to provide instructor led and distance based technical training and satellite based broadband Internet access and domestic and international calling services through exclusive partnerships with certain Nigerian based universities. While establishing centers which provide these services on two university campuses during the fourth quarter of 2004, AfriHUB experienced significant unanticipated delays and costs in opening these facilities, as well as greater price sensitivity within the university communities. As a result, AfriHUB recorded an impairment charge of approximately $0.8 million in December 2004 and suspended its planned roll out of service to additional campuses. While AfriHUB is actively pursuing other opportunities to provide technical training in the Nigerian market, including establishing a facility on a single additional campus, in August 2005, SkyTerra decided to cease providing funding to AfriHUB. Given the uncertainty with respect to AfriHUB’s future prospects, SkyTerra recorded an impairment charge of approximately $0.4 million during the three months ended June 30, 2005 relating to the remaining value of AfriHUB’s long-lived assets. In August 2005, AfriHUB’s Nigerian subsidiary received approximately $0.2 million of short-term financing from a Nigerian bank to fund the investment necessary to establish the facility on the additional campus. In September 2005, the Nigerian subsidiary also received a $0.3 million grant from a charitable foundation to further AfriHUB’s efforts in providing technical training in Nigeria. The grant is payable in two equal annual installments with the first such payment being received in September 2005. In December 2005, SkyTerra made a decision to discontinue operating AfriHUB and entered into a letter of intent to sell our interests in AfriHUB for a promissory note with a principal amount of approximately $0.2 million and a maturity date one year following the execution of definitive documentation. The sale of our ownership interest in AfriHUB will not have a material impact on our financial position or results of operations.

 

Since October 2004, Navigauge has been attempting to raise capital to expand its data measurement capabilities beyond the Atlanta market. Other than an aggregate of $1.1 million of short-term promissory notes purchased by SkyTerra from October 2004 through June 2005 and an aggregate of $1.1 million of short-term promissory notes purchased by other existing investors during the same time period, Navigauge has been unsuccessful in raising such capital. Accordingly, in light of its prospects, Navigauge’s board of directors is evaluating whether to cease the operations of the company. Accordingly, during the six months ended June 30, 2005, SkyTerra recognized a loss of $1.3 million relating to the impairment of the aggregate remaining carrying amount of our equity interest in Navigauge and the short-term promissory notes. This loss is included in loss on investments in affiliates on the condensed consolidated statements of operations. In July 2005, Navigauge entered into a non-binding letter of intent to sell substantially all of its assets. The sale of the assets was subject to, among other things, completion of the buyer’s due diligence and negotiation and execution of definitive documentation satisfactory to the parties. In September 2005, the negotiations pursuant to the letter of intent were terminated. Navigauge is pursuing other options with respect to selling its assets.

 

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To execute its business plan, Miraxis needed to raise significant amounts of capital in order to launch several satellites. Other than an aggregate of $0.1 million of promissory notes purchased by us from January 2004 through July 2005, Miraxis has been unsuccessful in raising capital. Accordingly, the holders of the membership interests of Miraxis are in the process of dissolving the company. The dissolution of Miraxis would not have a material impact on our financial position or results of operations.

 

Distribution

 

The distribution is the method by which SkyTerra will be separated into two publicly owned companies: us, consisting of, among other things, the assets, liabilities and operations associated with the HNS, ESP and AfriHUB businesses and certain minority investments in entities including Edmunds Holdings, Inc., Data Synapse, Inc. and Hughes Systique Corporation, along with all of SkyTerra’s cash as of the distribution date, excluding $12.5 million, and certain other liabilities expressly allocated to us; and SkyTerra, which consists of the assets and liabilities associated with SkyTerra’s interest in the MSV Joint Venture and its stake in TerreStar, along with $12.5 million in cash. Upon a change of control of SkyTerra, including in connection with a consolidation of the ownership of the MSV Joint Venture and TerreStar, its remaining cash will be transferred to us.

 

To effect the distribution, SkyTerra will distribute to each of its stockholders one-half of one share of the our common stock for each share of SkyTerra common stock (or, in the case of SkyTerra’s preferred stock and Series 1-A and 2-A warrants, in accordance with their terms, one-half of one share of our common stock for each share of SkyTerra common stock issuable upon conversion or exercise of such preferred stock and warrants).

 

Pursuant to SkyTerra’s 1998 Long Term Incentive Plan, the compensation committee of the board of directors of SkyTerra is required to make an equitable adjustment to the terms of options issued under that plan in the event a special, large and nonrecurring dividend or distribution affects SkyTerra’s common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of the participants under such plan. SkyTerra’s compensation committee has discretion to make such an adjustment to any option issued under the plan by adjusting the number and kind of shares that may be issued in respect of outstanding options or the exercise price relating to such options. Pursuant to this provision, SkyTerra’s compensation committee has indicated that holders of stock options issued under the plan who are current members of SkyTerra’s management and board of directors, as well as a consultant and former directors who were involved with SkyTerra’s acquisition of HNS, will receive an option to purchase one share of our common stock for each option to purchase two shares of SkyTerra common stock that they hold. The issuance of such options to purchase our common stock will be in lieu of a larger adjustment to the exercise price of the SkyTerra options that such holders would have been otherwise entitled had they not received options to purchase our common stock. A reduction in the exercise price (or in some cases, an increase in the number of shares) is expected to be the manner in which all other SkyTerra options outstanding under the plan will be adjusted. We expect to issue options to purchase 432,496 shares of our common stock to holders of SkyTerra options.

 

Shortly following the distribution, we expect to terminate the HNS bonus unit plan and issue options to purchase approximately 865,000 shares of our common stock under the 2006 Equity and Incentive Plan, in lieu of the existing bonus units. The exercise price of such options will be the closing price of our common stock on the date of grant. The other terms of such options will be determined by the compensation committee of our board of directors prior to the date of grant. In connection with this option issuance, we will recognize compensation expense over the vesting period equal to the fair value of the options on the grant date using an option pricing model. The amount of the compensation expense cannot be predicted at this time as it will depend on the specific terms of the options.

 

Also following the distribution, we expect that our compensation committee will grant vested options to purchase an aggregate of approximately 140,000 shares of our common stock under the 2006 Equity and Incentive Plan, consisting of 20,000 shares to six of our executive officers and a consultant. Such executive officers include our chief executive officer and president and each of our executive vice presidents. Each option is expected to be exercisable for a period of less than 15 days following the date of grant, and the exercise price

 

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of each option is expected to be $10.35 per share, an approximate 20% discount to the subscription price in the rights offering. We will recognize compensation expense equal to the fair value of each option on the date of grant using an option pricing model. The amount of compensation expense cannot be predicted at this time as it will depend on the closing price of our common stock on the date of grant.

 

We and SkyTerra have entered into a separation agreement. The separation agreement effected, on December 31, 2005, the transfer, by way of contribution, from SkyTerra to us of the assets related to our business, and the assumption by us of certain liabilities. The separation agreement and certain related agreements govern, among other things, certain of the ongoing relations between us and SkyTerra following the distribution.

 

In general, pursuant to the terms of the separation agreement, all assets and liabilities of SkyTerra, other than those specifically relating to the MSV Joint Venture and TerreStar and $12.5 million in cash, became our assets and liabilities. Upon a change of control of SkyTerra, its remaining cash will be transferred to us. The separation agreement also provides for assumptions of liabilities and cross-indemnities designed to allocate generally, effective as of the date of the distribution, financial responsibility for all liabilities arising out of or in connection with our businesses to us and all liabilities arising out of or in connection with SkyTerra’s interest in the MSV Joint Venture and TerreStar to SkyTerra. In addition, we will indemnify SkyTerra for liabilities relating to certain litigation in which SkyTerra or its subsidiaries are involved. See “Certain Relationships and Related Party Transactions.”

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