UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
November 7, 2003 (August 25, 2003)
SkyTerra Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 000-13865 23-2368845
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification Number)
19 West 44th Street, Suite 507, New York,
New York 10036 (Address of principal
executive offices, including zip code)
(212) 730-7540
(Registrant's telephone number, including area code)
Rare Medium Group, Inc.
(Former name or former address, if changed since last report)
Explanatory Paragraph
The undersigned registrant hereby amends and restates Item 7 of its
current report on Form 8-K, originally filed with the Securities and Exchange
Commission on September 3, 2003 to include the requisite historical financial
information of Electronic System Products, Inc. and the pro forma financial
statements of the registrant. The complete text of Item 7 as amended and
restated is as follows.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Independent Auditors' Report
Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002
and 2001
Statements of Operations for the six months ended June 30, 2003
(unaudited) and for the years ended December 31, 2002 and 2001
Statement Of Changes In Stockholders' Equity (Deficit) for the six
months ended June 30, 2003 (unaudited) and for the years ended
December 31, 2002 and 2001
Statements of Cash Flows for the six months ended June 30, 2003
(unaudited) and for the years ended December 31, 2002 and 2001
Notes to Financial Statements
(b) Pro Forma Financial Information.
Overview
Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the six months ended June 30, 2003 and for the year ended
December 31, 2002
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 2003
Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements
(c) Exhibits.
Number Description
------ -----------
2.1 * - Stock Purchase Agreement between Rare Medium Group, Inc.
and Arris International, Inc.
2.2 * - Securities Purchase Agreement by and among American Tower
Corporation, Verestar Manager, LLC, and Verestar, Inc.
10.1 * - Note Purchase and Revolving Credit Agreement by and between
Verestar, Inc. and Rare Medium Group, Inc.
23.1 - Consent of Independent Public Accountant
99.1 * - Press release issued by Rare Medium Group, Inc. on
September 2, 2003.
* Previously filed as an exhibit to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 3, 2003, and incorporated herein by reference.
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Stockholder of
Electronic System Products, Inc.:
We have audited the accompanying balance sheets of ELECTRONIC SYSTEM PRODUCTS,
INC. as of December 31, 2002 and 2001, and the related statements of operations,
changes in stockholder's equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ELECTRONIC SYSTEM PRODUCTS,
INC. as of December 31, 2002 and 2001, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The June 30, 2003 financial statements were reviewed by us, and our report
thereon, dated October 3, 2003, stated we were not aware of any material
modifications that should be made to those statements for them to be in
conformity with generally accepted accounting principles. However, a review is
substantially less in scope than an audit and does not provide a basis for the
expression of an opinion on the financial statements taken as a whole.
/s/ Habif, Arogeti & Wynne, LLP
Atlanta, Georgia
October 3, 2003
ELECTRONIC SYSTEM PRODUCTS, INC.
BALANCE SHEETS
December 31,
---------------------------------
June 30, 2003 2002 2001
----------------- --------------- --------------
(Unaudited)
Assets
Current assets:
Cash $9,000 $9,000 $9,000
Accounts receivable, net of allowance of $316,267,
$551,905 and $1,190,841, respectively 383,775 786,539 1,466,146
Prepaid expenses 441 6,039 224,242
Deferred job costs -- -- 239,091
----------------- --------------- --------------
Total current assets 393,216 801,578 1,938,479
----------------- --------------- --------------
Property, plant and equipment:
Computer equipment 1,073,355 1,073,355 1,073,355
Furniture and fixtures 42,712 42,712 42,712
Machinery and equipment 548,946 548,946 548,946
Leasehold improvements 58,455 375,471 375,471
----------------- --------------- --------------
Total property, plant and equipment, at cost 1,723,468 2,040,484 2,040,484
Accumulated depreciation (1,661,825) (1,765,226) (1,594,499)
----------------- --------------- --------------
Total property, plant and equipment, net 61,643 275,258 445,985
----------------- --------------- --------------
Other assets:
Note receivable -- -- 487,318
Goodwill, net of accumulated amortization of $2,268,482 -- -- 10,805,981
Investments 1,027,903 1,027,903 1,201,599
----------------- --------------- --------------
Total other assets 1,027,903 1,027,903 12,494,898
----------------- --------------- --------------
Total assets $1,482,762 $2,104,739 $14,879,362
================= =============== ==============
Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Accounts payable $72,052 $93,335 $9,090
Accrued expenses 209,635 532,132 209,023
Deferred revenue 233,343 539,064 517,000
Due to related party 15,394,938 13,027,617 6,512,416
Accrued estimated loss on contract 330,667 568,572 --
----------------- --------------- --------------
Total current liabilities 16,240,635 14,760,720 7,247,529
----------------- --------------- --------------
Stockholder's equity (deficit):
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 13,074,463 13,074,463 13,074,463
Accumulated deficit (27,833,336) (25,731,444) (5,443,630)
----------------- --------------- --------------
Total stockholder's equity (deficit) (14,757,873) (12,655,981) 7,631,833
----------------- --------------- --------------
Total liabilities and stockholder's equity (deficit) $1,482,762 $2,104,739 $14,879,362
================= =============== ==============
See auditors' report and accompanying notes.
ELECTRONIC SYSTEM PRODUCTS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
Six Months Ended -----------------------------------
June 30, 2003 2002 2001
----------------- --------------- ----------------
(Unaudited)
Net sales $ 1,437,174 $3,798,707 $12,405,528
Cost of services 1,771,764 5,452,581 8,221,572
----------------- --------------- ----------------
Gross profit (loss) (334,590) (1,653,874) 4,183,956
Selling, general and administrative expenses 1,557,628 6,741,966 7,263,169
----------------- --------------- ----------------
Loss from operations (1,892,218) (8,395,840) (3,079,213)
Interest expense (83,639) (164,195) (138,715)
Loss on investments -- (948,798) --
Loss on disposal of property, plant and equipment (147,635) -- --
Other income 21,600 27,000 --
----------------- --------------- ----------------
Loss before income tax expense and cumulative
effect of a change in accounting principle (2,101,892) (9,481,833) (3,217,928)
Income tax expense -- -- --
----------------- --------------- ----------------
Loss before cumulative effect of a change in (2,101,892) (9,481,833) (3,217,928)
accounting principle
Cumulative effect on prior years (to December 31, 2001)
of changing goodwill impairment -- (10,805,981) --
----------------- --------------- ----------------
Net loss $ (2,101,892) $ (20,287,814) $ (3,217,928)
================= =============== ================
See auditors' report and accompanying notes.
ELECTRONIC SYSTEM PRODUCTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
Total
Stockholder's
Additional Accumulated Equity
Common Stock Paid-In Capital Deficit (Deficit)
---------------- ---------------- --------------- ---------------
Balance, January 1, 2001 $1,000 $13,074,463 $(2,225,702) $10,849,761
Net loss -- -- (3,217,928) (3,217,928)
---------------- ---------------- --------------- ---------------
Balance, December 31, 2001 1,000 13,074,463 (5,443,630) 7,631,833
Net loss -- -- (20,287,814) (20,287,814)
---------------- ---------------- --------------- ---------------
Balance, December 31, 2002 1,000 13,074,463 (25,731,444) (12,655,981)
Net loss (unaudited) -- -- (2,101,892) (2,101,892)
---------------- ---------------- --------------- ---------------
Balance, June 30, 2003 (unaudited) $1,000 $13,074,463 $(27,833,336) $(14,757,873)
================ ================ =============== ===============
See auditors' report and accompanying notes.
ELECTRONIC SYSTEM PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
Six Months Ended -----------------------------------
June 30, 2003 2002 2001
------------------ --------------- ---------------
(Unaudited)
Cash flows from operating activities:
Net loss $(2,101,892) $(20,287,814) $(3,217,928)
------------------ --------------- ---------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization -- -- 335,936
Depreciation 65,980 170,727 223,652
Loss on investments -- 948,798 --
Loss on property, plant and equipment 147,635 -- --
Goodwill impairment -- 10,805,981 --
Provision for doubtful receivable accounts (235,638) (638,936) 1,157,134
Accrued estimated loss on contract (237,905) 568,572 --
Changes in assets and liabilities:
Accounts receivable 638,402 1,030,759 (1,871,596)
Prepaid expenses 5,598 218,203 (106,536)
Deferred job costs -- 239,091 (239,091)
Accounts payable (21,283) 84,245 (220,266)
Accrued expenses (322,497) 323,109 (166,803)
Deferred revenue (305,721) 22,064 517,000
Due to related party 2,367,321 6,515,201 3,788,007
------------------ --------------- ---------------
Total adjustments 2,101,892 20,287,814 3,417,437
------------------ --------------- ---------------
Net cash provided by operating activities -- -- 199,509
------------------ --------------- ---------------
Cash flows from investing activities:
Acquisition of property, plant and equipment -- -- (210,509)
------------------ --------------- ---------------
Net cash used by investing activities -- -- (210,509)
------------------ --------------- ---------------
Net decrease in cash -- -- (11,000)
Cash, beginning of period 9,000 9,000 20,000
------------------ --------------- ---------------
Cash, end of period $9,000 $9,000 $9,000
================== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $-- $-- $--
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2002, the Company converted $287,784 of net trade receivables into stock
of the debtor.
During 2001, the Company converted $1,000,000 of trade receivables into stock of
the debtor (see Note D).
Also during 2001, the Company exchanged trade receivables from a customer
totaling $487,318 for a note receivable. The note receivable was subsequently
converted into stock of the debtor in 2002 (see Note D).
See auditors' report and accompanying notes.
ELECTRONIC SYSTEM PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
Nature of Operations:
---------------------
Electronic Systems Products, Inc. (the "Company") provides a wide range of
product development, professional consulting and engineering services targeted
toward the telecommunications, broadband, satellite communications and wireless
industries. The Company was incorporated in Illinois in 1989 and was acquired by
Antec Corporation ("Antec", also the predecessor to Arris Group, Inc. ("Arris"))
in 1994.
Revenue Recognition:
--------------------
Revenues from contracts for consulting and engineering services that the
Company provides its clients are recognized on a time-and-materials or on a
percentage-of-completion basis. Revenues from time-and-materials service
contracts are recognized as the services are provided. For service contracts
where revenue is recognized under the percentage-of-completion basis, revenues
recognized in excess of billings are recorded as work in progress on the
accompanying balance sheet. Billings in excess of revenues recognized are
recorded as deferred revenue. Losses on contracts are recognized during the
period in which the loss first becomes probable and reasonably estimable.
Contract losses are determined to be the amount by which the estimated costs of
the contract exceed the estimated total revenues that will be generated by the
contract.
Reimbursements, including those relating to travel and other out-of-pocket
expenses, are included in revenues. A handling and finance charge is added to
materials and equipment purchased for certain product development engagements.
The costs of these reimbursements are included in cost of services.
The Company also earns revenues from the sales of an internally developed
database of pre-designed parts for a computer-aided design software system which
is used to develop circuit boards. Revenues from these sales are recognized at
the time the product is shipped.
Property, Plant and Equipment:
------------------------------
Property, plant and equipment are carried at cost. Expenditures for
maintenance and repairs are expensed as incurred, while renewals and betterments
that materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed of, and the related allowance for
depreciation, are eliminated from the accounts, and any resulting gain or loss
is recognized at the time of disposition.
The Company reviews its long-lived assets for impairment at each balance
sheet date or whenever events or changes in circumstances indicate that the
carrying amount of an asset should be assessed.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which are as follows:
Computer equipment 3 - 5 years
Furniture and fixtures 3 - 5 years
Machinery and equipment 2 - 5 years
Leasehold improvements 5 - 10 years
Depreciation expense for the six months ended June 30, 2003 was $65,980
and for the years ended December 31, 2002 and 2001 was $170,727 and $223,652,
respectively.
Intangibles:
------------
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill
and Other Intangible Assets. SFAS No. 142 eliminated the requirement to
amortize goodwill and indefinite-lived intangible assets and replaces the
amortization with an impairment test which must be performed at least
annually. The Company adopted SFAS No. 142 in January 2002 and determined that
the goodwill resulting from its acquisition by Antec was fully impaired. As
such, the Company recognized a charge of $10,805,981 during 2002 relating to
the write off of the remaining carrying value of the goodwill. See Note C.
Investments:
------------
The Company accounts for investments in which it owns less than 20% of the
voting stock and does not possess significant influence over the operations of
the investee, under the cost method of accounting.
Long-Term Debt and Capital Lease Obligations:
---------------------------------------------
The Company is not a party to any long-term debt or capital lease
obligations. The interest expense recorded on the accompanying statements of
operations represents the allocation of interest expense and finance charges
resulting from debt obligations of Arris. See Note G.
Income Taxes:
-------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The difference between the statutory federal income tax rate and
the Company's effective tax rate for the six months ended June 30, 2003 and the
years ended December 31, 2002 and 2001 is principally due to the Company
incurring net operating losses ("NOL") for which no tax benefit was recorded.
As of June 30, 2003 and December 31, 2002 and 2001, the Company had net
deferred tax assets primarily relating to NOL carryforwards, startup expenses
and impairment of investments. As there is uncertainty about whether the Company
will ultimately realize the benefit from the deferred tax assets, the Company
has recorded a valuation allowance against the entire balance. Furthermore,
subject to Section 382 of the Internal Revenue Code, the utilization of NOL
carryforwards existing as of the August 2003 ownership change (Note I) will be
limited.
Stock-Based Compensation:
-------------------------
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
The Company uses the intrinsic value method for valuing its awards of stock
options and restricted stock and recording the related compensation expense, if
any, in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. All options granted to employees are
issued through Arris stock incentive plans (see Note H). No stock-based employee
or director compensation cost for stock options is reflected in net income, as
all options granted have exercise prices equal to the market value of the
underlying common stock on the date of grant. The Company records compensation
expense related to its restricted stock awards and director stock units. The
following table illustrates the effect on net income and earnings per share as
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation.
Years Ended December 31,
Six Months Ended ----------------------------------
June 30, 2003 2002 2001
--------------- --------------- ---------------
(Unaudited)
Net loss, as reported $(2,101,892) $(20,287,814) $(3,217,928)
Add: Stock-based employee compensation included in
reported net loss, net of taxes -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of taxes (228,000) (565,000) (335,000)
--------------- --------------- ---------------
Net loss, pro forma $(2,329,892) $(20,852,814) $(3,552,928)
=============== =============== ===============
The weighted average assumptions used in this model to estimate the fair
value of options granted under the applicable Arris stock incentive plans for
2002 and 2001 were as follows: risk-free interest rates of 3.97% and 4.27%,
respectively; a dividend yield of 0%; volatility factor of the expected market
price of Arris' common stock of .83 and .71, respectively; and a weighted
average expected life of five and four years, respectively.
Use of Estimates:
-----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period.
Estimates are used for, but not limited to, the accounting for doubtful
accounts, depreciation, accrued expenses and contingencies. Actual results could
differ from those estimates.
Fair Value of Financial Instruments and Concentration of Credit Risk:
---------------------------------------------------------------------
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable, investments and
debt. The fair value of these instruments approximate book value.
Concentration of credit risk with respect to receivables is limited due to
the geographically diverse customer base. The Company routinely assesses the
financial strength of its customers and does not require collateral or other
security to support customer receivables. Credit losses are provided for in the
financial statements in the form of an allowance for doubtful accounts. The
Company reserves a percentage of its accounts receivable as uncollectible based
on historical information and existing economic conditions and writes off any
uncollectible invoices to this provision. The amount of accounting loss due to
credit risk the Company would incur if the parties to the accounts receivable
failed to perform according to the terms of the agreement would be the balance
of the accounts receivable, net of the allowance for doubtful accounts.
The Company generates revenue principally from customers located in United
States. For the six months ended June 30, 2003, two customers accounted for more
than 10% of revenues. Combined, these customers accounted for approximately
$440,000 of total revenues for the six months ended June 30, 2003. Accounts
receivable from these significant customers at June 30, 2003 was approximately
$120,000.
For the years ended December 31, 2002 and 2001, four and three customers,
respectively, accounted for more than 10% of revenues. Combined, these customers
accounted for approximately $2,600,000 and $4,700,000 of total revenues for the
years ended December 31, 2002 and 2001, respectively. Accounts receivable from
these significant customers at December 31, 2002 and 2001, was approximately
$420,000 and $545,000, respectively.
Note B - Note Receivable
As of December 31, 2001, the Company held a convertible note receivable for
$487,317 from IQStat, Inc. ("IQStat"). The note was subsequently canceled and
replaced by a new note in the principal amount of $157,462 with the remaining
balance converted to stock in IQStat. See Note D.
Note C - Goodwill
As discussed in Note A, in January 2002, the Company adopted SFAS No. 142,
which eliminated the amortization of goodwill and indefinite-lived intangible
assets. Instead, SFAS No. 142 requires the goodwill and indefinite-lived
intangible assets be reviewed on an annual basis for impairment. Upon adoption,
the Company performed the impairment test and determined that its fair value was
less than the carrying value of the goodwill resulting from its acquisition by
Antec. As such, the Company recognized a charge of $10,805,891 during 2002
relating to the write-off of the remaining carrying value of the goodwill. This
charge has been recorded as a cumulative effect of a change in accounting
principle on the accompanying statements of operations.
The following sets forth a reconciliation of net income information for the
years ended December 31, 2002 and 2001, as adjusted for the non-amortization
provisions of SFAS No. 142:
Years Ended December 31,
Six Months Ended ---------------------------------
June 30, 2003 2002 2001
----------------- -------------- ---------------
(Unaudited)
Net loss, as reported $(2,101,892) $(20,287,814) $(3,217,928)
Add: Goodwill amortization -- -- 335,936
----------------- -------------- ---------------
Net loss, pro forma $(2,101,892) $(20,287,814) $(2,881,992)
================= ============== ===============
The changes in the carrying amount of goodwill for the years ended December
31, 2002 and 2001 are as follows:
Balance, January 1, 2001 $11,141,917
Amortization (335,936)
---------------
Balance, December 31, 2001 10,805,981
Goodwill impairment charge (10,805,981)
---------------
Balance, December 31, 2002 $--
===============
Note D - Investments
In exchange for services rendered, in October 2001, the Company received a
convertible note receivable from IQStat with a principal balance of $487,318 and
due on demand. Per the terms of the note, anytime after one year, the Company
had the option of converting the note into stock of IQStat. In October 2002, the
Company agreed to exchange the note and additional services rendered through
September 2002 for 968,877 shares of IQStat Series A Convertible Preferred Stock
and a new promissory note in the principal amount of $157,462. Per the terms of
the new note, $57,462 was paid on October 31, 2002 and $10,000 was paid monthly
until the note was fully repaid in 2003. As of June 30, 2003 and December 31,
2002, the carrying value of the IQStat stock is $775,102.
In exchange for services rendered in 2001 totaling $1,000,000, the Company
received 666,667 shares of common stock of coaXmedia, Inc. ("coaXmedia"). During
2002, based on the valuation of coaXmedia's latest funding transaction, the
Company determined that its investment was permanently impaired. As such, the
Company recognized a charge of $747,199, which is included in the accompanying
statements of operations under "Loss on Investments." As of June 30, 2003 and
December 31, 2002, the carrying value of the coaXmedia stock is $252,801.
In exchange for services rendered in 1999 and 2000, the Company received
warrants to purchase 88,284 shares of common stock of Evolve Communications,
Inc. ("Evolve"). At the time of issuance, the fair value of the warrant was
$201,598. Based on Evolve's financial position and its inability to raise
capital, the warrant was deemed fully impaired during 2002. As such, the Company
recognized a charge of $201,598, which is included in the accompanying
statements of operations under "Loss on Investments."
Note E - Deferred Revenue
Costs, estimated earnings and billings on incomplete projects are
summarized as follows:
December 31, December 31,
June 30, 2003 2002 2001
---------------- -------------- ---------------
(Unaudited)
Billings to date $ 581,818 $1,064,007 $517,000
Costs and estimated earnings (348,475) (524,943) (239,091)
Deferred job costs -- -- 239,091
---------------- -------------- ---------------
Deferred revenue $233,343 $539,064 $517,000
================ ============== ===============
Additionally, one project that was incomplete as of June 30, 2003 and
December 31, 2002, is expected to incur a loss. As a result, the remaining
expected loss as of June 30, 2003 and December 31, 2002 of $330,667 and
$568,572, respectively, has been recorded on the accompanying balance sheet.
As of December 31, 2001, there was deferred revenue relating to a project
with payment terms in excess of one year. Deferred revenue relating to this
project totaled $517,000 and deferred costs totaled $239,091. There were no
material fixed fee contracts in process at December 31, 2001.
Note F - Pension and Profit Sharing
The Company participates in a multi-employer 401(k) profit-sharing
retirement plan known as the Arris Group, Inc. Employee Savings Plan (the
"Plan") in conjunction with its parent company. Eligible employees of the
Company may participate in the Plan and elect to make contributions pursuant to
a compensation reduction agreement. The Company matches contributions in an
amount equal to 100% of the first 6% of employee contributions. Additional
Company contributions are at the discretion of the board of directors to all
eligible employees who are active participants. Participant contributions are
voluntary and employees may contribute up to 15% of their annual compensation to
the Plan, limited to statutory annual dollar limits during the plan year.
Participant contributions are always 100% vested. Company contributions may be
funded by cash or by assets at fair market value and fully vest once the
employee has reached three years of service. Contributions of $60,350 were made
to the Plan for the six months ended June 30, 2003. Contributions of $180,503
and $66,504 were made to the Plan for the years ended December 31, 2002 and
2001, respectively.
Note G - Related Party Transactions
During the six months ended June 30, 2003, the Company recognized revenues
of approximately $46,119 for certain consulting and engineering services
performed for Arris and other subsidiaries of Arris. During the years ended
December 31, 2002 and 2001, the Company recognized revenues of approximately
$467,500 and $1,210,000, respectively, for these services performed for Arris
and other subsidiaries of Arris.
Arris provided certain corporate functions on behalf of the Company
(relating to accounting, executive management, legal, administrative, human
resources, information systems, insurance and other corporate functions). These
expenses have been allocated to the Company based on its direct and indirect
utilization of specific services. Indirect expenses were allocated based on
sales, headcount and square footage in proportion to combined Company and Arris
totals. Included in selling, general and administrative expenses were corporate
allocations of $83,639 for the six months ended June 30, 2003 and $657,832 and
$456,777 for the years ended December 31, 2002 and 2001, respectively.
Management believes these allocations are reasonable. On the accompanying
balance sheets, these allocations are included in "Due to Related Party," along
with the cumulative amount funded to the Company by Arris for operations since
the acquisition by Antec.
Note H - Stock-Based Compensation
Employees of the Company are eligible for stock options granted through
Arris stock option plans. Arris grants stock options for a fixed number of
shares to employees and directors with an exercise price equal to the market
price of the shares at the date of grant. The stock option grants are accounted
for in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees and, accordingly, the Company does not recognize compensation expense
for the stock option grants.
A summary of option activity related to employees of the Company under the
Arris plans is presented below:
Six Months Ended Year Ended Year Ended
June 30, 2003 December 31, 2002 December 31, 2001
------------------------- ------------------------ ------------------------
(Unaudited)
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number Exercise Number Exercise
Shares Prices of Shares Prices of Shares Prices
----------- ---------- ---------- ---------- ---------- ----------
Balance, beginning of period 304,745 $12.85 190,463 $16.95 107,131 $23.43
Grants -- -- 122,074 6.52 91,998 10.10
Exercises -- -- -- -- -- --
Terminations (29,500) 8.71 (7,792) 13.87 (6,498) 25.06
Expirations (39,375) 10.71 -- -- (2,168) 21.96
----------- ---------- ----------
Balance, end of period 235,870 13.73 304,745 12.85 190,463 16.95
=========== ========== ==========
Vested at end of period 140,095 17.28 128,145 14.51 73,610 15.08
=========== ========== ==========
Weighted average fair value of $-- $4.47 $6.27
options granted during period
Note I - Subsequent Event
In August 2003, SkyTerra Communications, Inc. ("SkyTerra", formerly known
as Rare Medium Group, Inc.) purchased all of the outstanding common stock of the
Company from Arris. As part of this transaction, the Company transferred its
equity holdings in coaXmedia and Evolve, as well as certain rights with respect
to its intellectual property, to Arris, and Arris canceled all amounts owed by
the Company under intercompany financing arrangements. Also in connection with
this transaction, Arris and the Company entered into a one year sublease
agreement whereby the Company would lease office space and certain network and
computer equipment for $19,100 per month.
Subsequent to the stock purchase, SkyTerra agreed to purchase up to
$800,000 of senior secured promissory notes from the Company and up to an
additional $600,000 of senior secured promissory notes if the Company meets
certain financial performance metrics. Further, the Company is expected to make
restricted stock grants to employees representing an aggregate of 30% of the
Company's outstanding equity.
SKYTERRA COMMUNICATIONS, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet
assumes that the acquisition by SkyTerra Communications, Inc. ("SkyTerra",
formerly known as Rare Medium Group, Inc.) of all of the outstanding common
stock of Electronic System Products, Inc. ("ESP") (the "Acquisition") had
occurred on June 30, 2003. The Unaudited Pro Forma Condensed Consolidated
Statements of Operations assume that the Acquisition had occurred on January 1,
2002, combining the results of SkyTerra and ESP for the year ended December 31,
2002 and the six months ended June 30, 2003.
The pro forma information is derived from the historical financial
statements of SkyTerra and ESP, after giving effect to the Acquisition using the
purchase method of accounting and assumptions and adjustments considered
appropriate by SkyTerra, certain of which are described in the accompanying
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. The
allocation of purchase price to the assets acquired and liabilities assumed has
been made using estimated fair values. These estimates may be subject to
adjustment to reflect actual amounts, primarily in the case of accrued
liabilities. Any subsequent adjustments are not expected to be material. The pro
forma information is provided for illustrative purposes only and is not
necessarily indicative of the results of operations or financial condition that
actually would have been obtained if the acquisition had occurred on the dates
indicated or of the operating results that may be obtained in the future.
The Unaudited Pro Forma Condensed Consolidated Financial Information should
be read in conjunction with the historical financial statements, and the related
notes thereto, of SkyTerra and ESP. The historical financial statements of ESP
and the related notes thereto as of and for the year ended December 31, 2002 and
as of and for the six months ended June 30, 2003 are included herein. The
historical financial statements of SkyTerra and the related notes thereto as of
and for the year ended December 31, 2002 and as of and for the six months ended
June 30, 2003 have been previously filed with the Securities and Exchange
Commission.
SKYTERRA COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
June 30, 2003
-------------------------------------------------------------------
Pro Forma SkyTerra
SkyTerra ESP Adjustments Pro Forma
------------- ------------ -------------- -----------
Assets
Current assets:
Cash and cash equivalents $28,694 $9 $ (95) (1) $ 28,833
225 (2)
Short-term investments 6,473 -- 6,473
Accounts receivable -- 384 384
Prepaid expenses and other current assets 455 -- 455
------------- ------------ -------------- -----------
Total current assets 35,622 393 130 36,145
Property and equipment, net 22 62 84
Notes receivable 59,671 -- 59,671
Investments in affiliates 2,500 1,028 (253) (2) 2,575
(700) (4)
Other assets 165 -- 165
------------- ------------ -------------- -----------
Total assets $97,980 $1,483 $(823) $98,640
============= ============ ============== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $1,621 $72 $1,693
Accrued liabilities 4,596 541 $(186) (2) 4,951
Due to related party -- 15,395 (15,395) (2) --
Deferred revenue -- 233 233
------------- ------------ -------------- -----------
Total current liabilities 6,217 16,241 (15,581) 6,877
------------- ------------ -------------- -----------
Series A Convertible Preferred Stock, $.01 par
value, net of unamortized discount of $39,176 75,308 -- 75,308
------------- ------------ -----------
Minority interest 11,889 -- 11,889
------------- ------------ -----------
Stockholders' equity:
Preferred stock, $.01 par value -- -- --
Common stock, voting, $.01 par value 61 1 (1) (3) 61
Common stock, non-voting, $.01 par value 90 -- 90
Additional paid-in capital 546,291 13,074 15,395 (2) 546,291
(28,469) (3)
Accumulated deficit (541,705) (27,833) 27,833 (3) (541,705)
Treasury stock, at cost (171) -- (171)
------------- ------------ -------------- -----------
Total stockholders' equity 4,566 (14,758) 14,758 4,566
------------- ------------ -------------- -----------
Total liabilities and stockholders' equity $97,980 $1,483 $(823) $98,640
============= ============ ============== ===========
SKYTERRA COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
For the Six Months Ended June 30, 2003
-----------------------------------------------------------------
SkyTerra ESP Pro Forma SkyTerra
Adjustments Pro Forma
-------------- ------------ -------------- -------------
Revenues $ -- $1,437 $1,437
Cost of revenues -- 1,772 1,772
-------------- ------------ -------------
Gross profit -- (335) (335)
Selling, general and administrative expenses 3,334 1,557 4,891
-------------- ------------ -------------
Loss from operations (3,334) (1,892) (5,226)
Interest income (expense), net 3,064 (84) 2,980
Loss on investments in affiliates (199) -- (199)
Other expense, net (5) (126) (131)
Minority interest (547) -- (547)
-------------- ------------ -------------
Loss from continuing operations (1,021) (2,102) (3,123)
Cumulative dividends and accretion of convertible
preferred stock to liquidation value (4,813) -- (4,813)
-------------- ------------ -------------
Loss from continuing operations attributable
to common stockholders $ (5,834) $(2,102) $ (7,936)
============== ============ =============
Basic and diluted loss per share from continuing
operations $(0.38) $(0.51)
============== =============
Weighted average common shares outstanding 15,638,769 15,638,769
============== =============
For the Year Ended December 31, 2002
-----------------------------------------------------------------
Pro Forma SkyTerra
SkyTerra ESP Adjustments Pro Forma
-------------- ------------ -------------- -------------
Revenues $ -- $3,799 $ 3,799
Cost of revenues -- 5,453 5,453
-------------- ------------ -------------
Gross profit -- (1,654) (1,654)
Selling, general and administrative expenses 6,513 6,742 13,255
-------------- ------------ -------------
Loss from operations (6,513) (8,396) (14,909)
Interest income (expense), net 5,602 (164) 5,438
Loss on investments in affiliates (385) (949) (1,334)
Other (expense) income, net (14,716) 27 (14,689)
Minority interest (998) -- (998)
-------------- ------------ -------------
Loss before income taxes (17,010) (9,482) (26,492)
Income tax benefit 350 -- 350
-------------- ------------ -------------
Loss from continuing operations (16,660) (9,482) (26,142)
Cumulative dividends and accretion of convertible
preferred stock to liquidation value (10,937) -- (10,937)
-------------- ------------ -------------
Loss from continuing operations attributable
to common stockholders $(27,597) $(9,482) $(37,079)
============== ============ =============
Basic and diluted loss per share from
continuing operations $(2.32) $(3.12)
============== =============
Weighted average common shares outstanding 11,865,291 11,865,291
============== =============
SKYTERRA COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma financial information is based on the following assumptions
and adjustments:
(1) The total cash consideration paid for ESP was one dollar. In addition,
SkyTerra has incurred approximately $0.1 million of transaction costs
related to the Acquisition.
(2) Reflects the following provisions of the Acquisition: (i) the cash payment
of approximately $0.2 million from Arris Group, Inc. ("Arris") to ESP upon
closing which represents the net funding of certain ESP obligations, (ii)
the transfer from ESP to Arris of the equity investment in coaXmedia, Inc.
which had a net book value of $0.3 million, (iii) the release by all ESP
employees, as of the date of the Acquisition, of claims against ESP valued
at approximately $0.2 million, and (iv) the capital contribution by Arris
of the $15.4 million intercompany payable to Arris.
(3) Represents the removal of the historical equity of ESP resulting from the
Acquisition.
(4) Represents the reduction in value of certain non-current assets as a result
of the excess of fair value of the identifiable assets, net of liabilities
assumed, over the Acquisition price, including transaction costs.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Date: November 7, 2003 By: /s/ ROBERT C. LEWIS
------------------------------
Name: Robert C. Lewis
Title: Senior Vice President
and General Counsel
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of SkyTerra Communications, Inc.:
We consent to the use of our report dated October 3, 2003, included
elsewhere herein, on the financial statements of Electronic System Products,
Inc. as of and for the years ended December 31, 2002 and 2001.
/s/ Habif, Arogeti & Wynne
Atlanta, GA
November 7, 2003