Court File No.: CV-10-8944-00CL ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED APPLICATION OF TERRESTAR NETWORKS INC. UNDER SECTION 46 OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED FIFTH REPORT OF THE INFORMATION OFFICER DELOITTE & TOUCHE INC. March 18, 2011
2 INTRODUCTION 1. On October 19, 2010 (the Petition Date ), TerreStar Networks Inc. ( TSNI ), TerreStar National Services Inc., TerreStar License Inc., TerreStar New York Inc., 0887729 B.C. Ltd., TerreStar Networks Holdings (Canada) Inc., and TerreStar Networks (Canada) Inc. ( TerreStar Canada ) (collectively, the Debtors ), 1 each filed voluntary petitions under chapter 11 of title 11 of the United States Code (the U.S. Bankruptcy Proceeding ) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court ). 2. On October 19, 2010, pending approval of TSNI as Foreign Representative (as defined below) by the Bankruptcy Court, the Ontario Superior Court of Justice (Commercial List) (the Court ) entered an order (the Interim Initial Order ) granting certain interim relief, including, among other things, a general stay of proceedings against the Original Debtors. 3. On October 20, 2010, the Bankruptcy Court entered an order appointing TSNI as the foreign representative of the Original Debtors (the Foreign Representative ). 4. On October 21, 2010, the Court entered an Initial Order and a Supplemental Order (together, the Initial Recognition Orders ) under Part IV of the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the CCAA ), in respect of the U.S. Bankruptcy Proceeding and certain orders entered therein (the Recognition Proceeding ). 1 As detailed in the Fourth Report (as defined herein), the chapter 11 cases of Motient Holdings Inc., Motient Communications Inc., Motient License Inc., Motient Services Inc., MVH Holdings Inc., and Motient Ventures Holding Inc. (collectively, the Motient Debtors, and together with the Debtors, the Original Debtors ), were also commenced on the Petition Date and were originally jointly administered with the chapter 11 cases of the Debtors. Pursuant to the Amended Joint Administration Order (as defined herein), the chapter 11 cases of the Motient Debtors are no longer jointly administered with the jointly administered chapter 11 cases of the Debtors. As set forth herein, the chapter 11 cases of the Motient Debtors are jointly administered with the chapter 11 cases of TSC (as defined herein) and TerreStar Holdings Inc. (together with the Motient Debtors, the TSC Debtors ).
3 5. On November 9, 2010, the Court entered an order (the November 9th Order ), which recognized the following orders entered by the Bankruptcy Court: (a) the Bar Date Order; 2 (b) the Insurance Order; and (c) the Utilities Order. 6. On November 19, 2010, the Court entered an order (the November 19th Order ), which recognized the following orders entered by the Bankruptcy Court: (a) the U.S. Final DIP Financing Order; (b) the U.S. Final Cash Management Order; and (c) the Taxes Order. 7. On November 26, 2010, the Court entered an order (the November 26th Order ), which recognized the Restricted Trading Order entered by the Bankruptcy Court. 8. On December 23, 2010, the Court entered an order (the December 23rd Order ), which recognized the following orders entered by the Bankruptcy Court: (a) the Backstop Agreement Order; (b) the Disclosure Statement Order; and (c) the Solicitation Procedures Order. 9. On March 4, 2011, the Court entered an order (the March 4th Order ), which recognized the Amended Joint Administration Order entered by the Bankruptcy Court. Pursuant to the Amended Joint Administration Order: (i) the Debtors chapter 11 cases are being jointly administered and have the following caption: In re TerreStar Networks Inc., et al., Ch. 11 Case No. 10-15446 (SHL); and (ii) the TSC Debtors chapter 11 cases are being jointly administered and have the following caption: In re TerreStar Corporation, et. al., Ch. 11 Case No. 11-10612 (SHL). PRIOR REPORTS OF THE INFORMATION OFFICER 10. To date, Deloitte & Touche Inc. ( Deloitte ), as Information Officer, has provided this Court with the following reports: 2 Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to such terms in the Pre-Filing Report, the First Report, the Second Report, the Third Report, the First Supplemental Report, or the Fourth Report, as applicable.
4 a. a pre-recognition Proceeding report, dated October 20, 2010 (the Pre- Filing Report ), to provide this Court with information relating to the Original Debtors business and operations, their debt and capital structure, and other matters relevant to the Court s determination of the Foreign Representative s request for the Initial Recognition Orders; b. a first report of the Information Officer, dated November 5, 2010 (the First Report ), to provide this Court with information relating to the Foreign Representative s request for the November 9th Order; c. a second report of the Information Officer, dated November 18, 2010 (the Second Report ), to provide this Court with information relating to the Foreign Representative s request for the November 19th Order, and to provide this Court with an overview of the Plan and Disclosure Statement relating to the Debtors, which were filed in the U.S. Bankruptcy Proceeding on November 5, 2010; d. a third report of the Information Officer, dated December 22, 2010 (the Third Report ), to provide this Court with: (i) information relating to the Foreign Representative s request for the December 23rd Order; (ii) information on certain amendments made to the Plan and Disclosure Statement; and (iii) an overview of the Debtors formal marketing process for an alternative transaction superior to that contemplated under the Plan; e. a supplemental report to the Third Report, dated December 23, 2010 (the First Supplemental Report ), to provide this Court with an update on the hearing on the requested relief described in the Third Report, and the Information Officer s recommendation as to the Foreign Representative s request for the December 23rd Order; and f. a fourth report of the Information Officer, dated February 28, 2011 (the Fourth Report ), to provide this Court with information relating to the Foreign Representative s request for the March 4th Order, termination of
5 the Backstop Agreement and the Rights Offering, withdrawal of the Plan, amendments to the DIP Agreement, an overview of ongoing marketing and restructuring efforts of the Debtors business, the Debtors request for an order extending the exclusive period, and the claims filed by Sprint in the U.S. Bankruptcy Proceeding. Copies of the Pre-Filing Report, First Report, Second Report, Third Report, First Supplemental Report, and Fourth Report are available on the Information Officer s website at: www.deloitte.com/ca/terrestar-networks. 11. In preparing this fifth report of the Information Officer (the Fifth Report ), Deloitte has relied solely on the information and documents supplied by the Foreign Representative and its counsel and/or documents publicly available on the docket of the U.S. Bankruptcy Proceeding. Copies of all materials filed in the U.S. Bankruptcy Proceeding are available at the Debtors claims and noticing agent s website: www.terrestarinfo.com. Deloitte has not audited, reviewed or otherwise attempted to independently verify the accuracy or completeness of the information contained in the materials supplied by the Foreign Representative and its counsel or materials filed in the U.S. Bankruptcy Proceeding, and which information is reflected in this Fifth Report. Accordingly, Deloitte expresses no opinion or other form of assurance on the information contained herein. PURPOSE 12. The purpose of this Fifth Report is to provide this Court with information regarding: (i) the Debtors requests of the Bankruptcy Court for orders: (a) authorizing TerreStar Canada to enter into a purchase agreement with Data Sales Co. (the Data Sales Motion );
6 (b) authorizing the Debtors to reject certain agreements with Elektrobit, Inc. (the Elektrobit Motion ); and (c) authorizing the Debtors to reject certain executory contracts and unexpired leases of non-residential real property entered into before the Petition Date (the Rejected Agreements Motion ); (ii) provide this Court with information on the granting of an order by the Bankruptcy Court extending the exclusive period during which only the Debtors may file a chapter 11 plan and solicit acceptance thereof; and (iii) provide this Court with an update on the discovery and briefing schedule relating to the Debtors Objection to the proofs of claim filed by Sprint. THE DATA SALES MOTION 13. On March 2, 2011, the Debtors filed the Data Sales Motion for an order (the Purchase Agreement Order ) authorizing TerreStar Canada s entry into a purchase agreement with Data Sales Co. (the Purchase Agreement ). 14. The Purchase Agreement involves the sale of excess equipment (the Excess Equipment ) currently subject to a lease between TSNI and Data Sales Co., which lease was entered into prior to the commencement of the U.S. Bankruptcy Proceeding. Deloitte understands that TSNI continues to utilize certain equipment under the lease, but no longer requires the Excess Equipment for its business operations, and that TerreStar Canada requires the Excess Equipment for use in development of its point of presence in Ontario. 15. Deloitte understands that TerreStar Canada s spectrum license and Canadian federal regulations require companies that provide telecommunications services in Canada to establish a lawful intercept point. Deloitte further understands that, after discussion with Canadian regulators, TerreStar Canada has begun to build such an intercept point in Ontario (scheduled for completion by the third quarter
7 of 2011) and that TerreStar Canada requires the Excess Equipment for this purpose. 16. To ensure timely completion of the intercept point in Ontario, Deloitte understands that TerreStar Canada needs to acquire the Excess Equipment quickly. Failure to meet the construction completion schedule may jeopardize TerreStar Canada s ability to comply with its spectrum license and the Canadian regulations. Deloitte also understands that TSNI has a vested interest in TerreStar Canada s continued Canadian license compliance because TSNI s license in the United States is based in part on TerreStar Canada s license. 17. Pursuant to the terms of the proposed Purchase Agreement, TerreStar Canada will pay Data Sales Co. USD $557,472.27 (the Purchase Price ) for the Excess Equipment. Deloitte understands that the Debtors believe the Purchase Price to be fair and reasonable. Deloitte understands that upon TerreStar Canada s entry into the Purchase Agreement, Data Sales Co. has agreed to amend the lease with TSNI to reflect a proportionate reduction in TSNI s payments under the lease to account for the removal of the Excess Equipment from the lease. Deloitte understands the Purchase Price for the Excess Equipment will be paid from funds received from the DIP Facility as provided in the DIP budget, and that the DIP Lender has consented to same. 18. A hearing before the Bankruptcy Court on the Data Sales Motion is scheduled for March 23, 2011. THE ELEKTROBIT MOTION 19. On March 4, 2011, the Debtors and the TSC Debtors filed a motion (the Elektrobit Motion ) for an order authorizing the rejection of certain agreements by and among the Debtors and Elektrobit, Inc. ( Elektrobit ), effective February 16, 2011. 20. On August 10, 2007, TSNI and Elektrobit entered into a master development and licensing agreement (the Licensing Agreement ), whereby Elektrobit would
8 assist TSNI in the development of the GENUS headset. Deloitte understands that pursuant to an amendment dated November 18, 2009, TerreStar Corporation ( TSC ) purportedly guaranteed TSNI s obligations to Elektrobit under the Licensing Agreement. 21. On December 1, 2009, TSC entered into a master supply agreement with Elektrobit (the Supply Agreement, and together with the Licensing Agreement, and all other ancillary or related agreements, including any associated purchase orders, the Agreements ). A listing of the Agreements is included at Exhibit B to the Elektrobit Motion. Deloitte understands that, pursuant to the Supply Agreement, Elektrobit provides manufacturing services, forward and reverse logistics, and after-market services for certain satellite-terrestrial smartphones, starting with the GENUS smartphone. 22. Deloitte understands that on or about November 19, 2010, Elektrobit filed suit against TSC in the Supreme Court of New York seeking payment of outstanding receivables in the amount of USD $25.8 million and also filed a proof of claim in TSNI s chapter 11 case for the same amount. 23. Deloitte understands that the Debtors, with their professional advisors, have undertaken a comprehensive review of the Agreements and determined that any benefit derived from the Agreements does not outweigh the relative burden because the Debtors no longer require the services provided under the Elektrobit Agreements. Deloitte further understands that the Debtors believe the rejection of the Agreements will not affect the Debtors enterprise value nor the Debtors current efforts to market their assets. 24. Although the Agreements are with TSNI and TSC, Deloitte understands that since the Elektrobit Motion was filed by and on behalf of all Debtors, and the corresponding order of the Bankruptcy Court will provide rejection authority to each such Debtor, the Foreign Representative is seeking recognition of such order from this Court.
9 25. A hearing before the U.S. Bankruptcy Court to consider the Elektrobit Motion is scheduled for March 23, 2011. THE REJECTED AGREEMENTS MOTION 26. On March 9, 2011, the Debtors filed the Rejected Agreements Motion for an order authorizing the rejection of executory contracts and unexpired leases of non-residential real property (collectively, and as subsequently amended by the Revised List of Rejected Agreements (as defined below) and further amended by the Debtors and as to be presented to the Bankruptcy Court, the Rejected Agreements ), effective February 9, 2011. A summary of the Rejected Agreements, including employment agreements, consulting agreements, satellite services and construction agreements, public and investor relations agreements and software license and supply agreements, is included in the Rejected Agreements Motion itself. 27. On March 17, 2011, the Debtors filed a notice of adjournment (the Notice of Adjournment ) in the U.S. Bankruptcy Proceeding indicating, among other things, that (i) certain agreements were removed from the list of Rejected Agreements originally attached as an exhibit to the Rejected Agreements Motion (collectively, the Removed Agreements ) 3 ; (ii) the hearing on the Debtors request to reject the revised list of Rejected Agreements (the Revised List of Rejected Agreements ), included as Exhibit A to the Notice of Adjournment, will proceed as scheduled on March 23, 2011. Deloitte understands that subsequent to the filing of the Notice of Adjournment, the Debtors have amended the Revised List of Rejected Agreements and will present the amended list of Rejected Agreements to the Bankruptcy Court at the hearing on the Rejected Agreements Motion. 3 Deloitte understands that the Debtors have notified the counterparties to the Removed Agreements that such Removed Agreements have either (a) been removed from the list of the Rejected Agreements or (b) adjourned to a hearing date to be determined.
10 28. Deloitte understands that TerreStar Canada is listed as the Debtor counterparty on four of the Rejected Agreements, all of which are described as consulting agreements (the Canadian Agreements ). Deloitte understands that the Debtors believe no amounts are currently outstanding to any counterparty under the Canadian Agreements and that pursuant to the terms of the Canadian Agreements, TerreStar Canada is only required to pay the counterparties thereto for services actually rendered from time to time to TerreStar Canada upon the request of TerreStar Canada. 29. Deloitte understands that the Debtors, with their professional advisors, have undertaken a comprehensive review of their executory contracts and unexpired leases entered into prior to the U.S. Bankruptcy Proceeding to determine which remain beneficial to ongoing operations. Deloitte further understands that the Debtors believe the Rejected Agreements are no longer necessary for their ongoing business, and have limited profitability or value for the Debtors, their estates and stakeholders, and any benefit derived therefrom is insufficient compared to the related burden. 30. Deloitte understands that the Debtors believe that the rejection of the Rejected Agreements will not in any way affect the Debtors sale and marketing efforts or reorganization strategies. 31. Pursuant to the terms of the proposed order of the Bankruptcy Court approving the Rejected Agreements Motion, counterparties to the Rejected Agreements will have 30 days after service of such order to file a proof of claim for any rejection damages resulting from the rejection of the Rejected Agreements. 32. A hearing before the Bankruptcy Court to consider the Rejected Agreements Motion is scheduled for March 23, 2011. EXTENSION OF THE EXCLUSIVITY PERIOD 33. On January 26, 2011, the Debtors and the TSC Debtors filed a motion for an order extending the exclusive period during which only the Original Debtors may file a
11 chapter 11 plan and solicit acceptance thereof (the Exclusivity Motion and the Original Debtors Exclusive Filing Period, respectively). A hearing to consider the Exclusivity Motion was originally scheduled for February 16, 2011, but was adjourned to March 9, 2011. 34. In connection with the adjournment, the Bankruptcy Court granted a bridge extension of the Original Debtors Exclusive Filing Period through to the March 9, 2011 hearing on the Exclusivity Motion. 35. On March 9, 2011, the Bankruptcy Court issued an order (the Exclusivity Extension Order ) extending the Original Debtors Exclusive Filing Period for seventy-five (75) days through to and including May 23, 2011 and the period of time during which only the Original Debtors may solicit acceptances of a plan of reorganization was extended for seventy-five days through and including July 22, 2011. 36. The Information Officer understands that in connection with the withdrawal of the Plan and the extension of their exclusivity periods pursuant to the Exclusivity Extension Order that the Debtors and their advisors are continuing to explore potential restructuring and/or sale transactions for their assets and business, including, but not limited to, through a new plan process, and continue to engage their respective stakeholders in this process. To the extent material developments arise in respect of this process, Deloitte will provide a further report to this Court. OBJECTION TO SPRINT CLAIM 37. By stipulation (the Stipulation ) between counsel to the Debtors, Sprint, and the Official Committee of Unsecured Creditors in the U.S. Bankruptcy Proceeding, and approved by the Bankruptcy Court on March 11, 2011, the parties agreed to a certain discovery and briefing schedule for the resolution of the Objection to the Sprint proofs of claim filed in the U.S. Bankruptcy Proceeding. A detailed description of the Objection to the Sprint claim is contained in the Fourth Report.
12 38. The Stipulation sets forth the dates by which such things as written discovery requests, document productions, expert witness reports, depositions, and briefing are to be completed. Of note, pursuant to the Stipulation, the parties are to use best efforts to substantially complete all discovery by no later than April 20, 2011, and supplemental reply briefs, if any, are to be served by no later than May 13, 2011. To the extent any material developments arise in respect of the Objection, Deloitte will accordingly advise this Court. RECOMMENDATION OF THE INFORMATION OFFICER 39. Deloitte understands that the Foreign Representative intends to seek an order of this Court recognizing the orders of the U.S. Bankruptcy Court approving the Data Sales Motion, Elektrobit Motion, and the Rejected Agreements Motion, and that the Foreign Representative believes recognition of such orders to be necessary for the protection of the Debtors property and that these orders are in the interests of the Debtors creditors. The Information Officer supports the granting of such an order by this Court. All of which is respectfully submitted at Toronto, Ontario, this 18th day of March, 2011. DELOITTE & TOUCHE INC. (solely in its capacity as Information Officer) Per: Paul Casey, CA CIRP Senior Vice-President
IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED APPLICATION OF TERRESTAR NETWORKS INC. UNDER SECTION 46 OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED Court File No. CV-10-8944-00CL ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) FIFTH REPORT OF THE INFORMATION OFFICER, DELOITTE & TOUCHE INC. March 18, 2011 BENNETT JONES LLP 3400 One First Canadian Place Toronto, ON M5X 1A4 Kevin J. Zych (LSUC#33129T) Tel: (416) 777-5738 Fax: (416) 863-1716 Lee J. Cassey (LSUC#53654I) Tel: (416) 777-6448 Fax: (416) 863-1716 Lawyers for Deloitte & Touche Inc., the Information Officer