Risks and Uncertainties Identified by the Board (November 1, 2011)
EB has identified a number of business, market and finance related risk factors and uncertainties that can affect the level of sales and profits. Those of the greatest significance on a short term are those affecting the utilization and chargeability levels and average hourly prices of R&D services. On the ongoing financial period the global economic uncertainty may affect the demand for EB's services, solutions and products and provide pressure on e.g. volumes and pricing. It may also increase the risk for credit losses and weaken the availability and terms of financing.
On November 1, 2011, EB's receivables from TerreStar amounted to approximately USD 25.8 million (EUR 18.4 million as per exchange rate of October 31, 2011), which it has claimed in the Chapter 11 cases of both TerreStar Networks and TerreStar Corporation. In addition to the booked receivables, EB has also claimed additional costs in the amount of approximately USD 2.1 million (EUR 1.5 million as per exchange rate of October 31, 2011) and resulting mainly from the ramp down of the business operations between the parties. Thus, EB has asserted claims against each of the TerreStar entities in amounts totaling USD 27.9 million (EUR 20.0 million as per exchange rate of October 31, 2011). Due to uncertainties related to the accounts receivable, EB booked an impairment of the accounts receivable in the amount of EUR 8.3 million during the second half of 2010.
On October 19, 2010, TerreStar Networks and certain other affiliates of TerreStar Corporation and on February 16, 2011, the parent company TerreStar Corporation filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code to strengthen their financial position. Generally in a Chapter 11 case, any distribution of cash or other assets by a debtor to satisfy pre-bankruptcy claims of its creditors must be made under a Chapter 11 plan of reorganization or liquidation. Such plans must be approved by the United States Bankruptcy Court and (with limited exceptions) an affirmative vote of all classes of creditors whose claims will not be paid fully and immediately after the plan is approved by the court and becomes effective by its terms.
Within the first four months of its Chapter 11 case, TerreStar Networks filed, then withdrew, a proposed plan of reorganization. Subsequently, on July 7, 2011, the United States Bankruptcy Court approved the sale of substantially all TerreStar Networks' assets to Gamma Acquisition L.L.C., an acquisition subsidiary formed by Dish Network Corporation for about USD 1.375 billion. Based upon filings made by TerreStar Networks with the Bankruptcy Court, USD 1.345 billion of the purchase price has been funded to date, with the remainder of the purchase price payable at closing, and payments have been made to secured creditors from the sale proceeds in the amount of about USD 1.128 billion. However, the sale will not result in an immediate distribution to general unsecured creditors. EB's share of the TerreStar Networks' sale proceeds, and the timing of distribution, cannot be predicted with certainty at this time. Any such distribution must be provided for under a Chapter 11 plan of liquidation to be filed, voted on and submitted to the court for approval, which to date has not occurred.
On July 22, 2011, TerreStar Corporation filed a reorganization plan with the Bankruptcy Court. Its plan contains only incomplete information on how EBīs receivables will be treated in the reorganization. However, the plan suggests that unsecured claims (such as EB's) may be exchanged for new notes to be issued by a reorganized TerreStar Corporation in the face amount of each allowed claim. It is also possible that some part of an allowed unsecured claim may be exchanged for shares in a new class of preferred stock in the reorganized entity. The terms of these new notes and preferred stock are not available at this time. Further, it is premature to speculate regarding distributions to creditors under this plan because the plan TerreStar Corporation filed may or may not obtain the necessary approvals, and the terms of the plan may change through negotiation with creditors. EB has objected to the disclosure statement accompanying the proposed plan on the ground that it does not provide adequate information of a kind, and in sufficient detail, to enable EB and other creditors to make an informed judgment about the plan. EB has also formally sought further information to evaluate the filed incomplete plan and preliminary objected to the plan.
Recoveries by holders of claims against TerreStar Networks and TerreStar Corporation are to be funded by separate pools or streams of assets. Timing or amount of any payment either by TerreStar Networks or TerreStar Corporation cannot be predicted with certainty at this time. However, subject to a great number of assumptions, EB anticipates that creditors of TerreStar Networks may expect to receive cash payment corresponding to a relatively small percentage of their allowed claims. Under the plan proposed by TerreStar Corporation, its general unsecured creditors are to receive new promissory notes and possibly preferred stock, with a face value equivalent to their allowed claims. Payment of the note obligations and any distributions to holders of preferred stock are to be funded by future revenues and profits of reorganized TerreStar Corporation. For the reasons noted in the previous paragraph, it is premature to comment on the extent of EBīs potential recovery. Additionally, as part of the process of reconciling accounts in preparation for making distributions under a plan, Chapter 11 debtors often challenge the amount or validity of some creditor claims, and it is possible that either TerreStar Networks, TerreStar Corporation or another party in interest may object to EB's claims filed in the respective bankruptcy cases. EB expects to vigorously defend any such objections to its claims, but speculation regarding the likely outcome of any such future dispute is premature at this time. Further, it is possible that, as part of the Chapter 11 process, TerreStar Corporation, TerreStar Networks and their affiliated debtors may seek to recover payments previously made to creditors and other parties pursuant to various provisions of the Bankruptcy Code. The risk that the TerreStar debtors may attempt to recover payments from EB, or that such recovery actions, if attempted, may be successful, cannot be ruled out at this time.
Based on EBīs current understanding, there is no reason to believe that there would be further impairment losses on EB's account receivable from TerreStar Networks and TerreStar Corporation. EB aims to collect the amounts owed to it in full through the Chapter 11 cases of TerreStar Networks and TerreStar Corporation, and/or for example through selling of the earlier mentioned accounts receivable. It is possible that based on later information related to the TerreStar Networks' and TerreStar Corporationīs Chapter 11 cases, the above views may need to be reconsidered. Despite the TerreStar companies' efforts to reorganize, it is possible that the credit risk may still grow during the second half of 2011. Should the accounts receivable not be collected at all, either from TerreStar Networks or TerreStar Corporation, an impairment loss and costs related to the collection process would additionally lower EB's operating result on a non-recurring basis by approximately EUR 10 million, at maximum (USD-nominated items as per exchange rate of October 31, 2011). However, this would not have any significant negative effect on the EB's cash flow.
As the EB's customer base consists mainly of companies operating in the fields of automotive and telecommunications, the company is exposed to market changes in these industries. EB believes that expanding the customer base will reduce dependence on individual companies and that the company will thereby be mainly affected by the general business climate in automotive and telecommunication industries. However, some parts of EB's business are more sensitive to customer dependency than others. Respectively, this may translate as accumulation of risk with respect to outstanding receivables and ultimately with respect to credit losses. The more specific market outlook is presented in the Interim Report published on November 1, 2011 under the "Business Segments' development during the third quarter 2011 and market outlook" section.
EB's operative business risks are mainly related to following items: uncertainties and short visibility on customers' product program decisions, their make or buy decisions and on the other hand, their decisions to continue, downsize or terminate current product programs, ramping up and down project resources, availability of personnel in labour markets (in particular in Germany and Finland), timing and on the other hand successful utilization of the most important technologies and components, competitive situation and potential delays in the markets, timely closing of customer and supplier contracts with reasonable commercial terms, delays in R&D projects, activations based on customer contracts, obsolescence of inventories and technology risks in product development causing higher than planned R&D costs. In addition there are typical industry warranty and liability risks as well as risks related to management of intellectual property rights involved in selling EBīs services, solutions and products.
Product delivery business model includes such risks as high dependency on actual product volumes, development of the cost of materials and production yields. The above-mentioned risks may manifest themselves as higher cost of product delivery, and ultimately, as lower profit. Revenues expected to come from new products for existing and new customers include normal timing risks.