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Iridium Opinion.V12.DOC 01-02952-jmp Doc 234 Filed 08/31/07 Entered 08/31/07 16:04:42 Main Document Pg 1 of 114 UNITED STATES BANKRUPTCY COURT FOR PUBLICATION SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------x In re: x IRIDIUM OPERATING LLC, x Chapter 11 IRIDIUM CAPITAL CORP., x IRIDIUM IP LLC, x Case No. 99-45005 (JMP) IRIDIUM ROAMING LLC, x IRIDIUM (POTOMAC) LLC, and x Jointly Administered IRIDIUM PROMOTIONS, INC. x ---------------------------------------------------------------x STATUTORY COMMITTEE OF UNSECURED x CREDITORS on behalf of x IRIDIUM OPERATING LLC, x IRIDIUM CAPITAL CORP., x IRIDIUM IP LLC, x IRIDIUM LLC, x IRIDIUM ROAMING LLC, x Adv. Pro. No. 01-02952 (JMP) IRIDIUM (POTOMAC) LLC, x x Plaintiff, x x v. x x MOTOROLA, INC. x x Defendant. x ---------------------------------------------------------------x OPINION REGARDING INSOLVENCY AND UNREASONABLY SMALL CAPITAL 01-02952-jmp Doc 234 Filed 08/31/07 Entered 08/31/07 16:04:42 Main Document Pg 2 of 114 TABLE OF CONTENTS INTRODUCTORY STATEMENT AND OVERVIEW .....................................................4 PROCEDURAL HISTORY...............................................................................................26 JURISDICTION AND VENUE ........................................................................................27 FINDINGS OF FACT........................................................................................................28 I. IRIDIUM CORPORATE HISTORY ................................................................................28 II. THE IRIDIUM SYSTEM ..................................................................................................29 A. Iridium System Performance .................................................................................33 B. Expectations About Handset Size..........................................................................38 III. RELEVANT INFORMATION REGARDING EXPECTED SYSTEM PERFORMANCE WAS DISCLOSED TO IRIDIUM AND ITS INVESTORS ..............39 A. Iridium And Its Board Were Informed About The System’s Voice Quality And Expected Performance In Various Environments..........................................39 B. Iridium Publicly Disclosed System Limitations to Investors ................................43 IV. IRIDIUM’S BUSINESS PLANS AND MARKET RESEARCH.....................................44 A. Early Iridium Business Planning And Market Research.......................................44 B. The 1996-1998 Market Research...........................................................................47 C. Translating Market Research Into Projections.......................................................49 1. KPMG Financial Models ...........................................................................50 2. Business Plan 2.0 .......................................................................................51 3. Business Plans – 2.x, 2.x Update and 3.0 ..................................................52 D. Marketing Expert Opinions....................................................................................52 V. IRIDIUM’S BANK LOANS .............................................................................................54 A. Global Arrangers’ Due Diligence ..........................................................................54 B. The C&L/ADL “Banking Case”............................................................................57 1. ADL technical due diligence......................................................................63 2. ADL risk assessment..................................................................................64 3. ADL understanding of system performance ..............................................65 VI. IRIDIUM PUBLIC AND PRIVATE EQUITY AND DEBT TRANSACTIONS ............66 A. Private Equity Investments ....................................................................................66 1. Due diligence associated with private investments ...................................68 a. Goldman Sachs ..............................................................................68 b. Early investors................................................................................69 01-02952-jmp Doc 234 Filed 08/31/07 Entered 08/31/07 16:04:42 Main Document Pg 3 of 114 B. 1995 Contemplated Debt Offering.........................................................................70 C. Public Equity Offerings .........................................................................................71 1. Public Equity Due Diligence And Understanding Of System Limitations .................................................................................................72 a. Merrill Lynch.................................................................................72 b. Salomon Smith Barney..................................................................73 2. Equity underwriter valuations of Iridium ..................................................74 D. Iridium’s Public Debt Offerings ............................................................................75 E. Bondholder due diligence and understanding of system limitations .....................77 VII. IRIDIUM’S STOCK PRICE AND ANALYST ASSESSMENTS ...................................78 A. Iridium Stock Price ................................................................................................78 B. Analysts..................................................................................................................79 VIII. EVIDENCE REGARDING IRIDIUM’S CAPITAL ADEQUACY.................................81 A. Iridium’s Financial Advisors .................................................................................81 B. Iridium CFO/CEO..................................................................................................81 C. KPMG....................................................................................................................82 IX. MOTOROLA SOLVENCY EXPERTS ............................................................................83 A. Paul Pfleiderer........................................................................................................83 B. Bruce Den Uyl .......................................................................................................84 1. Den Uyl DCF Analysis ..............................................................................84 a. 1995 DCF analysis.........................................................................85 b. 1997 DCF analysis.........................................................................85 c. 1998 DCF analysis.........................................................................85 C. Other Evidence Regarding Iridium’s Solvency.....................................................86 X. COMMITTEE’S SOLVENCY EXPERT..........................................................................87 A. The Committee’s Adjusted Iridium Projections ....................................................89 1. Spragg’s 1995 Projections .........................................................................89 2. Spragg’s 1997 Projections .........................................................................90 CONCLUSIONS OF LAW ...............................................................................................92 XI. BURDEN OF PROOF.......................................................................................................92 XII. LEGAL STANDARDS FOR PROVING INSOLVENCY/INADEQUACY OF CAPITAL...........................................................................................................................95 A. Insolvency..............................................................................................................95 ii 01-02952-jmp Doc 234 Filed 08/31/07 Entered 08/31/07 16:04:42 Main Document Pg 4 of 114 B. Capital Adequacy...................................................................................................97 XIII. RELEVANCE OF IRIDIUM’S SUBSEQUENT FAILURE IN DETERMINING INSOLVENCY AND/OR INADEQUACY OF ITS CAPITAL .......................................98 XIV. ROLE OF CONTEMPORANEOUS EVIDENCE IN DETERMINING IRIDIUM’S INSOLVENCYAND/OR INADEQUACY OF ITS CAPITAL .................100 A. Iridium’s Market Capitalization...........................................................................100 B. Iridium Projections of Future Cash Flows ...........................................................101 C. Analysts, Investors and Lenders ..........................................................................102 XV. EXPERT TESTIMONY ON INSOLVENCY AND INADEQUATE CAPITAL ..........105 A. Legal Standards Regarding The Reliability And Credibility Of Expert Testimony.............................................................................................................105 B. The Expert Opinion Testimony Regarding Insolvency Offered By The Committee Is Not Persuasive ...............................................................................106 CONCLUSION............................................................................................................................110 iii 01-02952-jmp Doc 234 Filed 08/31/07 Entered 08/31/07 16:04:42 Main Document Pg 5 of 114 APPEARANCES: WEIL, GOTSHAL & MANGES LLP Attorneys for Statutory Committee of Unsecured Creditors 767 Fifth Avenue New York, New York 10153 Greg A. Danilow, Esq. Michael F. Walsh, Esq. Scott J. Atlas, Esq. Diane Harvey, Esq. Ashish D. Gandhi, Esq. KIRKLAND
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