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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 333-11149
ORBCOMM GLOBAL, L.P.
ORBCOMM GLOBAL CAPITAL CORP.
ORBCOMM CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
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54-1698039
54-1841164
DELAWARE 54-1890273
(State or Other Jurisdiction of (I.R.S. Employer
incorporation or organization of Registrants) Identification Nos.)
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2455 HORSE PEN ROAD, SUITE 100
HERNDON, VIRGINIA 20171
(ADDRESS OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(703) 406-6000
(REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the last 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
Item 5. Market for the Registrants' Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 39
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 94
PART III
Item 10. Directors and Executive Officers of Registrants............. 94
Item 11. Executive Compensation...................................... 97
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 99
Item 13. Certain Relationships with Related Transactions............. 99
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 110
Signatures.................................................. 113
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PART I
ITEM 1. BUSINESS
BACKGROUND
ORBCOMM Global, L.P. ("ORBCOMM") is a Delaware limited partnership formed
in 1993 to develop, construct, operate and market the ORBCOMM low-Earth orbit
("LEO") satellite-based data and messaging system. Our general and limited
partnership interests are held by each of Orbital Communications Corporation
("OCC"), a Delaware corporation and subsidiary of Orbital Sciences Corporation
("Orbital"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), a Delaware
general partnership whose interests are wholly owned on an indirect basis by
Teleglobe Inc. ("Teleglobe").
As of December 31, 1998, we had six subsidiaries:
- ORBCOMM USA, L.P., a Delaware limited partnership, was formed in July
1993 to market services using the ORBCOMM system in the United States.
We hold general and limited partnership interests with a 98%
participation percentage, and OCC directly holds general and limited
partnership interests with a 2% participation percentage, in ORBCOMM
USA;
- ORBCOMM International Partners, L.P., a Delaware limited partnership,
was formed in July 1993 to market services using the ORBCOMM System
internationally. We hold general and limited partnership interests
with a 98% participation percentage, and Teleglobe Mobile directly
holds general and limited partnership interests with a 2%
participation percentage, in ORBCOMM International;
- ORBCOMM Global Capital Corporation ("Capital"), a Delaware corporation
and a wholly owned subsidiary of ours, was formed in July 1996 to act
as a co-issuer with us in connection with the private placement (the
"Notes Offering") of our $170,000,000 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Notes"). Capital has nominal
assets and does not conduct any operations;
- ORBCOMM Corporation, a Delaware corporation and a wholly owned
subsidiary of ours, was formed in March 1998 for the sole purpose of
investing in and acting as a general partner of ORBCOMM in connection
with the initial public offering we anticipated would be conducted in
1998, which offering was not consummated;
- Dolphin Information Services, Inc. ("DIS"), a Delaware corporation and
wholly owned subsidiary of ours, was formed in September 1998 to
purchase substantially all of the assets of Dolphin Software Systems
Inc., a Canadian corporation ("Dolphin"). DIS distributes outside
Canada software products that enable our customers to better access
and manage information obtained from or regarding their remote or
mobile assets (collectively, the "Dolphin Software"); and
- Dolphin Software Services ULC, a Nova Scotia unlimited liability
company ("DSS") and wholly owned subsidiary of DIS, was formed in
October 1998. DSS develops, and distributes within Canada, the Dolphin
Software.
OUR BUSINESS
We provide two-way data and messaging services using the world's first
commercial LEO satellite-based system. We have launched 28 satellites to date
and expect to launch seven additional satellites in 1999, which will create a
35-satellite enhanced constellation with increased capacity and improved service
in the equatorial regions. The ORBCOMM system comprises three segments,
including the space segment, which consists of small and relatively inexpensive
satellites, a ground segment, which includes a relatively low-cost ground
infrastructure and a subscriber segment, which consists of relatively
inexpensive subscriber units. We believe our services provide a reliable,
cost-effective method of providing fixed asset monitoring, mobile asset tracking
and messaging services to a broad range of customers around the world, enabling
such customers to collect
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data from multiple locations, track assets on a global basis and transmit and
receive short text messages outside the coverage area of other systems. We
market our services to customers within the United States indirectly through
value-added resellers ("VARs") and directly through internally developed
value-added resellers ("Internal VARs") and internationally through
international service licensees ("International Licensees") that may distribute
our services directly or through a distribution network.
We expect that the aggregate cost to design, develop, launch and place in
commercial service the 35-satellite enhanced constellation and design and
construct the associated ground infrastructure in the United States (the "U.S.
Ground Segment"), which includes an ORBCOMM system message switch, or gateway
(the "U.S. Gateway") and the master control center for the entire ORBCOMM
network (the "Network Control Center"), will be approximately $337,000,000, of
which approximately $295,000,000 had been spent through December 31, 1998
(excluding approximately $57,000,000 of capitalized interest).
MILESTONES
Milestones Achieved to Date
During the period from January 1, 1998 to March 31, 1999, we achieved the
following milestones:
- Launch of Satellites and Commencement of Commercial Service. In 1998,
following the successful launch of our initial two satellites in April
1995 and the successful launch of one plane of eight satellites in
late 1997, we successfully launched 18 additional satellites on three
separate launch vehicles. While from February 1996 to November 1998 we
provided limited commercial service in the United States, on November
30, 1998, we formally launched full commercial service in North
America.
- Launch of Commercial Service by International Licensees. Our
International Licensees for Europe and a portion of South America
launched commercial service in January 1999 and March 1999,
respectively. Our International Licensee for Japan is expected to
launch commercial service on March 31, 1999. Collectively, these three
International Licensees cover approximately 50 countries.
- Application Development and Testing. We have continued development and
testing of applications for a variety of market segments including
electric utility meter and chemical storage tank monitoring, trailer,
container, rail car, heavy equipment, automotive and fishing vessel
tracking, and in-cab trucking, government and personal messaging.
- Internal VARs. We have developed three Internal VARs, one of which has
commercial applications that are capable of monitoring the entire
field production site for oil and gas producers, and measuring natural
gas flow through gathering pipelines and monitoring chemical storage
tanks. Another of our Internal VARs has a commercially available
application to provide end-to-end tracking and monitoring services to
the heavy equipment industry. Our third Internal VAR plans to have a
commercial application capable of tracking trailers available in the
second quarter of 1999.
- Subscriber Units. We have type approved six different subscriber unit
models for use with the ORBCOMM system, one of which is a messaging
subscriber unit from Magellan Corporation, a majority-owned subsidiary
of Orbital, which unit became commercially available in September
1998. In addition, we are finalizing type approval of three subscriber
unit models that can be used in connection with monitoring and/or
tracking applications.
- Regulatory Approvals. In addition to the full regulatory approvals
that had previously been received in the United States, Canada and
Malaysia, approval to provide full commercial services was received in
Japan, Argentina, Venezuela, Morocco, Uruguay, Romania, Curacao and
Iceland. Preliminary licenses or approval to provide limited services
have been received in Germany, Italy, the Czech Republic, Australia,
New Zealand, South Africa, Spain, Belgium, Norway, Sweden, Northern
Ireland, Botswana and Namibia.
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- Gateways. Gateways located in Italy, Japan, Brazil, Argentina and
South Korea have successfully completed acceptance testing. ORBCOMM
International subsequently terminated its service license agreement
with the International Licensee for South Korea for default. ORBCOMM
International is currently negotiating with a proposed new
International Licensee for South Korea, which International Licensee
may acquire this gateway.
- Federal Communications Commission ("FCC") Authorizations. On March 31,
1998, OCC received authority to construct, deploy and operate an
additional 12 LEO satellites in the United States.
Future Milestones
We expect to achieve the following milestones in 1999:
- Launch of Additional Satellites; Provision of Global Service. In 1999,
we plan to launch an additional plane of seven satellites in an
equatorial orbit, which we expect will enable us to provide enhanced
ORBCOMM services in the equatorial regions.
- Launch of Commercial Service by International Licensees. During the
remainder of 1999, we expect that certain of our International
Licensees for Malaysia, Morocco, the remaining portion of South
America and the south Caribbean region, Mexico, the north Caribbean
region, Russia and Ukraine will launch commercial service as well. In
addition, during 1999 we expect to execute agreements with several
additional International Licensees.
OUR SERVICE OFFERINGS
We believe our system will provide a reliable, cost-effective method of
providing data and messaging services to a broad range of customers around the
world. We are targeting specific markets for our services, including those in
which potential customers currently have geographically limited or otherwise
inefficient methods of obtaining information. Our primary target markets include
the following:
Fixed Asset Monitoring. Our system provides a means of collecting data from
industrial assets in multiple locations around the world. Ultimately, we also
expect to provide a method of controlling the functions of such assets. Primary
applications currently include or are expected to include monitoring and control
applications for:
- electric utility meters;
- oil and gas storage tanks, wells and pipelines; and
- environmental projects.
Many of the customers for these applications manage numerous, widely
dispersed assets in locations not currently or adequately served by other
systems.
Mobile Asset Tracking. We believe our system will provide a means to
regularly and reliably track the location and report the status or condition of
mobile assets around the world, thereby enabling customers to reduce "down
time," repair costs, theft and other losses, improve service and more
effectively utilize transportation and other equipment assets. Primary
applications currently include or are expected to include tracking and
monitoring applications for:
- trailers, containers and rail cars;
- heavy equipment;
- fishing vessels and barges; and
- government assets.
Certain of the customers in this market segment have no efficient means of
tracking the location and may have no means of monitoring the status or
condition of their assets.
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Messaging. We introduced messaging services in the United States in
September 1998 and expect to introduce messaging services on a global basis as
the necessary ground infrastructure is completed, the necessary regulatory
approvals are received and, in the equatorial region, as additional satellites
are launched. The ORBCOMM system is designed to provide short, alphanumeric
paging-like communications services. We expect that messaging customers will
include a broad range of consumer, commercial and government customers that
require a means of communicating with various locations such as their offices,
dispatch centers or homes or who require the ability to send priority messages
or position information. Certain customers in this market segment currently have
no cost-effective alternatives or rely on pagers, cellular phones or fleet
dispatch systems, all of which can be expensive, unavailable or inconvenient in
certain locations.
Future Applications. In addition to the addressable markets described above
for data and messaging services, we believe that future potential markets
include:
- tracking and messaging services for automobiles;
- additional U.S. and foreign government applications; and
- monitoring applications for home security systems.
MARKETING AND DISTRIBUTION
VARs. In the United States, we have entered into agreements with over 45
VARs and we continue to negotiate agreements with prospective VARs. The VARs
have primary responsibility for marketing our services to industries or markets
within specific regions according to a marketing plan and program that we have
reviewed and approved. The VARs are also responsible for developing
applications, retail pricing, customer service, billing, training, customer
support and maintaining an inventory of or having subscriber units available.
Our relationship with each VAR is governed by a reseller agreement that
establishes the VAR's responsibilities with respect to developing and
maintaining customer relationships, as well as the cost of service to the VAR.
In soliciting customers, the VAR "adds value" to the basic data service provided
by us by integrating the ORBCOMM system with related applications software and
hardware in a manner intended to address the needs of a particular industry or
market segment.
The VARs provide or are expected to provide at least one of our tracking,
monitoring and messaging services in one or more of the market segments we have
identified within our target markets.
National Account Program. Our National Account Program, a sales and
marketing initiative, supplements the activities of the VARs by identifying
specific large corporations that we believe are likely to purchase our services.
The National Account Program and the VAR activities are designed as
complementary strategies, with the goals of coordinated penetration of our
target markets and the efficient use of the full range of our services.
Internal VARs. We also market and distribute our services directly to
customers through Internal VARs. To date, we have established several Internal
VARs to market and distribute monitoring and tracking services to the oil and
gas, transportation and heavy equipment industries. In the future, we may
establish additional Internal VARs to market and distribute applications to the
automotive and other industries and to provide messaging services. The Internal
VARs are working closely with customers to develop and integrate the ORBCOMM
system with related applications and develop hardware and software to address
the specific needs of customers in particular industries and market segments.
Our Internal VAR for fixed asset monitoring has a commercial application
that is capable of monitoring the entire field production site for oil and gas
producers. This application involves the integration of field sensors that
measure tank levels or monitor condition of equipment in the field with
applications software used by customers in conjunction with their existing
management information systems. This Internal VAR has also developed commercial
products that are capable of measuring natural gas flow through gathering
pipelines and that monitor chemical storage tanks. In the future, this Internal
VAR intends to develop monitoring and control applications for oil and gas
pipelines, chemical storage tanks, agricultural assets, such as grain silos and
irrigation systems, water treatment facilities and environmental projects.
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Another of our Internal VARs has a commercially available application to
provide end-to-end tracking and monitoring to the heavy equipment industry. Our
other Internal VAR completed beta testing of a trailer tracking application in
December 1998 and plans to launch this application commercially in the second
quarter of 1999. This application involve the integration of subscriber units
mounted on mobile assets with the ORBCOMM system and with applications software
for use by customers in conjunction with their existing management information
systems.
International Licensees. We expect to market and distribute our services
outside the United States through International Licensees. We have executed
agreements with 12 International Licensees covering over 80 countries, and are
in the process of replacing four former International Licensees that
collectively represent an additional approximately 25 countries.
Our relationship with each International Licensee is governed by a service
license or similar agreement. Subject to certain limitations, these agreements
grant to the International Licensee, among other things, the exclusive right to
market services using our satellites in a designated geographic area and a
limited right to use certain of our proprietary technologies and intellectual
property. In return, the International Licensees are responsible for, among
other things, procuring and installing the necessary gateways, obtaining the
necessary regulatory and other approvals to provide our services in their
designated regions and marketing and distributing our services in such regions.
International Licensees generally are required to make the ORBCOMM system
available to VARs in their designated geographic regions on the same terms as
resellers authorized by such International Licensees.
We select each International Licensee primarily by evaluating its ability
to successfully market and distribute our services. Key components of such an
evaluation include the International Licensee's:
- reputation in the marketplace;
- existing distribution capabilities and infrastructure;
- financial condition and other resources; and
- ability to obtain the necessary regulatory and other approvals.
International Licensees will pay fees for access to the ORBCOMM system in
their region, including a monthly usage or service fee. This fee is calculated
as the greater of a percentage of gross operating revenues and a data throughput
fee, which percentage and dollar amount may be adjusted by us in accordance with
the terms of the agreements. One International Licensee is entitled to satellite
usage fee credits as a result of our failure to meet certain milestones with
respect to the launch of the ORBCOMM system.
BUSINESS STRATEGY
Key components of our business strategy include the following:
Providing Reliable, Global Coverage. We believe that the integration of
proven technologies into the ORBCOMM system and the redundancy provided by the
ORBCOMM constellation will enable us to provide reliable, global, two-way data
and messaging communications services. The distributed nature of the ORBCOMM
satellite constellation is designed to reduce potential risks associated with
the loss or outage of one or more satellites.
Capitalizing on Our First-to-Market Advantage. With the successful launch
of 28 satellites, we are able to provide commercial service in the United States
and around the world. We expect that we will be able to provide enhanced service
on a global basis in 1999, when the seven satellites to be launched in an
equatorial plane are expected to be placed in commercial service. Having in
place the 28-satellite constellation, as well an operational U.S. Gateway and
type approved subscriber units, has permitted us to conduct a significant number
of beta tests throughout 1998 for companies in various industries including the
electric utility meter, transportation and government market segments. Based on
published reports, we believe that other LEO systems, such as the ORBCOMM
system, operating in the frequencies below 1 GHz (so-called "Little LEO"
systems) are not expected to be commercially operational until at least the year
2000. We believe that being
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first to market with our Little LEO system provides us with the opportunity to
achieve a significant competitive advantage and therefore a greater market
penetration because of our ability to:
- establish certain industry standards for hardware and software
applications;
- demonstrate the ORBCOMM system in an actual operating environment;
- deploy an installed base of subscriber units;
- solidify customer relationships; and
- create relationships with leading VARs, International Licensees,
subscriber unit manufacturers and other hardware and software
developers.
Offering Affordable and Convenient Service. We believe that our small and
relatively inexpensive satellites and subscriber units and relatively low-cost
ground infrastructure enable us to provide customers with affordable and
convenient data and messaging communications services. Each of our satellites is
designed specifically for the transmission of short messages, which eliminates
the need for a number of complex and expensive components such as customized
spot beams, on-board switching and high-powered amplifiers. These components are
required on larger, more complex satellites designed to carry voice, video and
high-intensity data traffic. The less complex and more compact design of our
satellites (each of which weighs between approximately 90 and 105 pounds)
reduces the cost and time of production and enables us to launch multiple
satellites using a single, relatively low-cost launch vehicle. Because we have
relatively inexpensive satellites and a relatively low-cost ground
infrastructure, we believe that we are in a position to offer affordable
services. Additionally, our subscriber units are small, lightweight and have
substantial battery lives. We believe that as more subscriber units become
commercially available and as the overall production volume for subscriber units
increases, the price for subscriber units will decline.
Focusing on Global Marketing and Distribution of Our Services. We are
targeting specific markets for our services, including those in which customers
have geographically limited or otherwise inefficient methods of obtaining
information using other systems. We believe that we can rapidly achieve a global
presence by capitalizing on the customer relationships, technical expertise and
other resources of our VARs, Internal VARs and International Licensees. The
Internal VARs enable us to broaden our distribution base, capture additional
revenue from value-added hardware, software and customer services provided
directly to customers and facilitate the development of application hardware and
software that can hasten market development in the United States and by the
International Licensees.
Relying on the Commitment and Expertise of Our Strategic Partners. Through
December 31, 1998, Orbital and Teleglobe, through OCC and Teleglobe Mobile,
respectively, had invested an aggregate of approximately $228,000,000 in us.
While they are not contractually required to do so, our partners are currently
funding our operations. Orbital is a U.S.-based space and information systems
company, with 1998 revenues of approximately $734,000,000, that designs,
manufactures, operates and markets a broad range of space-related products and
services, including satellites, launch vehicles, electronics and sensor systems,
ground systems, satellite-based navigation, positioning and communications
products and transportation management systems, including the manufacture and
launch of the ORBCOMM satellites. Teleglobe is a North America-based
telecommunications carrier, with 1998 revenues of approximately $3,400,000,000,
whose network and service capabilities (including voice, data, Internet,
broadcast and other value-added services) can be accessed in virtually all
countries. Orbital and Teleglobe have significant operating, regulatory and
marketing experience in the satellite and communications industries, which has
contributed to our becoming the operator of the first commercial global
satellite-based data and messaging system. We have used and will continue to use
the expertise and capabilities of our current partners, including their
expertise in the design, construction and launch of satellites and the marketing
and operation of communications services, to enhance the services offered by the
ORBCOMM system.
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ADDRESSABLE MARKETS
We have defined our "addressable market" as the aggregate of those certain
market segments that possess a significant unsatisfied need for, and can afford
the products and services provided by, LEO systems, such as the ORBCOMM system,
operating in the frequencies below 1 GHz (so-called "Little LEO" systems). We
have identified a number of industries and industry segments in which a demand
currently exists for fixed asset monitoring, mobile asset tracking and messaging
services. We view these industries and industry segments as our primary target
markets.
FIXED ASSET MONITORING
The fixed asset monitoring market segment includes a broad group of
industries that require a means of regularly collecting data from, or in some
cases controlling equipment in, multiple locations. Primary applications include
or are expected to include monitoring and control applications for:
- electric utility meters;
- oil and gas storage tanks, wells and pipelines; and
- environmental projects.
Electric Utility Meters. Currently, wireline, cellular and paging systems,
as well as traditional manual meter reading, are all being used to collect data
from electric utility meters located in urban and suburban areas. For example,
SkyTel Communications, Inc. (formerly Mobile Telecommunications Technologies
Corp.) has entered into a service agreement with Enron Energy Services, Inc.,
under which SkyTel will use its system to support meter reading and provide
services for residential power customers nationwide primarily in urban areas.
The ORBCOMM system is capable of reading electric utility meters in urban,
suburban and rural areas. Our subscriber unit for utility meter monitoring
currently has the capability to read meters and transmit data relating to usage
to a central location. In the future, subscriber units may be programmed to turn
power on and off and identify unauthorized usage.
Oil and Gas Storage Tanks, Wells and Pipelines. We believe that the oil and
gas storage tank monitoring market segment comprises tanks used, among other
things, in petroleum upstream, crude oil production and retail, wholesale and
fleet motor fuel storage. We believe that our services could be used, among
other things, to monitor tank levels and provide related tank management
services, to assist in inventory management and to aid reporting and compliance
efforts by tank operators. For the monitoring of wells in less remote areas,
private radio systems based on VHF radio frequency, multiple-address radio and
microwave are currently being used to collect data for storage tanks and wells.
These systems have been installed primarily for other communications purposes;
therefore, the incremental cost of monitoring storage tanks and wells is low.
However, asset monitoring based on private radio systems is not cost-effective
in locations where the system cannot be combined with other communications
functions. In addition to recording operations data such as tank level and
leakage information, subscriber units using the ORBCOMM system could be
programmed to operate tank and well valves, oil pumps and gas compressors.
The oil and gas pipeline monitoring market segment consists of gas
compressors, oil pumps, pipeline rectifiers (which measure pipeline corrosion),
offshore platforms and pipeline valves. For remote and/or hard-to-read meters,
manual monitoring systems are typically used, which require personnel to travel
to the site to read the meter. We believe that we offer a cost-effective means
of gathering data from meters located in remote locations. In addition to
recording operations data, subscriber units could be programmed to operate
pipelines, pumps, compressors and valves on a routine basis, as well as in the
event of a leak or other emergency.
Environmental. We believe that the environmental monitoring market segment
comprises numerous sites that monitor meteorological, hydrological and other
environmental data such as rainfall, water levels and water quality. These sites
are located in remote areas not served or inadequately served by wireline or
terrestrial-based wireless communications systems. Based on discussions with
VARs that target the environmental monitoring market, we believe that there are
numerous sites globally that require water and air
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monitoring devices that measure substances such as bacteria, dissolved oxygen
and concentrations of carbon monoxide and ozone, and provide meteorological data
on wind speed and barometric pressure.
MOBILE ASSET TRACKING
We believe that primary applications for mobile asset tracking include or
are expected to include monitoring and tracking of:
- trailers, containers and rail cars;
- heavy equipment;
- fishing vessels and barges; and
- government assets.
We believe that we provide companies in such industries with a
cost-effective means to regularly and reliably track the location and status of
assets globally, thereby enabling customers to reduce asset losses, improve
service and more effectively utilize transportation assets.
Trailers, Containers and Rail Cars. We believe that the addressable market
for trailer tracking services includes:
- non-refrigerated trailers belonging to large trucking fleets that need
to improve trailer utilization and operational efficiency;
- trailers that carry high-value goods in the medium and small truck
fleet segment; and
- refrigerated trailers.
Many trailers (both refrigerated and non-refrigerated) are currently being
tracked by a geostationary satellite-based system offered by Qualcomm, Inc. This
system provides seamless coverage, but depends on larger power sources that
require the trailer to be attached to the tractor. As a result, when the trailer
is detached from the tractor, it can no longer be tracked. HighwayMaster
Communications, Inc. offers a cellular-based system to track untethered
trailers, although this system's coverage will be limited to the range of
cellular communications. Private trucking fleets may use systems internal to
their companies where each trailer's number is manually recorded as trailers
enter and leave a point of distribution. We believe we provide a cost-effective
means of tracking untethered trailers based on their current location. Our
tracking application is not constrained by the cellular coverage limitations,
significant power source requirements or, in general, certain line-of-sight
limitations of currently available solutions.
We believe that the addressable market for marine and land containers
includes refrigerated containers, containers carrying valuable items subject to
theft (e.g., electronics and cigarettes) and general freight containers that
need to be tracked for security and liability purposes. Currently, intermodal
container transportation systems use manual and radio tag systems to record
containers as they enter and leave distribution facilities. These systems
therefore record only where the container has been. Our services are capable of
tracking the current location of the asset, as well as monitoring its status and
the condition of its contents.
We believe that the addressable market for rail cars includes rail cars
used to transport high-value cargo, such as automobiles, cigarettes,
refrigerated goods and paper rolls, or hazardous cargo comprising bulk
materials. The American Association of Railroads has mandated the use of
automatic equipment identifiers ("AEI") on rail cars. AEI systems consist of a
radio tag mounted on the rail car and a reader that records the identity of the
car as it passes by. AEIs therefore share the same limitations as bar code
systems because they record only where the rail car has been, not its current
location, status or the condition of its contents. Our services are capable of
tracking the current location of the railcar, as well as monitoring its status
or the condition of its contents.
Heavy Equipment. We believe that the addressable market for heavy equipment
includes equipment used in various large-scale construction, infrastructure and
mining operations. Currently, heavy equipment and
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machine diagnostic information is collected manually and provided to equipment
manufacturers and operators for warranty programs and maintenance operations.
Our services enable equipment manufacturers and operators to automatically
collect diagnostic information from remote locations on a more timely and
efficient basis.
Fishing Vessels and Barges. We believe that the use of Little LEO systems
such as the ORBCOMM system will provide fishing vessel and barge operators with
cost-effective tracking applications. Fishing vessels usually remain at sea for
extended periods and operate on extremely tight margins and therefore must
carefully control their operating costs. As a result, they need cost-effective
communications systems to meet safety and regulatory requirements and to
exchange commercial and operational information with their offices, fuel
providers, provisioners and packing houses. Commercial deep sea fishing vessels
currently use either high-frequency radio or one of the International Maritime
Satellite Organization ("Inmarsat") services. High-frequency radio is not
considered cost-effective and is considered difficult to use, while use of the
Inmarsat system requires a considerable up-front investment of capital.
Commercial fishing vessels operating in coastal waters may also acquire service
from American Mobile Satellite Corporation ("American Mobile") or use cellular
telephone service, particularly in the Gulf of Mexico. The ORBCOMM system is
capable of providing remote tracking and operational data to a central location
from a fishing vessel anywhere in the world. Given the limitation of American
Mobile's geographic coverage, the ORBCOMM system may provide a more efficient
communications service for both deep sea and coastal fishing vessels.
U.S. Government Assets. The U.S. military has been relying on manual record
keeping to track assets and this process has recently been supplemented by
distributed database systems communicating over lines owned and/or leased by the
U.S. Department of Defense ("DoD"). One of the problems encountered by the U.S.
military is that asset tracking is currently performed at the endpoints of the
distribution chain. This means that a misdirected shipment can be relocated only
by tracing forward from its most recent known location, and this can take weeks
to accomplish. We believe our services can provide tracking on demand or on a
scheduled basis for use by the U.S. military for the location of either assets
or personnel. We are competing or expect to compete to provide Little LEO
services to the U.S. military, including in connection with programs that have
already been announced by the U.S. government. For instance, the DoD Movement
Tracking System ("MTS") is an eight-year indefinite delivery/indefinite quantity
program to provide equipment tracking (and personal messaging) services in
support of the U.S. military and for foreign military sales.
In addition, we believe that our services could provide other U.S.
government users with cost-effective solutions, low probability of intercept and
detection and worldwide availability. We expect or may elect to compete to
provide Little LEO services to other departments or agencies of the U.S.
government. For instance, the U.S. Postal Service ("USPS") has an approximately
$5 billion budget that will be allocated to a number of procurements to provide
vehicle and container, pallet or small package tracking (and personal messaging)
services to track all or a portion of USPS' several hundred thousand vehicles,
as well as the millions of pieces of mail processed daily by USPS. Also, the
DoD's Global Transportation Network is a $418,000,000 program to track
personnel, aircraft and weapon systems anywhere in the world.
MESSAGING
We believe that the messaging market segment includes a broad range of
consumer, commercial and government customers. We expect that the ORBCOMM system
will complement existing and planned wireline and terrestrial-based wireless
communications systems by providing coverage in geographic areas where such
services are not offered or by enhancing data applications currently being
offered by such systems. Internationally, we believe that we will be able to
offer services in developing countries or remote regions where basic telephone
service or data and messaging communications services are not available. With
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coverage of virtually all of the Earth's surface when fully operational, we
believe that the ORBCOMM system will be able to efficiently and cost-effectively
offer messaging services in these geographic areas.
Consumer. We believe that the addressable market for messaging applications
for consumers includes:
- consumers who are frequent hunters, hikers, campers or backpackers;
and
- boating enthusiasts who enjoy traveling a considerable distance
outside the range of wireline and terrestrial-based wireless
communications systems and whose boats are generally over 26 feet and
have overnight accommodations suitable for extended travel.
Recreational boaters typically use VHF radio and/or cellular telephone
where terrestrial-based wireless communications systems are available. Some
individuals rely on high-frequency radio and a very small number employ Inmarsat
services. However, due to the significant limitations of these alternatives in
terms of geographic coverage or expense, there are few viable communications
alternatives currently available to back-country or boating enthusiasts. The
primary market requirements of these customers are based on a concern for safety
and the desire for a reliable, cost-effective, lightweight, personally portable
unit. We believe that our messaging services and hand-held subscriber units meet
these market requirements.
Commercial. We believe that the addressable market for messaging
applications for remote workers includes mobile and remote workers who
frequently use terrestrial-based wireless communications in their jobs but
require the extension of coverage that we are able to provide. These workers
spend a significant portion of their time away from an office and require
ubiquitous messaging while in remote areas as well as reliable, cost-effective,
lightweight and personally portable units. The industries typically populated by
these workers include: mining, construction, energy, forestry and utilities. We
believe that we can provide these workers with messaging services through
hand-held subscriber units and laptop-compatible modems.
U.S. Government. Today, numerous independent e-mail systems, including the
Autodin system (which sends messages between fixed terminals located throughout
the world), provide messaging services to the military. We believe that Little
LEO systems such as the ORBCOMM system would complement existing and other
planned communications services to provide messaging to the military and other
U.S. government departments and agencies. For instance, in addition to the
potential for providing messaging solutions for MTS and USPS, we are currently
conducting pilot tests of certain personal messaging applications (including e-
mail applications) for the Federal Emergency Management Agency and the U.S.
Coast Guard. Also, the Defense Messaging System ("DMS") a $1,500,000,000 project
with an annual operating budget of $45,000,000, is designed to provide messaging
for the DoD, NATO and certain civilian agencies. We believe that use of the
ORBCOMM system in connection with the DMS implementation could offer users the
ability to send and receive messages regardless of location. Over the long term,
our services could provide a relatively low-cost means to extend DMS to remote
areas that are out-of-reach of existing or planned communications services.
FUTURE APPLICATIONS
In addition to the current primary target market segments described above,
we believe that the ORBCOMM system's combination of capabilities may stimulate
demand in other potential markets.
Automotive. We believe that the global remote coverage provided by the
ORBCOMM system will address private car owners' safety and security concerns and
could complement services such as General Motors' OnStar(R) and Ford's RESCU(R),
each of which relies on the limited coverage of terrestrial-based wireless
communications systems. We also believe that certain vehicles operating in
fleets in and out of remote areas in dispatch mode have similar safety and
security concerns and would also value the ORBCOMM system's ubiquitous coverage.
This segment also includes taxis and special vehicles such as emergency-
response vehicles, regional police, buses, tow trucks, snowplows and road
maintenance vehicles.
U.S. Government. We believe that there are additional DoD programs that may
use the services of Little LEO systems. For example, in February 1999, the U.S.
General Services Administration awarded a satellite services contract to Hughes
Global Services. This indefinite delivery/indefinite quantity contract has a
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$100,000,000 ceiling for which we could provide any or all of our fixed asset
monitoring, mobile asset tracking and messaging services. In addition, we
believe that each of the U.S. Air Force, the U.S. Coast Guard and the U.S. Navy
is likely to initiate its own indefinite delivery/indefinite quantity
procurement for satellite-based data and messaging communications services such
as those we provide. We would expect to position ourselves to be competitive
with respect to any such procurements.
Foreign Governments. We expect that use of Little LEO systems such as the
ORBCOMM system to provide foreign governments with cost-effective applications,
low probability of intercept and detection and worldwide availability. Potential
defense applications include:
- transmission of Global Positioning System ("GPS")-determined position
data for maneuvering units and recovering downed pilots;
- transmission of data for air defense, fire support and asset tracking;
and
- tactical messaging.
Potential civil government applications include wide-area secure
communications, monitoring and control of natural resources and search and
rescue functions.
Home Security Systems. We believe that the ORBCOMM system could be used for
home security monitoring. In addition, units could be used to remotely turn
alarms, lights or home appliances on or off. Security systems have historically
relied on telephone lines for communication with central offices but such lines
can be intentionally disabled. Wireless systems are now being adopted to
eliminate this problem and ensure service quality. We could supplement
terrestrial-based wireless systems by providing communications with security
systems in remote areas. We are continuing to assess this market.
COMPETITION
Competition in the communications industry is intense, fueled by rapid and
continuous technological advances and alliances between industry participants
seeking to use such advances on an international scale to capture significant
market share. At this time, the ORBCOMM system is the only commercially
operational Little LEO system. We expect that potential competitors will include
other Little LEO systems, certain geosynchronous or geostationary orbit
("GEO")-based systems, certain terrestrial-based communications systems, certain
LEO satellite systems operating above 1GHz (so-called "Big LEO" systems) and
various medium-Earth orbit ("MEO") systems.
In addition to OCC, four other entities have been licensed by the FCC to
provide Little LEO satellite services in the United States. Volunteers in
Technical Assistance ("VITA") was licensed for one of the two satellites for
which it applied. VITA will use a small amount of uplink and downlink spectrum
to transmit health, research and scientific data on a delayed basis between
developing countries and the United States. In addition, in 1998, the FCC's
International Bureau granted licenses to Leo One USA Corporation, Final Analysis
Communication Services and E-SAT, Inc.
Based on published reports, we do not believe that any of the other
proposed Little LEO systems will be commercially operational until at least the
year 2000. We believe that we hold a substantial advantage over these potential
competitors by having already designed, constructed and launched a fully
functional system, by having obtained FCC licenses for all elements of our
system in the United States, and by achieving, in large part, international
coordination of our designated frequencies through the ITU. Over the course of
the next several years, we expect to obtain further advantages over these
potential competitors by establishing certain standards in the industry,
developing operational expertise, launching the remaining satellites in the
ORBCOMM system, signing agreements with additional subscriber unit
manufacturers, signing reseller agreements, service licenses and similar
agreements with additional entities and expanding our marketing activities
generally as the ORBCOMM system matures.
Plans for Little LEO systems have been announced in Australia, Brazil,
France, Russia, South Korea, Tonga and Uganda, although we believe that, without
additional allocations of spectrum in the United States, these systems will be
unable to offer services in the United States. With the sole exception of the
French
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candidate system, S80-1, the ORBCOMM system is protected from harmful
interference from all other systems.
In addition, we believe that we compete in certain of our market segments
with existing operators and users of certain GEO-based systems such as American
Mobile and Qualcomm, and companies providing services using the Inmarsat system.
American Mobile offers SKYCELL mobile data services, both satellite only and
"dual-mode", i.e., satellite and terrestrial, through a public data network that
can reach both densely populated urban areas and sparsely populated rural areas.
In 1998, American Mobile acquired Motorola's ARDIS two-way terrestrial-based
wireless messaging network, which complements American Mobile's existing
satellite-based voice and data communications services. This allows American
Mobile to offer a hybrid solution that has the ability, among other things, to
serve urban areas and to penetrate buildings. Qualcomm designs, manufactures,
distributes and operates the OmniTRACS(R) Communications System, a
satellite-based, two-way mobile communications and tracking system that provides
messaging, position reporting and other services for transportation companies
and other mobile and fixed site customers using certain GEO satellites. In
addition, various companies using the Inmarsat system are providing fishing
vessel and other marine tracking applications. ORBCOMM believes that the ORBCOMM
system has certain advantages over these other systems including worldwide
coverage and, in most cases, lower equipment costs.
While the ORBCOMM system is not intended to compete in general with
existing and planned terrestrial-based communications systems, in certain of our
market segments we believe we compete with certain of these systems including
the system operated by HighwayMaster. The architecture of these systems may
provide certain advantages relative to the ORBCOMM system, including in-building
penetration. HighwayMaster operates a wireless enhanced services network
providing integrated mobile voice, data, tracking and fleet management
information services to trucking fleets and other operators in the long-haul
segment of the transportation industry. The terrestrial-based wireless systems
operated by American Mobile and BellSouth Mobile Data Systems (formerly RAM
Mobile Data) are capable of providing geographically limited data communications
services to a variety of end users. SkyTel provides messaging services in cities
in the United States and is using its messaging network to provide fixed
location services, specifically utility meter reading in urban areas. Because of
the inherent coverage limitations of a terrestrial-based communications systems,
we believe that the ORBCOMM system will also complement these systems, which
provide cost-effective services primarily in metropolitan areas where subscriber
densities justify construction of radio towers. Such systems generally do not
have sufficient coverage outside metropolitan areas, making them less attractive
to certain market segments. We believe that the ORBCOMM system presents an
attractive complement to tower-based services because it can provide geographic
gap-filler service at affordable costs without the need for additional
infrastructure investment. We have entered into reciprocal reseller agreements
with Aeris Communications, Inc. and BellSouth, both of which permit ORBCOMM to
resell services offered by Aeris and BellSouth, respectively. The ORBCOMM
system's ability to serve as a geographic gap-filler may be reduced, however, as
terrestrial-based communications systems expand their coverage.
The Big LEO and MEO systems are expected to provide real time,
uninterrupted service. These systems are designed primarily to provide two-way
voice services that require larger, more complex satellites than the ORBCOMM
satellites and larger constellations to provide coverage. As a result, the cost
of the Big LEO and MEO systems is significantly greater than those of the
ORBCOMM system. However, the marginal cost on a per-message basis of providing
services similar to those we offer could be relatively low for a Big LEO or MEO
system that is unable to sell its capacity for voice services. Iridium LLC
initiated commercial service in November 1998 based on a 66-satellite
constellation providing voice and other communications services at usage charges
of approximately $2.00 to $7.00 per minute plus tail charges (land-line
extension charges). Iridium's total system cost is expected to exceed
$4,000,000,000. The satellite system operated by Globalstar, L.P. is expected to
cost approximately $3,000,000,000 and to consist of a constellation of 48
satellites with wholesale usage charges of approximately $0.35 to $0.55 per
minute. The initial service date for the Globalstar system is anticipated to be
the third quarter of 1999. Another satellite system designed primarily to
provide voice communications is the system proposed by ICO Global
Communications. The ICO system is expected to cost approximately $4,500,000,000
and consists of a constellation of MEO satellites. The ICO System is scheduled
to commence full commercial service in the year 2000.
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We may also face competition in the future from companies using new
technologies and new satellite systems. Our business could be adversely affected
if competitors begin operations or existing or new communications service
providers penetrate our target markets. A number of these new technologies, even
if they are not ultimately successful, could have an adverse effect on our
financial condition and results of operations.
SYSTEM ARCHITECTURE
The ORBCOMM system comprises three operational segments:
- a space segment that consists of a constellation of 28 LEO satellites,
which will be expanded in 1999 to create a 35-satellite enhanced
constellation;
- a ground and control segment consisting of a network control center
that serves as the global control for the satellites and gateways, the
major elements of which include Gateway Earth Stations that send
signals to and receive signals from the satellites, and a message
switching system that processes the message traffic; and
- a subscriber segment consisting of subscriber units used by customers
to transmit and receive messages to and from satellites.
Overview. To use the ORBCOMM system, an initial message or other data is
generated by a subscriber unit. From that source, the data is transmitted to the
nearest ORBCOMM satellite, which confirms receipt to the unit. The satellite
downlinks the data to the Gateway Earth Station portion of a , which then
transmits the data to the associated Control Center. Within the Gateway Control
Center, the data is processed using a combination of ORBCOMM-developed and
commercial e-mail software, and transmitted to its ultimate destination, which
may be to another subscriber unit or pager or to a personal or business address
using public/private X.25 data networks, the Internet, text-to-fax conversion or
modems connected to a telephone network. If desired, an acknowledgment message
is returned to the sender. To mitigate design and implementation risks and to
control costs, the ORBCOMM system architecture, where possible, makes use of
existing, mature technologies and conforms to internationally accepted
standards. The ORBCOMM system network architecture comprises a multi-nodal
packet network using X.400 messaging and Time Division Multiple Access ("TDMA")
as the enabling technologies.
Space Segment. The enhanced space segment will consist of a constellation
of 35 LEO satellites comprising:
- three planes of eight satellites each;
- one plane of seven satellites; and
- two planes of two satellites each,
in highly inclined orbits between approximately 740 and 1,000 kilometers above
the Earth. Currently, two planes of two satellites and three planes of eight
satellites have been launched. We expect to launch an additional plane of seven
satellites in 1999.
The satellites are produced by Orbital, one of our general partners. The
satellites currently on-orbit and scheduled to be launched in 1999 were procured
by us pursuant to a procurement agreement with Orbital dated September 12, 1995,
as amended. The satellites generally have been launched in groups of eight using
Orbital's Pegasus(R) launch vehicle. One plane of two satellites was placed in a
high-inclination orbit using a Pegasus launch vehicle and the other plane of two
satellites was launched using an Orbital-built Taurus(R) launch vehicle. The
plane of seven satellites scheduled for launch in 1999 will be launched using a
Pegasus launch vehicle. Orbital's Pegasus vehicle is launched from beneath a
modified Lockheed L-1011 owned by Orbital and is capable of deploying satellites
weighing up to 1,000 pounds into LEO. Orbital has conducted 26 Pegasus missions,
with approximately a 96% success rate.
The satellites are equipped with a VHF communications infrastructure
capable of operation in the 137.0-150.05 MHz and the 400.075-400.125 MHz bands.
The use of the spectrum is managed by an on-board
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computer that employs an ORBCOMM-developed Dynamic Channel Activity Assignment
System (the "DCAAS"). The DCAAS continuously scans the authorized spectrum,
identifies frequencies in use and assigns channels to minimize the possibility
of interference. The DCAAS is expected to change the frequency of the uplink
random access channels every five seconds. The satellites can also transmit a
UHF beacon that provides subscriber unit manufacturers with the ability to
supply enhanced, cost-effective, Doppler positioning.
Gateway Earth Stations and the subscriber units comprising the ORBCOMM
system communicate with the satellites in the same band, thus eliminating the
design complexity, as well as the associated mass, power and cost of supporting
multiple radio payloads on a single satellite. The satellite also contains an
intelligent packet-routing capability, including a limited store-and-forward
capability.
We have negotiated a procurement agreement with Orbital under which we will
procure, at a minimum, eight additional satellites and two separate Pegasus
launch vehicles, at a total cost of approximately $70,000,000. In addition,
under this agreement we have the option to procure up to 22 additional
satellites and associated launch services using the Pegasus launch vehicle. We
expect that these additional satellites will be used, among other things, to
meet certain of the milestones set forth in the license granted by the FCC on
March 31, 1998 authorizing OCC to launch an additional 12 LEO satellites, as
replenishment satellites or as ground spares.
Ground and Control Segment. The ground and control segment consists of
gateways strategically located throughout the world and the facilities to
monitor and manage all network elements to ensure continuous, consistent
operations in the provision of quality service. The role of the gateway is to
provide access to the space segment and interface to public and private data
networks. The major elements of a gateway include:
- Gateway Earth Stations, each of which is composed of two radomes, with
enclosed VHF tracking antennae, one of which is redundant, and
associated pedestal, controller and radio equipment;
- a gateway message switching system located within each Gateway Control
Center, which processes the message traffic and provides the
interconnection to the terrestrial networks; and
- a management system located within each Gateway Control Center, which
manages the gateway elements.
To provide services using the ORBCOMM system in a particular region, an
appropriately located gateway is required. Gateways cover a circular area with a
radius of approximately 3,300 miles. All elements of the U.S. Gateway are
operational, including four Gateway Earth Stations located in New York, Arizona,
Georgia and Washington and a Gateway Control Center located in Virginia. The
U.S. Gateway will be used to serve the United States, Canada, Mexico, the north
Caribbean region and, for at least the near future, a portion of South America
and the south Caribbean region. Gateways located in Italy, Japan, Brazil,
Argentina and South Korea have successfully completed acceptance testing.
The control segment of the ORBCOMM system is housed at the Network Control
Center. The control segment includes a network management system, which monitors
the status of all network elements, and a space vehicle management system.
Currently, there is no back-up Network Control Center, although the existing
Network Control Center is equipped with back-up hardware, and associated
software is backed up and stored off-site. In addition, the Network Control
Center is equipped with an automatic emergency generator to provide a backup for
normal building power. Requirements have been developed for a back-up Network
Control Center to be constructed in 1999. Through the U.S. Gateway, managed from
the Network Control Center, we have access to the space segment for command and
control purposes, although, consistent with the rules and regulations of the
FCC, OCC, as holder of the FCC licenses for the ORBCOMM system, maintains
ultimate control over the ORBCOMM system.
Subscriber Segment. The subscriber segment consists of various models of
subscriber units, some of which are intended for general use, and some of which
are designed to support specific applications, although
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even in the case of the general use subscriber units, the configuration of these
units may make them more or less suitable for certain applications. The
subscriber unit models include or will include:
- externally powered subscriber units for fixed applications such as
pipeline monitoring, remote device control or environmental
monitoring;
- self-contained, battery- and/or solar-powered subscriber units that
would support applications where commercial or other external power is
not available, including messaging applications; and
- vehicular-powered subscriber units that could be used in asset
tracking, cargo monitoring or vehicular operation monitoring.
The subscriber units targeted for industrial or telemetric applications are
designed to interface with sensors or control devices, through an
industry-standard serial interface using a proprietary communications protocol,
developed to take advantage of the packet nature of the ORBCOMM system. The
subscriber units targeted for the messaging market will incorporate interfaces
such as integrated keyboards or touch-sensitive screens. Additionally, while the
satellites are designed to support Doppler position determination in the
subscriber units, certain subscriber unit models are also equipped with GPS
receivers, permitting more rapid and more accurate location determination.
To ensure the availability of subscriber units having different functional
capabilities in sufficient quantities to meet demand, we have provided extensive
design specifications and technical and engineering support to various
subscriber unit manufacturers. We have entered into agreements with five
subscriber unit manufacturers, Kyushu Matsushita Electric Company, Ltd. (also
known as "Panasonic"), Scientific-Atlanta, Inc. (also a VAR), Magellan, Stellar
Electronics Ltd. and QUAKE Wireless, Inc., and have type approved six subscriber
unit models for commercial use with the ORBCOMM system. In addition, we are
finalizing type approval of three subscriber unit models that can be used in
connection with monitoring and/or tracking applications. Four subscriber unit
manufacturers have commenced production of subscriber units that can be used for
a variety of applications, including electric utility meter, oil and gas storage
tank, well and pipeline and environmental monitoring and commercial truck,
trailer, container, rail car, heavy equipment, fishing vessel and government
asset tracking applications, as well as personal messaging.
REGULATION
U.S. FCC Regulation
Regulation of NVNG Systems. All commercial non-voice, non-geosynchronous
("NVNG") satellite, or Little LEO, systems (such as the ORBCOMM system) in the
United States are subject to the regulatory authority of the FCC, which is the
U.S. government agency with jurisdiction over commercial uses of the radio
spectrum. Little LEO operators must obtain authorization from the FCC to launch
and operate their satellites to provide services in assigned spectrum segments.
The FCC both assigns (allocates) spectrum to particular uses or services
and designates (licenses) particular companies to operate in these frequencies.
In January 1993, the FCC allocated spectrum segments for NVNG mobile satellite
services ("MSS") and issued a Notice of Proposed Rulemaking to govern the NVNG
licensing process. In October 1993, the FCC formally adopted its licensing and
service rules for NVNG systems (the "NVNG Order"). The NVNG Order imposes limits
on subscriber units operating the band 148.0-149.9 MHz. Subscriber units are
limited to transmitting no more than one percent of the time during any
15-minute period and no transmission may exceed 450 milliseconds. We believe
that our services can be provided within these limitations.
First Processing Round; Original FCC License. On February 28, 1990, OCC
filed an application with the FCC for a Little LEO system. Thereafter, each of
Starsys Global Positioning, Inc. ("Starsys") and VITA also filed a Little LEO
system application. The FCC considered these applications together in a single
processing round.
On October 24, 1994, the FCC granted OCC a license to construct, launch and
operate 36 LEO satellites, in four inclined and two near-polar orbital planes,
for the purpose of providing two-way data and
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messaging communications and position determination services (the "Original FCC
License"). In 1995, the FCC granted OCC licenses to operate four Gateway Earth
Stations and to deploy up to 200,000 subscriber units in the continental United
States.
The frequency bands in which the ORBCOMM system is authorized to operate
are as follows:
<TABLE>
<S> <C>
Uplink: 148.0 -- 149.9 MHz
Downlink: 137.0 -- 138.0 MHz and 400.075 -- 400.125 MHz
</TABLE>
The Original FCC License authorizes OCC to offer service as a private
carrier and extends ten years from the operational date of the first ORBCOMM
satellite, FM1, which was April 1995. In order to ensure that a licensee
actually uses the spectrum that has been licensed to it, the FCC imposed
deadlines for initiating and completing construction and launch of the
licensee's satellite system. The milestone requirements of the Original FCC
License require that OCC launch:
- its first two satellites by December 1998;
- its remaining 34 authorized satellites by December 2000.
OCC has already met the first milestone with the launch of its first two
satellites, FM1 and FM2, in April 1995. In late 1997 and during 1998, OCC
launched an additional 26 satellites and expects to launch an additional seven
satellites in 1999, which, if successful, will result in OCC meeting the second
milestone. In addition, OCC is required to apply for a license renewal three
years prior to the expiration of the Original FCC license. While, based on past
experience, OCC believes that the FCC generally grants license renewals to
existing licensees where the licensee has satisfied the requirements of the
license, there can be no assurance that the Original FCC License would be
renewed should OCC apply.
To facilitate sharing between OCC and Starsys, the parties agreed to
certain technical limitations on their respective operations. These limitations
include OCC's agreeing to use channels at the edges of the 137.0-138.0 band, or
agreeing to shut down the channels located near the center of such band when
OCC's and Starsys' satellites were aligned. Starsys agreed to limit the number
and location of its Gateways, and also agreed to utilize narrow beamwidth
antennas to minimize the time during which the two systems' satellites will be
aligned. Although Starsys has returned its license to the FCC, under new rules
that took effect on January 2, 1998, the FCC authorized E-SAT to operate in the
spectrum previously licensed to Starsys consistent with the provisions of the
Starsys' first processing round authorization. Thus, these operating
restrictions remain in effect with respect to sharing of this band by OCC and
E-SAT.
Second Processing Round; Supplemental FCC License. On November 16, 1994,
the FCC closed the application filing period for a second processing round for
NVNG applications. Eight applicants (including OCC) initially filed applications
in the second processing round; however, three of these applicants later dropped
out of the processing round. The FCC's International Bureau, acting on delegated
authority, granted Leo One's application for a 48-satellite Little LEO system on
February 13, 1998, and granted the second-round applications of OCC, Final
Analysis, E-SAT and VITA on March 31, 1998. OCC has filed applications for
review of the International Bureau orders granting licenses to Leo One and Final
Analysis because OCC believes that the general obligation imposed in these
orders to complete coordination before commencing operations may not provide
adequate protection to OCC's subscriber uplink operations in the 148.0-149.9
band.
The March 31, 1998 license permits OCC, among other things, to launch an
additional 12 LEO satellites (the "Supplemental FCC License"). The term of the
Supplemental FCC License is ten years from the operational date of the first
ORBCOMM satellite, which was April 1995. The Supplemental FCC License contains
the following milestone requirements:
- that OCC begin construction of the first two of these additional 12
satellites by March 1999 and of the remaining ten satellites no later
than March 2001, respectively; and
- that OCC launch the first two of these additional 12 satellites by
September 2002 and the remaining ten satellites by March 2004,
respectively.
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OCC believes that it has met the first milestone requirement as ORBCOMM has
negotiated an agreement with Orbital to construct additional satellites that are
expected to be launched within the deadline imposed by the Supplemental FCC
License. Failure of OCC to meet these milestones will render the Supplemental
FCC License null and void, unless the FCC grants an extension of these
milestones. In addition, OCC is required to apply for a license renewal three
years prior to the expiration of the Supplemental FCC License. While, based on
past experience, OCC believes that the FCC generally grants license renewals to
existing licensees where the licensee has satisfied the requirements of the
license, there can be no assurance that the Supplemental FCC License would be
renewed should OCC apply.
The Supplemental FCC License also allowed OCC to refine the design of its
satellite system, by permitting:
- the ORBCOMM system to use fewer, potentially higher, data rate
customer downlink channels;
- a change in the orbital altitude of the ORBCOMM satellites in the
non-high-inclination planes from 775 kilometers to approximately 825
kilometers above Earth; and
- the launch of eight of the high-inclination satellites to 108 degrees
instead of 70 degrees.
The additional 12 satellites authorized by the Supplemental FCC License
will also improve the ORBCOMM system's high-latitude coverage over Alaska,
Canada and Europe as well as provide additional capacity and greater in-orbit
redundancy. In addition, ORBCOMM believes that the grant of the Supplemental FCC
license will facilitate coordination with Russia and France.
Finally, the Supplemental FCC License provided OCC a secondary right to use
a portion of the 149.9-150.0 MHz band for its feeder links, which right is
contingent on Final Analysis moving its feeder link to another location, which
it has indicated it desires to do. However, before Final Analysis can move its
feeder link, additional spectrum needs to be made available by ITU for the MSS,
which is not likely to happen until at least 1999, if at all.
Additional Domestic Regulatory Activities. On July 17, 1998, the FCC
granted a modification request filed by OCC that permits OCC to launch eight of
its authorized satellites in an equatorial orbit (rather than a 45 degree orbit)
and to increase the spacing between the other three planes of satellites (the
"Modification Request"). We believe this change to the satellite system design
enhances coverage in the equatorial regions of the world.
On March 18, 1999, OCC filed an additional request to modify its equatorial
plane of satellites by increasing the altitude of this plane of satellites to
1,000 kilometers and reducing the number of satellites in the plane from eight
to seven. We believe this further refinement of the ORBCOMM system will enhance
the availability of satellite coverage in the near-equatorial regions
(20(o)-25(o) latitude). This modification request is currently pending.
International Regulation
ITU Spectrum Allocations. The International Table of Frequency Allocations
(the "International Table") identifies radio frequency segments that have been
designated for specific radio services by the member nations of the
International Telecommunication Union ("ITU"). The International Table is
revised periodically at the World Radiocommunication Conferences ("WRCs").
Between WRCs, the member nations of the ITU, in connection with private
industry, prepare and propose recommendations for international allocations to
be considered at the next WRC. Preparatory analyses and recommendations are
considered in appropriate technical study groups for specific topics. In this
way, the countries of the world coordinate their respective spectrum
allocations.
Little LEO systems require use of radio spectrum on a global basis to reach
their full commercial potential. At the 1992 World Administrative Radio
Conference ("WARC-92"), with the sponsorship of the U.S. government and a number
of other key administrations, major portions of the 137 to 150 MHz band and
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<PAGE> 20
a narrow portion of the spectrum band at 400 MHz were allocated on a global
basis to Little LEO systems. The specific frequency allocations for uplink and
downlink operations included the following:
<TABLE>
<S> <C>
Uplink: 148.0 -- 149.9 MHz (1.9 MHz on a primary basis)
Downlink: 137.0 -- 138.0 (675 kHz on a primary basis; 325 kHz on a
secondary basis)
400.15 -- 401.00 MHz (850 kHz on a primary basis)
</TABLE>
The band 400.075-400.125 MHz licensed for use by the ORBCOMM system was
allocated previously on a global basis to Time and Frequency Standard service
and, therefore, was not subject to consideration at WARC-92. OCC's planned use
of this bandwidth complies with the regulations governing its use. In addition,
the procedures for "coordinating" Little LEO services with other registered
users of the band were established at WARC-92.
ITU Coordination. The United States, on behalf of OCC, is required to
coordinate the frequencies used by the ORBCOMM system through the ITU. ITU
frequency coordination is a necessary prerequisite to obtaining interference
protection from other NVNG satellite systems. There is no penalty for launching
a satellite system prior to completion of the ITU coordination process, although
protection from interference through this process is afforded only as of the
date of successful completion of the process and notification of the satellite
by the ITU.
The FCC, on behalf of OCC, notified the ITU that the ORBCOMM system was
placed in service in April 1995 and that it has operated without complaint of
interference since that time. The FCC also informed the ITU that OCC has
successfully completed its coordination with all other administrations except
Russia and France. Since that time, the United States has successfully
coordinated the ORBCOMM system with Russia with the exception of two downlink
channels that operate on co-frequency with the Russian Meteor system. We will
not need these two downlink channels immediately, but we will need them when the
additional high-inclination plane satellites are launched. Discussions are
continuing directly with the operator of the Russian Meteor system in accordance
with the U.S.-Russian coordination agreement, and we currently expect this
coordination to be completed in 1999. The United States has successfully
coordinated the ORBCOMM system with a French government system that is currently
in operation. However, the United States has not completed coordination of the
ORBCOMM system with the French commercial Little LEO system S80-1, which is
currently planned to be launched in November 2000. We currently expect that
coordination with respect to S80-1 will be completed before the planned launch
of this system.
The FCC must modify OCC's ITU registration documentation and proceed with a
supplementary coordination process with respect to the 12 satellites authorized
under the Supplemental FCC License. This process is not expected to affect
coordination of our 35-satellite system. Satellite systems subsequent to the
ORBCOMM system must coordinate with OCC to protect the ORBCOMM system from
interference.
ITU coordination is also required for the uplink channels required by the
ground segment of the ORBCOMM system, but is the responsibility of individual
administrations. Depending on the location of particular ground stations, the
applicable coordination distance specified in the ITU procedures may extend
across international boundaries and require coordination by more than one
governmental authority. For example, two of the four U.S. Earth Stations have a
coordination distance that extends into Canada, and thus required coordination
with Canada prior to ITU notification or registration.
At the 1995 WRC, France proposed a reduction in the threshold for
coordination with terrestrial services, which would require additional
coordination of MSS systems. France raised this proposal again at the 1997 WRC.
This proposed change was not adopted at either the 1995 or 1997 WRCs, but we
cannot assure you that it will not be proposed and adopted at the next WRC
scheduled for 1999, or that, if adopted, additional coordination requirements
would not be imposed on the ORBCOMM system, to the extent that OCC may not have
completed the ITU coordination process.
Coordination with Intelsat and Inmarsat. Pursuant to the Intelsat treaty,
international satellite operators are required to demonstrate that they will not
cause economic or technical harm to Intelsat. OCC was notified in March 1995
that this coordination with Intelsat had been successfully completed with
respect to the
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<PAGE> 21
planned 35-satellite enhanced constellation. Further coordination will be
required with respect to the 12 satellites licensed under the Supplemental FCC
License. OCC anticipates that it will successfully complete coordination with
Intelsat with respect to these satellites.
The Inmarsat treaty similarly requires both technical and economic harm
coordination. OCC was notified in October 1995 that it had successfully
completed both technical and economic coordination with Inmarsat with respect to
the planned 35-satellite enhanced constellation. Further coordination will be
required with respect to the 12 satellites licensed under the Supplemental FCC
License. As with the Intelsat coordination, OCC anticipates that it will
successfully complete such coordination with Inmarsat.
Regulation of Service Providers. Primary responsibility for obtaining local
regulatory approval to offer ORBCOMM system services in countries outside the
United States will reside with the various International Licensees. In all
cases, the proposed International Licensees are private companies, reflecting
the expectation that the ORBCOMM system will be licensed as a value-added
service rather than as a regulated basic service. International Licensees and
proposed International Licensees have had discussions with regulators in certain
major target countries and have advised us that such discussions indicate that
favorable regulatory treatment can be anticipated.
The process for obtaining regulatory approval in foreign countries
generally conforms to the following process. The International Licensee requests
regulatory approval from the appropriate national regulatory body, which has the
sole authority to grant an operating license. Obtaining such local regulatory
approvals normally requires, among other things, that the International Licensee
demonstrate the absence of interference to other authorized uses of the spectrum
in each country. In some countries, this process may take longer due to heavier
shared use of the applicable frequencies and, in certain other countries, may
require reassignment of some existing users. The national regulatory authority
will be required to associate with the OCC ITU submission. The national
regulatory authority also will be required to submit so-called Appendix 3
information to the ITU to coordinate and protect ORBCOMM Gateway Earth Stations
in the territory or region from interference by other ground systems in
neighboring countries.
To date, we have executed 12 agreements with International Licensees
covering over 80 countries within North, Central and South America, Europe, Asia
and the Caribbean, and are in the process of replacing four former International
Licensees that collectively represent an additional approximately 25 countries.
A total of 24 countries have granted approvals to provide full commercial or
other limited services using the ORBCOMM system.
We provide technical and regulatory assistance to our International
Licensees in pursuing operating authority. The assistance provided by ORBCOMM
includes actual in-country demonstrations that the ORBCOMM system can share use
of the allocated spectrum with existing users while neither causing harmful
interference nor constraining operations and growth of those systems. While
International Licensees have been selected, in part, based upon their perceived
qualifications to obtain the requisite foreign regulatory approvals, we cannot
assure you that they will be successful in doing so, and if they are not
successful, our services will not be available in such countries. In addition,
the continued operations of the International Licensees may be subject to other
regulatory requirements or regulatory or other changes in each foreign
jurisdiction.
EMPLOYEES
As of March 1, 1999, we had 387 full-time employees. None of our employees
is unionized. Our management considers its relations with employees to be good.
ITEM 2. PROPERTIES
We currently lease approximately 45,000 square feet of office space in
Herndon, Virginia, as well as approximately 22,500 square feet of office space
in Dulles, Virginia from Orbital. We also lease approximately 33,500 square feet
of additional space at various sites in Virginia and Maryland for, among other
purposes, self-storage, space to assemble certain portions of the Gateway and
for use by employees and a contractor. We currently operate four Gateway Earth
Stations. We own the properties on which the St. Johns, Arizona and
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<PAGE> 22
Arcade, New York Gateway Earth Stations are located and leases, subject to
long-term lease agreements, the properties on which the Ocilla, Georgia and East
Wenatchee, Washington Gateway Earth Stations are located.
ITEM 3. LEGAL PROCEEDINGS
On December 18, 1998, ORBCOMM International terminated for non-performance
its service license agreements with SEC ORBCOMM (Middle East) Ltd. ("SEC
ORBCOMM") and CEC Bosphorus Communications Ltd. ("CEC Bosphorus"), which
agreements together covered 20 countries. On December 23, 1998, SATCOM
International Group PLC ("SATCOM"), the alleged successor-in-interest to SEC
ORBCOMM's and CEC Bosphorus' interests in these agreements, filed an action (98
Civ. 9095, S.D.N.Y.) claiming that the termination of these agreements was
unjustified. This suit sought damages and a preliminary and permanent injunction
effectively awarding the licenses to SATCOM. The district court denied SATCOM's
application for a temporary restraining order on December 28, 1998. Following an
evidentiary hearing, on March 18, 1999, the district court denied SATCOM's
request for a preliminary injunction. While these decisions do not represent a
final adjudication of SATCOM's claims against ORBCOMM International, the
district court, in denying SATCOM's request for a preliminary injunction, ruled
that SATCOM was unlikely to prevail on the merits. ORBCOMM International is
actively seeking a new licensee or licensees for the countries formerly covered
by these service license agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We are a Delaware limited partnership that is owned 50% by OCC and 50% by
Teleglobe Mobile. There is no public trading market for any class of our common
equity. To date, we have not paid cash dividends to either OCC or Teleglobe
Mobile, and we do not intend to do so in the near future.
There are no distributions required to be made to our partners other than a
minimum annual distribution required by our partnership agreement in the amount
of (i) 40%, multiplied by the lesser of (a) such partners distributive share of
our taxable income for the preceding year, and (b) the excess, if any, of
cumulative Net Income (as defined) over cumulative Net Loss (as defined)
allocated to such partner since our inception. All other distributions are to be
made at the discretion of the partners. Pursuant to the covenants contained in
the Indenture dated August 7, 1996 among us, Capital, certain affiliate
guarantors and Marine Midland Bank (the "Indenture") governing the Notes, no
additional cash distributions are permitted to be made to our partners other
than those distributions that satisfy the requirements of the various
limitations on "Restricted Payments" contained in the Indenture.
ITEM 6. SELECTED FINANCIAL DATA
The following is our selected income and expense data for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 and our selected balance sheet data
as of December 31, 1994, 1995, 1996, 1997 and 1998, which in each case come from
our audited financial statements. You should read the selected financial data
set forth below together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the notes
thereto included elsewhere in this report. SINCE WE ACCOUNT FOR OUR OWNERSHIP IN
BOTH ORBCOMM USA AND ORBCOMM INTERNATIONAL USING THE EQUITY
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<PAGE> 23
METHOD OF ACCOUNTING, YOU SHOULD ALSO READ THE FINANCIAL STATEMENTS OF ORBCOMM
USA AND ORBCOMM INTERNATIONAL AND THE NOTES THERETO LOCATED ELSEWHERE IN THIS
REPORT.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
---------------------------------------------------
1994 1995 1996 1997 1998
---- ----- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSE DATA: (1)
Total revenues(2)...................... $ 0 $ 900(3) $ 420 $ 527 $ 1,262
Cost of product sales.................. 0 0 268 517 1,242
Depreciation........................... 0 0 6,198 7,348 11,048
Engineering expenses(4)................ 0 0 5,453 8,160 17,007
Marketing, administrative and other
expenses............................. 9 50 6,933 12,070 34,961
Equity earnings (losses) of
affiliates(5)........................ 0 (854) (4,602) (8,413) (4,732)
Interest income (expense), net......... 0 59 3,554 4,545 (1,900)
--- ----- -------- -------- --------
Net income (loss)...................... $(9) $ 55 $(19,480) $(31,436) $(69,628)
=== ===== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS)
---------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
investments(6)........................... $ 5,000 $ 1,785 $153,482 $ 38,862 $ 4,189
ORBCOMM system, net(7)..................... 68,647 106,990 170,034 263,379 327,946
Total assets............................... 73,647 109,030 329,509 316,969 346,634
Total long-term debt....................... 5,000 4,174 173,269 172,277 171,190
Partners' capital.......................... 58,509 94,601 137,942 106,418 104,790
</TABLE>
- - - ------------------------------
(1) For the period June 30, 1993 (date of inception) through December 31, 1994,
there were no significant income and expense transactions.
(2) We are a development stage enterprise and have had no significant system
revenues.
(3) Represents the forfeiture of a non-refundable fee received from a potential
International Licensee.
(4) Prior to 1996, we capitalized substantially all engineering expenses as part
of the total costs of the ORBCOMM system.
(5) We account for our investments in ORBCOMM USA and ORBCOMM International
using the equity method of accounting.
(6) Includes U.S. government securities pledged as security for repayment of
principal and interest on the Notes of $0 and $21,478,000 as of December 31,
1998 and 1997, respectively, and the amount in a segregated account related
to a Loan and Security Agreement dated December 22, 1994 (the "MetLife
Note") between us and MetLife Capital Corporation ("MetLife") of $1,700,000
and $2,800,000 as of December 31, 1998 and 1997, respectively.
(7) Represents the aggregate costs of the satellite constellation design,
construction and launch services, design and construction of the U.S. Ground
Segment, insurance and other system costs, including capitalized interest,
net of accumulated depreciation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In 1993, Orbital, acting through OCC, and Teleglobe, acting through
Teleglobe Mobile, formed ORBCOMM. OCC and Teleglobe Mobile each acquired and
currently owns a 50% partnership interest in us. Concurrently with our
formation, OCC and Teleglobe Mobile formed two marketing partnerships, ORBCOMM
USA and ORBCOMM International, with the exclusive right to market our services
in the United States and internationally, respectively. We are a 98% general
partner in each of ORBCOMM USA and ORBCOMM International, while OCC and
Teleglobe Mobile control the remaining 2% of ORBCOMM USA and ORBCOMM
International, respectively. OCC retains control over the licenses granted to it
by the FCC for the ORBCOMM system, consistent with FCC regulations.
Capital, a wholly owned subsidiary of ours, was formed in July 1996 to act
as a co-issuer with us in connection with the Notes Offering. Capital has
nominal assets and does not conduct any operations. ORBCOMM Corporation, another
wholly owned subsidiary of ours, was formed in March 1998 for the sole
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<PAGE> 24
purpose of investing in and acting as one of our general partners in connection
with the initial public offering we anticipated would be conducted in 1998,
which offering was not consummated. DIS, a Delaware corporation and a wholly
owned subsidiary of ours, was formed in September 1998 to purchase substantially
all of the assets of Dolphin. DIS distributes outside Canada the Dolphin
Software, while DSS, a Nova Scotia unlimited liability company and a wholly
owned subsidiary of DIS that was formed in October 1998, develops, and
distributes within Canada, the Dolphin Software.
OUR ORGANIZATIONAL STRUCTURE; BASIS OF OUR FINANCIAL REPORTING
Our consolidated financial statements include our accounts and the accounts
of two of our subsidiaries, DIS and DSS. Since OCC and Teleglobe Mobile have
effective control over ORBCOMM USA and ORBCOMM International, respectively, we
account for each of ORBCOMM USA and ORBCOMM International using the equity
method of accounting. We do not consolidate either ORBCOMM USA or ORBCOMM
International, and therefore do not report in our consolidated financial
statements, either of ORBCOMM USA's or ORBCOMM International's assets,
liabilities and operating revenues and expenses. Instead, our proportionate
share of the net income and losses of each of ORBCOMM USA and ORBCOMM
International is recorded under the caption "Equity in losses of affiliates" in
our consolidated financial statements. Correspondingly, our investment in each
of ORBCOMM USA and ORBCOMM International is carried at cost, subsequently
adjusted for the proportionate share of net income and losses, additional
capital contributions and distributions under the caption "Investments in and
advances to affiliates."
ORBCOMM USA pays to OCC an output capacity charge that is a quarterly fee
equal to 23% of ORBCOMM USA's total service revenues for such calendar quarter
in exchange for the exclusive right to market, sell, lease and franchise all
ORBCOMM system output capacity in the United States and exclusive use of the
tangible assets (including software) of the ORBCOMM system located in the United
States (the "System Assets"). In consideration of the construction and financing
by us of the System Assets, OCC, in turn, pays to us a system charge that is a
quarterly fee equal to the output capacity charge less 1.15% of total aggregate
revenues, defined as the aggregate of ORBCOMM USA's and ORBCOMM International's
total system service revenues ("Total Aggregate Revenues"). If the output
capacity charge as described above is less than 1.15% of Total Aggregate
Revenues, then OCC is not required to pay and does not owe any portion of the
system charge to us.
ORBCOMM International pays to Teleglobe Mobile an international output
capacity charge that is a quarterly fee equal to 23% of ORBCOMM International's
total service revenues for such calendar quarter in exchange for the exclusive
right to market, sell, lease and franchise all ORBCOMM system output capacity
outside the United States. In consideration of the grant by us to Teleglobe
Mobile of the exclusive right to market, sell, lease and franchise all ORBCOMM
system output capacity outside the United States, Teleglobe Mobile, in turn,
pays to us a system charge that is a quarterly fee equal to the international
output capacity charge less 1.15% of Total Aggregate Revenues. If the
international output capacity charge as described above is less than 1.15% of
Total Aggregate Revenues, Teleglobe Mobile is not required to pay and does not
owe any portion of the system charge to us.
ROLL-OUT OF OUR SERVICES
The ORBCOMM system provides a reliable, cost-effective method of providing
fixed asset monitoring, mobile asset tracking and messaging services to a broad
range of customers around the world. We have launched 28 satellites to date and
expect to launch seven additional satellites in an equatorial plane in 1999.
On November 30, 1998, we formally announced the launch of full commercial
service in North America. The U.S. Ground Segment, including the Network Control
Center and four Gateway Earth Stations, is operational. In addition, gateways
located in Italy, Japan, Brazil, Argentina and South Korea have successfully
completed acceptance testing. Our International Licensees for Europe, a portion
of South America and Japan have launched or are expected to launch commercial
service in the first quarter of 1999. Collectively, these three International
Licensees cover approximately 50 countries. During the remainder of 1999, we
expect that certain of our International Licensees for Malaysia, Morocco, the
remaining portion of South America and the
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<PAGE> 25
south Caribbean region, Mexico, the north Caribbean region, Russia and Ukraine
will launch commercial service as well, subject to completion of the necessary
ground infrastructure and receipt of the necessary regulatory approvals.
REVENUES
We expect to emerge from development stage during the first half of 1999.
Domestically, we generate revenues from the direct sale of satellite access and
usage to VARs, which sales to date have been primarily for resale to customers.
The pricing of satellite access and usage is based on many variables, including
the availability and cost of substitute services, the cost of providing service,
and the nature of the user application. Pricing generally is based on a
wholesale pricing structure that incorporates an initial activation charge, a
recurring monthly charge for access to the ORBCOMM system and charges based on
the customer's usage.
We expect that beginning in 1999 we will also generate revenues from the
sale of data and messaging communications services and applications developed
and distributed by Internal VARs. The pricing of services provided by the
Internal VARs is based on a pricing structure similar to the VAR pricing
structure except that the Internal VAR pricing structure generates additional
revenues from value-added software, hardware, and value-added customer services
that are provided to the customer.
We have on occasion entered into agreements, and may enter into additional
agreements in the future, to purchase subscriber units for resale. Historically,
we have not generated substantial revenues from the sale of subscriber units.
During 1998, we committed to purchase $6,200,000 of subscriber units from
certain manufacturers to accelerate initial customer sales by VARs, Internal
VARs and International Licensees. We expect to sell these subscriber units at
prices equal to or greater than cost, although we cannot assure you that we will
be able to do so.
Internationally, we generate revenues through license fees paid by and
through the sale of gateways to International Licensees. In addition, all
International Licensees in commercial service pay a monthly satellite usage fee
based on the greater of a percentage of gross operating revenues and a data
throughput fee. International Licensees' gross operating revenues are based on a
wholesale pricing structure similar to the prices charged to VARs which includes
an activation charge, a recurring monthly access charge and a usage charge. On
execution of an agreement, International Licensees purchase a gateway or gateway
components from us pursuant to a gateway procurement contract or arrange to
share a gateway with an International Licensee that is in close proximity. Cash
received under the gateway procurement contracts is generally accounted for as
deferred revenues and recognized when the gateway has successfully completed
acceptance testing. License fees from service license or similar agreements are
generally accounted for as deferred revenues and recognized over the term of the
agreements.
OPERATING EXPENSES
We own and operate the assets other than the licenses from the FCC, which
are owned by OCC and licensed to us, that comprise the ORBCOMM system.
Satellite-based communications systems are characterized by high initial capital
expenditures and relatively low marginal costs for providing service. On
November 30, 1998, we announced the commencement of full commercial service in
North America and depreciation of the 28-satellite constellation commenced.
Additionally, we incur:
- engineering expenses related to the development and operation of the
ORBCOMM system;
- marketing expenses related to the marketing of our services; and
- general, administrative and other expenses related to the operation of
the ORBCOMM system.
We have also incurred expenses related to the development of Internal VARs,
which are included in our marketing expenses. We anticipate that our expenses
related to the continued development and operation of the Internal VARs
(including the development of applications for customers) will increase
substantially as we expand the marketing and distribution efforts of the
Internal VARs. Cost of products sold includes the cost of sale of subscriber
units sold to customers.
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<PAGE> 26
RESULTS OF OPERATION -- ORBCOMM
We have generated substantial negative cash flows to date. Our activities
have focused primarily on:
- the acquisition of U.S. regulatory approvals for the operation of the
ORBCOMM system;
- the design, construction and launch of satellites;
- the design and construction of associated ground network and operating
systems (including associated software);
- the development of subscriber unit manufacturing sources;
- the negotiation of agreements with International Licensees;
- the hiring of key personnel;
- the negotiation of agreements with VARs;
- the development of Internal VARs;
- the development of customer software and hardware applications; and
- preliminary marketing and sales activities associated with our
commercial operations.
In October 1998, we purchased substantially all of the assets of Dolphin
and established two wholly owned subsidiaries, DIS and DSS. It is expected that
most DSS product sales will be to consolidated affiliates. As such, we do not
expect DSS to have a material impact on our financial results.
Revenues. Product sales of $1,262,000, $517,000 and $268,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, relate primarily to our
sale of subscriber units to ORBCOMM USA and ORBCOMM International, which in turn
sell to customers. The cost of product sales associated with such revenues was
$1,242,000, $517,000 and $268,000 respectively.
Expenses. In late 1994, we borrowed $5,000,000, at an interest rate of 9.2%
per annum, pursuant to the MetLife Note to help finance a portion of the ORBCOMM
system. In addition, in August 1996, we closed the Notes Offering. Most of the
net proceeds of the Notes Offering were invested primarily in short-term
government securities, with certain restrictions attached to all of the
investment portfolio. A portion of the net proceeds of the Notes Offering,
sufficient to pay when due all remaining interest and principal payments on the
MetLife Note, was deposited into a segregated account. For the year ended
December 31, 1998, we recognized interest expenses and other financial charges
(net of interest income of $914,000) of $1,900,000. We recognized interest
income (net of financial charges of $833,000 and $307,000) on the invested
portion of the MetLife Note and the proceeds of the Notes Offering of $4,545,000
and $3,554,000 for the years ended December 31, 1997 and 1996, respectively.
During the construction phase of the ORBCOMM system, we have capitalized
all interest expenses, as well as construction costs, consisting primarily of
satellites, launch vehicles and the U.S. ground segment acquired from Orbital.
Research and development expenses and selling, general and administrative costs
have been expensed in the year incurred.
We incurred $34,961,000, $12,070,000 and $6,933,000 of marketing,
administrative and other expenses for the years ended December 31, 1998, 1997
and 1996, respectively. These expenses for the year ended December 31, 1998
include expenses incurred by us in the third quarter of $2,200,000 relating to
the proposed initial public offering of securities by ORBCOMM Corporation, which
offering was not consummated. We incurred $17,007,000, $8,160,000 and $5,453,000
of ORBCOMM system engineering expenses for the years ended December 31, 1998,
1997 and 1996, respectively. We are capitalizing a portion of engineering direct
labor costs that relates to hardware and system design development and coding of
the software products that enhance the operation of the ORBCOMM system.
Marketing, administrative and other expenses as well as engineering expenses
were higher year-over-year due in substantial part to costs relating to an
increased number of employees. We also incurred $11,048,000, $7,348,000 and
$6,198,000 in ORBCOMM system depreciation expense for the years ended December
31, 1998, 1997 and 1996, respectively. Depreciation
24
<PAGE> 27
expense increased in 1998 due to the fact that on November 30, 1998, we
commenced global commercial service and depreciation of the 28-satellite
constellation began. We expect depreciation expense in 1999 to be approximately
$49,000,000.
Equity in Losses of Affiliates. We recognized our share of ORBCOMM USA's
and ORBCOMM International's losses, consisting primarily of marketing expenses.
As of December 31, 1998, 1997 and 1996, we recognized $4,732,000, $8,413,000 and
$4,602,000 of such losses, respectively.
RESULTS OF OPERATION -- ORBCOMM USA
Revenues. ORBCOMM USA recognized revenues relating to the provision of
products and services of $759,000, $172,000 and $240,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The costs of product sales
associated with such revenues were $798,000, $383,000 and $262,000,
respectively.
Expenses. ORBCOMM USA incurred $3,559,000, $5,173,000 and $2,984,000 of
marketing expenses for the years ended December 31, 1998, 1997 and 1996,
respectively. The variance in marketing expenses among years relates primarily
to employee-related expenses.
RESULTS OF OPERATION -- ORBCOMM INTERNATIONAL
Service License or Similar Agreements. ORBCOMM International has executed
12 service license or similar agreements with International Licensees, eight of
which have associated gateway procurement contracts and software license
agreements. These agreements authorize the International Licensees to use the
ORBCOMM system to provide two-way data and messaging communications services in
their respective territories. As of December 31, 1998 and 1997, $30,868,000 and
$13,270,000, respectively, had been received under these agreements and the
associated gateway procurement contracts, of which $20,094,000 and $13,270,000
respectively, were recorded as deferred revenue.
Construction of Gateways. ORBCOMM International is obligated to construct
and deliver eight gateways to certain International Licensees. Gateways,
including one Gateway Earth Station, located in Italy, Japan and South Korea
completed acceptance testing in the third and fourth quarters of 1998. As a
result, the revenue and the associated costs for construction and delivery of
the gateways have been reflected in ORBCOMM International's 1998 statements of
operations.
Expenses. ORBCOMM International incurred $1,231,000, $3,152,000 and
$1,692,000 of marketing expenses for the years ended December 31, 1998, 1997 and
1996, respectively. The variance in marketing expenses among years relates
primarily to employee-related expenses.
SUPPLEMENTAL DATA
Set forth below is certain supplemental data for the ORBCOMM system
comprising data of ORBCOMM, ORBCOMM USA and ORBCOMM International for the year
ended December 31, 1998. Such supplemental data should be read in conjunction
with our financial statements and the financial statements of ORBCOMM USA and
ORBCOMM International, and the notes thereto located elsewhere in this report.
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SUPPLEMENTAL DATA
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORBCOMM ORBCOMM ELIMINATION
ORBCOMM USA INTERNATIONAL ENTRIES TOTAL
-------- ------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Total revenue(1)............... $ 1,262 $ 759 $10,943 $(1,008) $ 11,956
Interest income (expense),
net.......................... 1,900(2) 0 0 1,900
Expenses....................... 64,258(3) 4,357 12,174 1,008 79,781
Loss before interest and
taxes........................ (62,996)(4) (3,598) (1,231) (67,825)
Net loss....................... (64,896)(4) (3,598) (1,231) (69,725)
Capital expenditures........... 75,615(5) 0 0 75,615
</TABLE>
SUPPLEMENTAL DATA
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
ORBCOMM ORBCOMM
ORBCOMM USA INTERNATIONAL TOTAL
-------- ------- ------------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 3,799 $ 0 $ 0 $ 3,799
ORBCOMM system, net............................. 327,946 0 0 327,946
Total debt...................................... 171,190 0 0 171,190
Subscriber units(6)............................. 0 2,394 500 2,894
</TABLE>
- - - ------------------------------
(1) ORBCOMM, ORBCOMM USA, and ORBCOMM International are development stage
enterprises.
(2) Includes $837,000 of amortization of deferred financing fees. Interest
expenses of $22,573,000 were capitalized in 1998.
(3) Includes depreciation expenses of $11,048,000.
(4) Excludes equity in losses of affiliates of $4,732,000.
(5) Represents capital expenditures, principally for the construction of the
space and ground network system elements.
(6) Represents units that either generate revenues or are used in beta testing.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative net losses from inception and have financed our
operations to date primarily with capital contributions from our partners and
through financing activities. For the year ended December 31, 1998, net cash
used in operating activities was $53,176,000 primarily as a result of a net loss
(excluding non-cash charges for depreciation, amortization and equity in losses
of affiliates) of $53,011,000. For the years ended December 31, 1997 and 1996,
net cash used in operating activities was $12,388,000 and $2,903,000,
respectively. Net cash used in operating activities in 1997 and 1996 was
primarily a result of net losses (excluding non-cash charges for depreciation,
amortization and equity in losses of affiliates) of $14,842,000 and $8,373,000
for the years ended December 31, 1997 and 1996, respectively. The increased net
loss for 1998 is primarily attributable to higher operating expenses related to
the roll-out of global commercial services.
Cash flows from investing activities for the year ended December 31, 1998
used cash of $26,044,000 primarily as a result of additional capital
expenditures, advances to affiliates and purchases and sales of investments. In
1998, we invested $45,915,000, including $22,573,000 of capitalized interest for
the design, development and construction of satellites, launch services, and
design and construction of the U.S. Ground Segment. The amount invested excludes
$29,700,000 of accrued milestone obligations. Further, we advanced an additional
$2,105,000 to ORBCOMM USA and ORBCOMM International to support their marketing
activities. For the years ended December 31, 1997 and 1996, $27,162,000 and
$167,375,000, respectively, were used in investing activities, primarily for
capital expenditures, advances to affiliates and purchases and sales of
investments.
Cash flows from financing activities for the year ended December 31, 1998
provided cash of $66,913,000. This amount includes $68,000,000 of contributions
by our current partners, of which $1,087,000 was used to repay a portion of the
principal of the MetLife Note. Cash flows related to financing activities for
the years
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ended December 31, 1997 and 1996 resulted in an increase (decrease) of
($1,214,000) and $225,363,000, respectively. The 1996 increase primarily
reflects additional partners' contributions of $62,733,000 and net proceeds of
$164,475,000 from the Notes Offering.
Expected future uses of cash include continued increases in staffing,
additional capital expenditures related to the completion of the 35-satellite
enhanced constellation, debt servicing and working capital requirements. In
addition, we intend to continue to increase marketing and product development
expenditures in anticipation of expanded commercial operations. The total cost
of the planned 35-satellite system through the third quarter of 1999 is expected
to be approximately $337,000,000 (excluding amounts under the proposed new
procurement agreement with Orbital, pursuant to which we have agreed to purchase
eight additional satellites and have an option to purchase up to 22 more). Of
this amount:
- $249,000,000 is for the design, development and construction of the
satellite constellation and launch services;
- $39,000,000 is for the design and construction of the U.S. Ground
Segment;
- $17,000,000 is for insurance; and
- approximately $32,000,000 is for other system costs such as
engineering and billing system costs.
We have negotiated a procurement agreement with Orbital under which we will
procure, at a minimum, eight additional satellites and two separate Pegasus
launch vehicles, at a total cost of approximately $70,000,000. In addition,
under this agreement we have the option to procure up to 22 additional
satellites and associated launch services using the Pegasus launch vehicle. We
expect that these additional satellites will be used, among other things, to
meet certain of the milestones set forth in the license granted by the FCC on
March 31, 1998 authorizing OCC to launch an additional 12 LEO satellites, as
replenishment satellites or as ground spares.
As of December 31, 1998, $295,451,000 had been expended for the ORBCOMM
system, excluding a total of $57,089,000 of interest expenses that have been
capitalized. The foregoing information reflects our current estimate of our
funding requirements for the ORBCOMM system. Actual amounts may vary from such
estimates for a variety of reasons, including satellite failures.
We expect to continue to generate negative cash flows for at least the next
several quarters. We expect that a portion of our cash requirements will be met
through revenues from operations. Our ability to generate significant revenues
is subject to numerous uncertainties. In 1999, we expect to receive additional
cash payments related to certain milestones under agreements with our
International Licensees. Our service and equipment contracts are U.S.
dollar-based and do not generate foreign currency risk. Through December 31,
1998, OCC and Teleglobe Mobile had made capital contributions to us totaling
$227,800,000. In July 1998, ORBCOMM Corporation postponed its proposed initial
public offering and in October 1998, a post-effective amendment was filed to
deregister the shares of ORBCOMM Corporation that had been previously
registered. As a result of the postponement of the initial public offering by
ORBCOMM Corporation, OCC and Teleglobe Mobile have each reaffirmed their
commitments to fund our operations while considering options for future
financing. We believe that the anticipated capital contributions from our
partners and the deferral of invoicing of certain amounts under the procurement
agreement between us and Orbital until alternative financing arrangements are
secured will be sufficient to fund our anticipated net cash loss from operations
and capital expenditures until we reach a positive net cash flow.
RISK FACTORS
Many statements contained in this report are not historical and are
forward-looking in nature. Examples of such forward-looking statements include
statements concerning:
- our operations, funding needs and financing sources;
- our launch and commercial service schedules;
- our cash flows and profitability;
- future regulatory approvals;
- expected characteristics of competing systems; and
- expected actions of third parties such as equipment suppliers, VARs
and International Licensees.
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These forward looking statements are inherently predictive and speculative,
and are based on our current views and assumptions regarding future events and
operating performance. The following are some of the risks that could cause
actual results to differ significantly from those expressed or implied by such
statements.
WE HAVE AN UNPROVEN TRACK RECORD
We Expect To Incur Continued Net Losses. To date, we have generated only
nominal revenues from our limited operations. We have incurred cumulative net
losses of approximately $120,500,000 through December 31, 1998 and expect losses
to continue for at least the next several quarters. Our continued business
development will require substantial capital expenditures, most of which we will
incur before we realize significant revenues from the ORBCOMM system. Together
with our operating expenses, these capital expenditures will result in negative
cash flows until or unless we establish an adequate revenue-generating customer
base. We cannot assure you that we will have positive cash flows or that we will
become profitable.
We Have A Limited Operating And Financial History. You have limited
operating and financial data on which to evaluate our business performance. We
have conducted full commercial operations for only a limited period of time. Our
ability to provide commercial service globally or even in key markets and to
generate positive operating cash flows will depend on our ability to, among
other things:
- successfully operate and maintain the satellites in the constellation;
- integrate the various ORBCOMM system segments (including the
satellites, the ground and control infrastructure and the hardware and
software used in customer applications);
- develop distribution capabilities within the United States and
licensing and distribution arrangements outside the United States
sufficient to capture and retain an adequate customer base;
- successfully and timely launch an additional plane of satellites to
create an enhanced 35-satellite constellation;
- install the necessary ground infrastructure and obtain the necessary
regulatory and other approvals outside the United States; and
- provide for the timely design, manufacture and distribution of
subscriber units to customers in sufficient quantities, with
appropriate functional characteristics and at competitive prices for
various applications.
Given our limited operating history, we cannot assure you that we will be
able to achieve these objectives or develop a sufficiently large
revenue-generating customer base to achieve profitability.
WE WILL HAVE SIGNIFICANT ADDITIONAL FUNDING REQUIREMENTS
Additional Funding Required To Provide Global Service Could Be Significant.
To complete and maintain the planned 35-satellite enhanced constellation and to
expand global service, we will require significant additional capital
expenditures. We currently expect that the total cost of the planned
35-satellite enhanced constellation from June 30, 1993 (date of inception)
through the third quarter of 1999 will be approximately $337,000,000. Through
December 31, 1998, we had spent approximately $295,000,000 on satellite
constellation design, construction and launch services, design and construction
of the U.S. ground segment and insurance and other system costs (excluding
approximately $57,000,000 of capitalized interest). To finance these
expenditures, Orbital, through OCC, and Teleglobe, through Teleglobe Mobile, had
invested approximately $228,000,000 in us through December 31, 1998. In
addition, we received net proceeds of approximately $164,000,000 from the Notes
Offering and a loan of $5,000,000 from MetLife. While they are not contractually
required to do so, our partners are currently funding our operations. We will
require additional capital in 1999 and may seek to raise such additional capital
through additional contributions or loans from our current partners, other
equity or debt financings or operating lease arrangements or we may seek to
enter into strategic arrangements. We cannot assure you, however, that other
equity or debt financing or operating lease
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<PAGE> 31
arrangements will be available and, if so, that they will be available on terms
acceptable to us or that strategic arrangements will be possible and, if so,
that they will be possible on terms acceptable to us.
Developing, marketing and distributing data and messaging communications
services to customers, constructing certain components of the ground
infrastructure or procuring and launching additional satellites may require us
to make significant expenditures that are not currently planned. These
additional expenditures may arise as a result of, among other things:
- a decision to establish additional Internal VARs;
- the requirement that we construct international gateways because the
International Licensees are unable or unwilling to do so; or
- the requirement that we procure and launch satellites to replace
satellites in the event of, for example, an uninsured loss.
Also, we have experienced delays in implementing the ORBCOMM system,
resulting in increased funding requirements beyond our estimates at the time of
the Notes Offering. In addition, primarily because of our decisions to proceed
with an enhanced 35-satellite constellation rather than the originally planned
28-satellite constellation and to develop Internal VARs, we have experienced
significant cost increases. Moreover, interest expense on the Notes represents a
significant cash requirement for us. We do not expect to be able to generate
sufficient cash from operations to cover all these requirements for at least
several more quarters. Moreover, we may need additional funding to cover delays
or increased costs in the future. If this additional funding becomes necessary,
we cannot assure you that additional funding will be available from the public
or private markets or from our partners on favorable terms or on a timely basis,
if at all.
Our Substantial Debt Service Obligations Could Affect Our Competitiveness.
We have a highly leveraged capital structure. As of December 31, 1998, our
liabilities totaled approximately $242,000,000. Our debt service requirements
could negatively affect our market value because of the following:
- our ability to obtain additional financing for future working capital
needs or for other purposes may be limited;
- a substantial portion of our cash flows from operations will be
dedicated to paying principal and interest on our indebtedness,
thereby reducing funds available for operations and business
expansion; and
- we may have greater exposure to adverse economic conditions than
competing companies that are not as highly leveraged.
These factors could negatively affect our financial condition and results
of operations.
Restrictive Covenants In The Indenture Could Prevent Us From Taking
Otherwise Sound Business Action. The indenture governing our Notes contains
certain restrictive covenants. The restrictions in the indenture affect, and in
some cases significantly limit or prohibit, our ability to, among other things:
- incur additional indebtedness;
- make prepayments of certain indebtedness;
- make distributions;
- make investments;
- engage in transactions with affiliates;
- issue capital stock;
- create liens;
- sell assets; and
- engage in mergers and consolidations.
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If we fail to comply with the restrictive covenants in the indenture
governing the Notes, our obligation to repay the Notes may be accelerated.
MARKET DEMAND FOR OUR PRODUCTS AND SERVICES IS NOT CERTAIN
Customer Acceptance Depends On Several Factors. The success of the ORBCOMM
system will depend on customer acceptance of our services, which is contingent
on a number of factors, including:
- the number of satellites that are operational at any time;
- completion and performance of the necessary ground infrastructure;
- receipt of the necessary regulatory and other approvals to operate in
a particular country;
- the availability of subscriber units that are compatible with the
ORBCOMM system and meet the varying needs of customers;
- the price of our services and related subscriber units; and
- the extent, availability and price of alternative data and messaging
communications services.
As with any new communications service, we cannot assure you that the
market will accept our services.
In addition, we believe that market acceptance of certain of our services
depends on the design, development and commercial availability of integrated
hardware and software applications that support the specific needs of our target
customers. Each of our VARs, Internal VARs and applications developers is
responsible for developing and/or marketing such applications. To date, nearly
100 applications have been developed by or on behalf of VARs and Internal VARs
for use with the ORBCOMM system. If there is a lack of, or a delay in the
availability of the components necessary to fulfill our customers' business
requirements, market acceptance of ORBCOMM services could be adversely affected.
Currently over 100 companies are using or are in the process of evaluating
the ORBCOMM system. Our business plan assumes that our potential customers will
accept certain limitations inherent in satellite communications services. For
example, the ORBCOMM system's line-of-sight limitation, particularly in "urban
canyons," and its limited ability to penetrate buildings and other objects could
limit customers' use of the ORBCOMM system and services. In addition, system
availability will be limited in equatorial regions before the planned
35-satellite enhanced constellation is in commercial operation. In addition to
the limitations that the ORBCOMM system architecture imposes, our services will
not be available in those countries where we or our International Licensees have
not obtained the necessary regulatory and other approvals. Certain potential
customers may find these limitations on the availability of our services to be
unacceptable.
Competition Comes From Several Sources. Competition in the communications
industry is intense, fueled by rapid and continuous technological advances and
alliances among industry participants seeking to use such advances
internationally to capture significant market share. Although currently no other
company is providing the same global, satellite-based commercial data and
messaging communications services that we provide, we anticipate that the
ORBCOMM system will face competition from numerous existing and potential
alternative communications services. We expect that potential competitors may
include:
- operators or users of other Little LEO satellite networks similar to
the ORBCOMM system whose satellites operate below 1GHz;
- operators or users of networks of LEO satellites operating above 1GHz
that offer voice telephony as well as data services;
- operators or users of MEO satellite systems that use satellites with
orbits located between 2,000 and 18,000 miles above the Earth;
- operators or users of GEO satellite systems that use satellites with
orbits located approximately 22,300 nautical miles directly above the
equator; and
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- operators and users of terrestrial-based data communications systems.
If any of our competitors succeeds in marketing and deploying systems with
services having functions and prices similar to those we expect to offer, our
ability to compete in markets served by such competitors may be adversely
affected.
Some of our actual or potential competitors have financial, personnel and
other resources that are substantially greater than our resources. In addition,
a continuing trend toward consolidation and strategic alliances in the
communications industry could give rise to significant new competitors.
Furthermore, any foreign competitor may benefit from subsidies from, or other
protective measures taken by, its home country. Some of these competitors could
develop more technologically advanced systems than the ORBCOMM system or could
provide more efficient or less expensive services than those that we expect to
provide.
We may also face competition in the future from companies using new
technologies including new satellite systems. A number of these new
technologies, even if they are not ultimately successful, could negatively
affect us. Additionally, our business could be adversely affected if competitors
begin or expand their operations or if existing or new communications service
providers are able to penetrate our target markets.
RELIANCE ON THIRD PARTIES COULD AFFECT OUR OPERATIONS
We Will Rely Heavily On VARs Within The United States. In the United
States, we intend to rely heavily on VARs to market and distribute many of our
services to customers. Our success depends, in part, on our ability to attract
and retain qualified VARs. We cannot assure you that we will be able to enter
into VAR agreements for additional markets at the times or on the terms we
expect or that we will be able to retain our existing VARs when the terms of
their respective agreements end.
We believe that for the VARs to successfully market our services, they will
need to design, develop and make commercially available data and messaging
applications that support the specific needs of our target customers. This will
require the VARs to commit substantial financial and technological resources.
Certain VARs are or are likely to be newly formed ventures with limited
financial resources, and these entities may not be successful in designing data
and messaging applications or marketing our services effectively. The inability
of VARs to provide data and messaging applications to customers could negatively
affect market acceptance of our services. Also, if VARs fail to develop data and
messaging applications, we may do so, which will increase our expenses.
Furthermore, our reseller agreements provide that VARs will use all reasonable
commercial efforts to market and distribute our services, but in most cases
these agreements do not require VARs to meet established sales objectives. We
cannot assure you that VARs will successfully develop a market for and
distribute our services.
Although we are developing VARs, we currently act primarily as a wholesaler
to VARs. Thus, the cost to customers for our services purchased through Internal
VARs is largely beyond our control. Furthermore, we will have no rights
independently to offer particular data and messaging applications developed by
VARs or to use the associated software unless we enter into appropriate
licensing agreements. By developing Internal VARs, we may create actual or
apparent conflicts with certain VARs, which could adversely affect such VARs'
willingness to invest resources in developing and distributing data and
messaging applications for the ORBCOMM system.
We Will Rely Heavily On International Licensees Outside The United States.
Outside the United States, we enter into agreements with International
Licensees. The International Licensees are responsible in their territories for
procuring and installing the necessary gateways, obtaining the necessary
regulatory and other approvals to provide services using the ORBCOMM system and
marketing and distributing our services. We select the International Licensees
primarily by evaluating their ability to market and distribute our services
successfully.
Although we consider many elements in evaluating potential International
Licensees, an individual International Licensee may not satisfy any one or more
of these elements. Our success depends, in part, on our ability to attract and
retain qualified International Licensees. We cannot assure you that we will be
able to enter into agreements with International Licensees for additional
territories at the times or on the terms we
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expect, or that we will be able to retain our existing International Licensees
when the terms of their respective agreements end. In addition, each agreement
we have executed with an International Licensee provides that the International
Licensee may terminate the agreement upon one year's written notice, and any
International Licensee may decide to do so. Also, ORBCOMM International has the
right under the terms of these agreements to terminate such agreements based on
the non-performance of the licensee as described therein.
We are required to give one of our International Licensees satellite usage
fee credits as a result of our failure to meet certain ORBCOMM system launch
milestones. Moreover, certain of the agreements grant International Licensees
the right to terminate their agreements if they are unable to obtain the
necessary regulatory and other approvals within certain time parameters. Our
International Licensees may not be successful in obtaining the necessary
regulatory and other approvals, and, if successful, the International Licensees
may not develop a market and/or a distribution network for our services.
Certain International Licensees are or are likely to be newly formed
ventures with limited financial resources. These entities may not be successful
in procuring and installing the necessary gateways, obtaining the necessary
regulatory approvals or successfully marketing and distributing our services.
The general form of our service license agreement does not obligate us or give
us the contractual right to construct the necessary gateway if an International
Licensee is unable or unwilling to construct one. In the future, and if an
International Licensee is unable or unwilling to do so, we may desire to
construct, or finance the construction of, the necessary gateway. However, the
International Licensee or the relevant governmental authority may not permit us
to construct the gateway, or we may not be able to bear the cost of constructing
the gateway, which cost may be significant.
We Will Rely Heavily On Subscriber Unit Manufacturers To Satisfy Customer
Demand. Our success depends in part on manufacturers developing, on a timely
basis, relatively inexpensive subscriber units. While we have executed five
subscriber unit manufacturing agreements and have type approved or are
finalizing type approval of nine different subscriber unit models, a sufficient
supply of these subscriber units may not be available to customers at prices or
with functional characteristics that meet customers' needs. As of December 31,
1998, we had procured for our own inventory, and our customers and distributors
had either received or ordered, a total of over 30,000 subscriber units. On
occasion, we have found it advisable to purchase or to subsidize the purchase of
subscriber units and may do so in the future. We expect to sell these subscriber
units to VARs, Internal VARs and International Licensees at prices equal to or
greater than cost, although we cannot assure you that we will be able to do so.
The cost of these purchases or subsidies could be significant. If subscriber
unit manufacturers are unable to develop and manufacture subscriber units
successfully at cost-effective prices that both meet the needs of customers and
are available in sufficient numbers, market acceptance of the ORBCOMM system and
the quality of our services could be affected, which, in turn, could negatively
affect our financial condition and results of operations.
We Rely Heavily On Orbital For Our Most Important Assets. We do not
independently have, and do not intend to acquire (except by contracting with
other parties), the ability to design, construct or launch the ORBCOMM
satellites. Under the September 1995 procurement agreement, we have contracted
with Orbital to provide these services on a fixed-price basis, subject to
adjustments for out-of-scope work. We may terminate this procurement agreement
if Orbital fails to achieve certain milestones within 56 weeks after the
contracted completion date or if Orbital fails to comply materially with any
terms of the procurement agreement. We may not, however, withhold payments under
this procurement agreement solely because Orbital fails to achieve certain
milestones by the dates originally planned. In addition, an adverse effect on
Orbital and its business for whatever reason may adversely affect Orbital's
ability to perform under this procurement agreement. We have not identified any
alternate provider of the services Orbital currently provides. An alternate
service provider may not be available or, if available, may not be available at
a cost or on terms acceptable to us.
We Rely Heavily On Third Parties To Control Access To Our Proprietary
Information. Our success and ability to compete depend to a certain degree on
our proprietary technology, and we depend on Orbital's intellectual property
rights relating to the ORBCOMM system. Under the procurement agreement, Orbital
or its subcontractors generally own the intellectual property relating to the
work performed by Orbital under the
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September 1995 procurement agreement, including the ORBCOMM satellites (other
than certain communications software) and the U.S. Ground Segment. We rely
primarily on copyright and trade secret law to protect our technology. We
currently hold no patents. Our policy is to enter into confidentiality
agreements with our employees, consultants and vendors. These agreements, where
appropriate, obligate the signatory to assign to us proprietary technology
developed during performance under the agreements and generally to control
access to and distribution of our software, documentation and other proprietary
information. Notwithstanding these precautions, it may be possible for a third
party to copy or otherwise obtain and use our software or other proprietary
information without authorization or to develop similar software independently.
In addition, absent the appropriate licensing agreements, we have no rights
independently to offer particular applications developed by VARs or to use the
software included in these applications. Enforcing intellectual property rights
to these products will depend on VARs. Furthermore, the laws of countries
outside the United States may afford us and the VARs little or no effective
protection of our intellectual property. Losing protection of these intellectual
property rights could negatively affect our financial condition and results of
operations.
The steps we have taken may not prevent misappropriation of our technology,
and agreements entered into for that purpose may not be enforceable. In
addition, we may have to resort to litigation in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. This litigation, whether or not
successful, could result in substantial costs and diverted resources, each of
which could negatively affect our financial condition and results of operations.
RISKS RELATED TO SATELLITES COULD AFFECT OUR OPERATIONS
A significant portion of our tangible assets are our LEO satellites and the
related ground infrastructure. The loss or failure of satellites in the
constellation could negatively affect us.
Useful Life Of Satellites; Damage To Or Loss Of Satellites. There are many
factors that contribute to and may affect the useful life of any satellites,
including our satellites, such as the quality of the satellites' design and
construction and the durability and expected gradual environmental degradation
of their electrical and other components.
The first generation of ORBCOMM satellites (with the exception of the first
two satellites to be placed in orbit, each of which has a design life of four
years) have eight-year design lives. We cannot assure you that any satellite
will operate for the full duration of its design life.
In addition, loss of or damage to our satellites may result from a variety
of causes, including:
- electrostatic storms;
- collisions with other objects, including space debris, man-made
objects or certain space phenomena such as comets, meteors or meteor
showers;
- random failure of satellite components; or
- high levels of radiation.
Also, loss of or damage to our satellites may result from the failure of
the launch vehicle that was to place the satellites in orbit.
The ORBCOMM system was designed to provide for redundancy in the event of
the loss or failure of one or more satellites in the constellation, whether due
to a satellite reaching the end of its design life or some other cause. However,
the loss or failure of satellites in the constellation may cause:
- gaps in service availability;
- significantly degraded service quality;
- increased costs; or
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- loss of revenue for the period that service is interrupted or
impaired.
Satellite Anomalies. In addition to the factors discussed above, there are
a number of factors that may cause anomalies with respect to the operation or
performance of satellites in orbit. In connection with the deployment of our
satellite constellation, we have experienced certain anomalies with respect to
several of our satellites. These anomalies include reduced power levels on
certain satellites and the failure of certain satellites to transmit data to
subscriber units. We have demonstrated that we are able to bypass the data
transmission anomaly, although the coverage footprint of such satellites will be
reduced. You should also note that:
- anomalies such as those described above, or other anomalies that have
comparable effects, could occur in the future with respect to the
in-orbit satellites or additional satellites launched by us; and
- while the anomalies described above have not materially affected our
business, if we are unable to correct such anomalies, if applicable,
or should additional anomalies occur in the future with respect to the
other in-orbit satellites or additional satellites that we launch,
such events could negatively affect our business.
Launch-Related Risks. To date, we have successfully launched 28 satellites
into their proper orbits. Under our current timetable, we plan to launch seven
additional satellites on a Pegasus launch vehicle in 1999.
Satellite launches are subject to significant risks, including:
- failure of the launch vehicle due to a crash or explosion, which could
cause disabling damage to or loss of the satellites;
- damage to the satellites during loading into the launch vehicle,
during the launch itself or as the satellites are deployed by the
launch vehicle;
- failure of the satellites to achieve their proper orbits; and
- unreasonable delays related to poor weather conditions or prior launch
failures.
We bear the risk of loss of a launch vehicle and satellites upon release of
the Pegasus launch vehicle from Orbital's L-1011 aircraft. Our insurance against
the loss of a launch vehicle and its satellite payload may be limited.
If our next satellite launch fails, or if we should need to procure launch
services from an alternate provider for any reason, the resulting delays would
increased the costs to deploy the 35-satellite enhanced constellation.
Cost Increases From Satellite Enhancements, Launch Failures And Other
Sources Could Negatively Affect Our Financial Performance. Due to the increased
costs of modifications and enhancements made to the ORBCOMM system, our
estimated costs have increased significantly since August 1996, when we
completed the Notes Offering. We attribute a portion of this increase to the
planned launch of an additional plane of seven satellites to complete the
35-satellite enhanced constellation, which plane was not included in the August
1996 estimate. Additional cost increases could come from, for example, launch or
uninsured satellite failures and further modifications to all or a portion of
the ORBCOMM system design to work out technical difficulties or to accommodate
changes in regulatory requirements. Significant cost increases related to
launching and implementing the planned 35-satellite enhanced constellation could
negatively affect our financial condition and results of operations.
Limited Insurance Exposes Us To Significant Risks Of Loss. Our insurance
may not adequately mitigate the adverse impact of a loss of satellites or a
launch vehicle failure. With respect to our next planned Pegasus launch (the
"Fourth Pegasus Launch"), if there is a loss of three or more satellites in any
of the planes of eight ORBCOMM satellites that were launched before the Fourth
Pegasus Launch, we have insurance that would cover the costs of obtaining a
replacement launch vehicle and eight replacement satellites. If there is no loss
of three or more satellites in any of the planes of eight ORBCOMM satellites
that were launched before the Fourth Pegasus Launch, we do not currently have
insurance that would cover the costs of obtaining a
34
<PAGE> 37
replacement launch vehicle or eight replacement satellites; however, we expect
to obtain such insurance before the Fourth Pegasus Launch, assuming such
insurance is available on commercially reasonable terms.
We have no insurance against in-orbit satellite failure for the two
satellites that were launched in April 1995 or for the two satellites launched
in February 1998. We have procured satellite insurance against the in-orbit
failure of satellites in each of the first three planes of eight satellites
launched using the Pegasus launch vehicle. This in-orbit insurance covers all
eight satellites in a single plane for five years (or longer if extended) after
the successful placement in orbit of such plane, but only if three or more
in-orbit satellites in the plane fail after their successful placement in orbit,
and only if we have used three or more satellites originally intended as ground
spares to replace satellites lost in an unsuccessful launch or because of
in-orbit failure.
Schedule Delays Could Affect Our Commercial Operations In Certain Areas. In
the past, we have had to delay satellite launches primarily because of
subcontractor late deliveries and because of enhancements made to the
satellites' design based on, among other things, lessons we learned from
operating the two satellites launched in April 1995. For instance, at the time
of the Notes Offering, we anticipated that we would have launched 28 satellites
by the end of 1997. Instead, we had launched 28 satellites by the third quarter
of 1998.
Additional delays in implementing the planned 35-satellite enhanced
constellation could result from a variety of causes, including, among others:
- a delay or failure of the launch of eight satellites planned for 1999;
and
- delays caused by design reviews in the event of a launch vehicle
failure or the loss of a satellite or other event beyond our control.
We cannot assure you that these or other factors, some of which are beyond
our control, will not delay the implementation of the planned 35-satellite
enhanced constellation, which could negatively affect our financial condition
and results of operations.
The Costs Of Maintaining The Space Segment May Outstrip Funds Generated
From Operations. The ORBCOMM satellites, which constitute a substantial portion
of our total assets, have limited useful lives. We anticipate using funds from
operations to develop a second generation of satellites to replenish and expand
the constellation. If sufficient funds from operations are not available and we
are unable to obtain financing for the second generation satellites, we will not
be able to replace the first generation satellites at the end of their useful
lives. We cannot assure you that additional capital would be available to
develop the second generation satellites on favorable terms or on a timely
basis, if at all.
Lack Of Adequate Security For Communications Via The Internet Could Affect
Customer Acceptance Of Our Services. Like many other modern communications
networks, we currently deliver a substantial portion of data to our customers
over the Internet and expect to continue to use the Internet as a primary
delivery method for data collected from subscriber units and satellites. We
currently take certain measures to ensure the security of customer data, but
despite these measures, persons seeking unauthorized access to our customer data
may be able to gain such access. We believe that if unauthorized access to our
customer data were to occur, or if our potential customers were to perceive that
such unauthorized access was likely, the market for our services would be
negatively affected.
We Could Experience Difficulty Integrating All Of The Components And
Sub-Components Of The ORBCOMM System. While the ORBCOMM system has successfully
transmitted approximately five million messages to date, the ORBCOMM system is
exposed to the risks inherent in any large-scale complex communications system
using advanced technologies. Operating the ORBCOMM system requires that we
design and integrate communications technologies and devices ranging from
satellites operating in space to ground infrastructure located around the world.
Even if built to specifications, the ORBCOMM system may not function as
expected. If any of the diverse and dispersed elements of the system fails to
function and coordinate as required, that failure could delay full deployment of
the ORBCOMM system or render it unable to perform at the quality and capacity
levels required for us to operate our business successfully.
35
<PAGE> 38
REGULATORY RISKS PRESENT POTENTIAL OBSTACLES TO GLOBAL OPERATION OF THE ORBCOMM
SYSTEM
Obtaining And Maintaining The Necessary U.S. Licenses Could Cause Delays.
Our business may be affected by the regulatory activities of various U.S.
government agencies, primarily the FCC. Although each of the Original FCC
License and the Supplemental FCC License is currently valid, the FCC could
revoke these licenses if OCC fails to satisfy certain conditions or to meet
certain prescribed milestones, including:
- the December 2000 milestone by which OCC must have launched 36
satellites;
- the September 2002 milestone by which OCC must launch two of the 12
satellites recently licensed under the Supplemental FCC License; and
- the March 2004 milestone by which OCC must launch the remaining ten of
these satellites,
unless the FCC grants extensions for accomplishing these milestones. While each
of these is valid until April 2005, OCC is required to apply for a license
renewal three years before each license expires. While, based on past
experience, OCC believes the FCC generally grants the renewal applications of
existing licensees where the licensee has satisfied the requirements of the
license, it is possible that the FCC will not, in fact, renew either of the FCC
Licenses. Should the FCC revoke or fail to renew the FCC Licenses, or if OCC
fails to satisfy any of the conditions of the FCC Licenses, such event would
negatively affect our financial condition and results of operations.
The FCC has licensed OCC to operate as a private carrier. Because of our
method of distributing services, we believe that OCC currently is not subject to
the restrictions that apply to common carriers or to providers of Commercial
Mobile Radio Services ("CMRS"). We plan to distribute our services to customers
indirectly through VARs and directly through Internal VARs. In most cases, we
will provide our customers with enhanced services and will not be interconnected
with the public switched telephone network. Therefore, we do not believe that
the FCC will regard these services as common carrier or CMRS. In the future,
however, we may provide services that the FCC deems common carrier or CMRS, or
the FCC may exercise its discretionary authority to apply the common carrier or
CMRS rules to our operations. Applying these rules could negatively affect our
financial condition and results of operations by, for instance, subjecting us to
rate regulation and certain tariff filing requirements, limiting some foreign
ownership in us and subjecting us to state regulation (if we were deemed to be a
common carrier).
Our financial condition and results of operations could be adversely
affected if the United States adopts new laws, policies or changes in the
interpretation or application of existing laws, policies and regulations that
modify the present regulatory environment.
The Failure To Obtain Regulatory Approvals In Other Countries Could Hinder
Global Service Offerings. Our business is affected by the regulatory authorities
of the countries in which we or the International Licensees will operate and in
which we plan to offer our services. Our International Licensees will be
required to obtain local regulatory approvals to offer our services, to operate
gateways and to sell subscriber units within their territories. Thus, the
International Licensees must obtain numerous approvals before we can offer full
global coverage. Our current business plan is based on our receiving regulatory
approvals in several foreign jurisdictions by the end 1999, when the final seven
satellites of the planned 35-satellite enhanced constellation are expected to be
launched. To date, 24 countries have granted approvals to provide full
commercial or other limited services using the ORBCOMM system. Certain of these
licenses permit a range of activities including the right to test and
demonstrate or operate the ORBCOMM system on a temporary or otherwise limited
basis. While each International Licensee is responsible for obtaining regulatory
approvals in its territory, each International Licensee may not be successful in
doing so. If any International Licensee is not successful, we will not be able
to offer services in the affected territory.
Although many countries have moved to privatize communications services and
permit competition in providing these services, some countries continue to
require that a government-owned entity provide all communications services.
While we anticipate that substantially all of the International Licensees will
be
36
<PAGE> 39
private entities, we may be required to offer our services through a
government-owned or -controlled entity in those territories where government
monopolies prevail.
Our inability to offer service in a foreign country or countries could
negatively affect our financial condition and results of operations. Regulatory
provisions in countries in which we or the International Licensees seek to
operate may impose impediments on our or the International Licensees'
operations, and such restrictions could be unduly burdensome. Our business may
also be adversely affected by regulatory changes resulting from judicial
decisions and/or the adoption of treaties, legislation or regulations by the
national authorities of countries or territories where we plan to operate the
ORBCOMM system.
Coordination With The International Telecommunications Union Poses Risks Of
Delays. Frequency coordination through the ITU is a necessary prerequisite to
obtaining interference protection from other satellite systems. There is no
penalty for launching a satellite system before completing the ITU coordination
process, although protection from interference through this process is only
afforded as of the date that the ITU notifies the ORBCOMM system that the
coordination process has been successfully completed. OCC has completed the ITU
coordination process with respect to the planned 35-satellite enhanced
constellation with all administrations except Russia and France. OCC expects
that it will successfully complete the ITU coordination process with Russia and
France by December 1999, at which time the ORBCOMM system will be fully
registered with the ITU. The FCC has modified OCC's ITU documentation to include
the proposed launch of the 12 additional satellites for which OCC has been
licensed. We do not expect this modification to affect coordination of the
35-satellite system. Moreover, supplemental coordination of these 12 satellites
is not required for countries for which the United States previously completed
coordination.
Any delay in or failure to complete the ITU coordination process
successfully may result in interference to the ORBCOMM system by other mobile
satellite systems operating internationally, and this interference could
negatively affect our financial condition and results of operations.
Furthermore, International Licensees working with their respective governments
are required to complete ITU coordination of subscriber units and gateways
located in their territories with countries located within distances determined
by ITU recommendations. These coordinations may not be completed successfully or
in a timely manner, which could result in delayed availability of ORBCOMM
services in the affected territories.
OPERATING RISKS COME FROM SEVERAL SOURCES
Multinational Operations And Developing Markets Pose Unique Operating
Challenges. Since we expect to derive substantial revenues by providing
communications services globally, we are subject to certain multinational
operating risks, such as:
- changes in domestic and foreign government regulations and
communications standards;
- licensing requirements;
- tariffs or taxes and other trade barriers;
- price, wage and exchange controls;
- political, social and economic instability;
- inflation;
- interest rate and currency fluctuations; and
- U.S. law prohibitions from operating in certain countries.
Many of these risks may be greater in developing countries or regions. In
addition, although we anticipate that the International Licensees will make all
payments in U.S. dollars, the potential lack of available U.S. currency in
certain countries may prevent the International Licensees in those countries
from being able to do so. Because we expect to receive most payments in U.S.
dollars, we do not intend to hedge against exchange rate fluctuations.
37
<PAGE> 40
OUR BUSINESS IS SUBJECT TO CERTAIN STRUCTURAL AND MARKET RISKS
We Are Controlled By Two Strategic Partners. We are a limited partnership
whose current partners, OCC and Teleglobe Mobile, each holds 50% of our
partnership interests. Under our current partnership agreement, substantially
all actions taken by us require the approval of at least a majority-in-interest
(i.e., partners holding a majority of the partnership interests). As such, the
partners must agree with respect to any and all decisions that require approval
of a majority-in-interest, or in the event the partners fail to agree, such
failure will result in deadlock between the partners. Such failure of the
partners to agree with respect to any decision requiring the approval of a
majority-in-interest could negatively affect us.
Potential Conflicts Of Interest With Orbital Or Teleglobe Could Negatively
Affect Us. Orbital and Teleglobe each has a substantial ownership interest in
ORBCOMM. A conflict of interest may exist between us and Orbital under the
procurement agreement and other related agreements between Orbital and OCC.
Also, Orbital is a majority owner of Magellan, one of our subscriber unit
manufacturers. Under our partnership agreement, transactions between us and
Orbital are subject to the approval of our related party transaction committee.
A conflict of interest also may exist between us and Teleglobe by virtue of
Teleglobe's majority ownership of ORBCOMM Canada Inc., our International
Licensee for Canada. Any potential conflict of interest between us and either of
these entities could negatively affect our results of operation.
THE YEAR 2000 POSES CERTAIN RISKS
We have initiated a Year 2000 readiness program, which is being implemented
by a program management office composed of, among others, certain of our senior
managers and certain outside consultants. The program has five phases:
inventory, assessment, remediation, testing and deployment, and addresses five
areas: critical system segment (comprising eight operational areas including the
satellites and the ground infrastructure for the ORBCOMM system), International
Licensees, Internal VARs, VAR and internal business infrastructure.
We have completed an inventory of each product, component or software
program in the critical system segment that uses date fields, contains embedded
systems or that may otherwise be impacted by the Year 2000 issue. All products,
components and software identified in the inventory phase have been assessed to
determine whether they are Year 2000 ready. For products, components or software
obtained from third party vendors (including Orbital), we surveyed each such
vendor to ascertain whether the product, component or software provided by such
vendor is Year 2000 ready (which may include obtaining a certification or
statement from each such vendor regarding Year 2000 readiness). Based on our
efforts to date, we estimate that the eight operational areas are between 60%
and 100% ready.
We will upgrade, repair, replace or otherwise bring into readiness the
products, components and software programs identified in the assessment and
testing phase(s) of the program as being non-Year 2000 ready. We anticipate that
for some custom applications in the critical system segment, we may use
replacements to or upgrades of existing applications that are already in
development, which replacements or upgrades may obviate the need for remediation
with respect to such applications. We expect that the remediation phase for the
critical system segment will be completed in the first quarter of 1999.
We have prepared a master test plan, which includes, with respect to the
critical system segment, testing within each of the eight operational areas at
both the unit or functional level, followed by end-to-end testing of the entire
ORBCOMM system. We have substantially completed unit level testing. We are
currently in the process of performing functional (or segment-to-segment)
testing. End-to-end testing of the ORBCOMM system will include testing of those
products, components and programs that have been procured from third party
vendors and certified or represented as Year 2000 ready, as well as any
products, components or programs that are subject to routine replacements or
upgrades during the term of the Program that are expected to cause such elements
to be Year 2000 ready. We expect that initial system testing will be completed
in the second quarter of 1999 and that final system testing (including testing
of internationally deployed systems that are our responsibility) will be
completed in the third quarter of 1999.
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<PAGE> 41
We are encouraging our International Licensees and each of the Internal
VARs and the VARs to implement a comprehensive Year 2000 readiness program. We
have begun and will continue to identify and assess the extent to which the
elements comprising our business infrastructure, including our information
systems, telephone systems, heating, cooling and electrical systems, building
security and other building operations, as well as back-up systems, are Year
2000 ready. To accomplish this, we are surveying the applicable third party
vendors and other entities to ascertain whether their systems are Year 2000
ready (which may include obtaining a certification or statement from each such
vendor or other entity regarding Year 2000 readiness).
The total estimated cost of the program, including the planned cost to
replace systems that are impacted by the Year 2000 issue, is not expected to be
material to our financial condition or results of operations. To date, we have
not deferred work on any information technology programs or systems as a result
of its efforts in connection with the program.
In connection with the program, we have initiated communications with our
vendors, customers and other service providers regarding our Year 2000 status.
While uncertainties surrounding the significance and likely impact of the Year
2000 problem make it nearly impossible for us to identify a reasonably likely
worst case scenario for the Year 2000 issue, such scenario could include:
- interruptions or failures of data or messaging communications using
the ORBCOMM system;
- the temporary inability of third parties to pay amounts due to us, and
- the temporary inability of vendors to provide goods or services to us.
We will develop a contingency plan for the ORBCOMM system designed to
address certain of these risks within our control. Our contingency plans will
evolve based upon the results of our unit, functional and end-to-end testing.
Despite our ongoing efforts in connection with the Program, we cannot assure you
that we have identified or will identify all Year 2000 affected systems or that
the Program will be successfully implemented or implemented on a timely basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have issued $170,000,000 in Notes that mature in August 2004. The Notes
earn a 14% fixed interest as well as a 5% revenue participation interest on
service and certain other revenues. The market price for the Notes may fluctuate
as a function of market interest rate changes, investors' perception of the
risks and our revenue growth.
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<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ORBCOMM GLOBAL, L.P.
Independent Auditors' Report.............................. 41
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... 42
Consolidated Statements of Operations and Comprehensive
Loss for the Years Ended December 31, 1998, 1997 and
1996 and Total Accumulated During Development Stage
through December 31, 1998.............................. 43
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 and Total Cash Flows
During Development Stage through December 31, 1998..... 44
Consolidated Statements of Partners' Capital for the
period June 30, 1993 (date of inception) to December
31, 1998............................................... 45
Notes to Consolidated Financial Statements................ 46
ORBCOMM USA, L.P.
Independent Auditors' Report.............................. 54
Balance Sheets as of December 31, 1998 and 1997........... 55
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996 and Total Accumulated During
Development Stage through December 31, 1998............ 56
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996 and Total Cash Flows During
Development Stage through December 31, 1998............ 57
Statements of Partners' Capital for the period June 30,
1993 (date of inception) to December 31, 1998.......... 58
Notes to Financial Statements............................. 59
ORBCOMM INTERNATIONAL PARTNERS, L.P.
Independent Auditors' Report.............................. 62
Balance Sheets as of December 31, 1998 and 1997........... 63
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996 and Total Accumulated During
Development Stage through December 31, 1998............ 64
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996 and Total Cash Flows During
Development Stage through December 31, 1998............ 65
Statements of Partners' Capital for the period June 30,
1993 (date of inception) to December 31, 1998.......... 66
Notes to Financial Statements............................. 67
ORBITAL COMMUNICATIONS CORPORATION
Independent Auditors' Report.............................. 70
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... 71
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996....................... 72
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................... 73
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1998, 1997, 1996 and 1995..... 74
Notes to Consolidated Financial Statements................ 75
TELEGLOBE MOBILE PARTNERS
Independent Auditors' Report.............................. 81
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... 82
Consolidated Statements of Operations and Comprehensive
Loss for the Years Ended December 31, 1998, 1997 and
1996 and Total Accumulated During Development Stage
Through December 31, 1998.............................. 83
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 and Total Cash Flows
During Development Stage Through December 31, 1998..... 84
Consolidated Statement of Partners' Capital for the period
July 21, 1993 (date of inception) to December 31,
1998................................................... 85
Notes to Consolidated Financial Statements................ 86
ORBCOMM CORPORATION
Independent Auditors' Report.............................. 91
Balance Sheet as of December 31, 1998..................... 92
Note to Financial Statement............................... 93
</TABLE>
40
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Partners
ORBCOMM Global, L.P.:
We have audited the accompanying consolidated balance sheets of ORBCOMM
Global, L.P. and subsidiaries (a development stage enterprise) as of December
31, 1998 and 1997, and the related consolidated statements of operations and
comprehensive loss, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 1998 and for the period from June 30,
1993 (date of inception) to December 31, 1998. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ORBCOMM
Global, L.P. and subsidiaries (a development stage enterprise) as of December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998 and for the
period June 30, 1993 (date of inception) to December 31, 1998, in conformity
with generally accepted accounting principles.
KPMG LLP
Washington, DC
March 30, 1999
41
<PAGE> 44
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,799 $ 16,106
Investments............................................... 390 22,756
Other receivables......................................... 248 1,931
Inventory................................................. 6,688 2,160
-------- --------
Total Current Assets................................... 11,125 42,953
Mobile Communications Satellite System, net................. 327,946 263,379
Other assets, net........................................... 4,690 5,527
Investments in and advances to affiliates................... 2,150 4,777
Investment in ORBCOMM Japan, Ltd............................ 333 333
Goodwill.................................................... 390 0
-------- --------
TOTAL ASSETS...................................... $346,634 $316,969
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Current portion of long-term debt......................... $ 1,190 $ 1,087
Accounts payable -- Orbital Sciences Corporation.......... 50,800 21,100
Accounts payable and accrued liabilities.................. 19,255 17,160
-------- --------
Total Current Liabilities.............................. 71,245 39,347
Revenue participation accrued interest...................... 599 14
Long-term debt.............................................. 170,000 171,190
-------- --------
Total Liabilities...................................... 241,844 210,551
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners................................. 56,520 57,834
Orbital Communications Corporation........................ 48,270 48,584
-------- --------
Total Partners' Capital................................ 104,790 106,418
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $346,634 $316,969
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE> 45
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
1998 1997 1996 1998
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales................................... $ 1,262 $ 517 $ 268 $ 2,047
Distribution fees............................... 0 0 100 1,000
Other........................................... 0 10 52 62
-------- -------- -------- ---------
Total revenues............................... 1,262 527 420 3,109
EXPENSES:
Cost of product sales........................... 1,242 517 268 2,027
Depreciation.................................... 11,048 7,348 6,198 24,594
Engineering expenses............................ 17,007 8,160 5,453 30,620
Marketing, administrative and other expenses.... 34,961 12,070 6,933 54,023
-------- -------- -------- ---------
Total expenses............................... 64,258 28,095 18,852 111,264
-------- -------- -------- ---------
Losses from operations....................... (62,996) (27,568) (18,432) (108,155)
OTHER INCOME AND EXPENSES:
Interest income................................. 914 5,378 3,861 10,212
Interest expense and other financial charges.... (2,814) (833) (307) (3,954)
Equity in net losses of affiliates.............. (4,732) (8,413) (4,602) (18,601)
-------- -------- -------- ---------
NET LOSS.......................................... (69,628) (31,436) (19,480) (120,498)
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains on investments, net.... 0 0 88 88
Less: reclassification adjustments for net
holding gains on sales of investments included
in net loss..................................... 0 (88) 0 (88)
-------- -------- -------- ---------
COMPREHENSIVE LOSS................................ $(69,628) $(31,524) $(19,392) $(120,498)
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE> 46
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1998 1997 1996 1998
-------- --------- --------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(69,628) $ (31,436) $ (19,480) $(120,498)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Depreciation.................................. 11,048 7,348 6,198 24,594
Amortization of financing fees................ 837 833 307 1,977
Equity in net losses of affiliates............ 4,732 8,413 4,602 18,601
Decrease (increase) in other receivables...... 1,683 (661) (1,270) (248)
Increase in inventory......................... (4,528) (409) (1,304) (6,688)
Increase in accounts payable -- Orbital
Sciences Corporation....................... 0 0 573 4,648
Increase in accounts payable and accrued
liabilities................................ 2,095 3,510 7,471 19,255
Increase in revenue participation accrued
interest................................... 585 14 0 599
-------- --------- --------- ---------
NET CASH USED IN OPERATING
ACTIVITIES.......................... (53,176) (12,388) (2,903) (57,760)
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (45,915) (84,241) (69,242) (306,388)
Increase in amount due from affiliates........ (2,105) (16,356) (1,608) (20,730)
Investment in ORBCOMM Japan, Ltd.............. 0 (333) 0 (333)
Purchase of investments....................... (7,228) (47,125) (136,532) (190,885)
Proceeds from sale of investments............. 29,594 120,893 40,007 190,494
Other......................................... (390) 0 0 (390)
-------- --------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES.......................... (26,044) (27,162) (167,375) (328,232)
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term
debt....................................... 0 0 164,475 169,475
Repayment of long-term debt................... (1,087) (992) (905) (3,809)
Partners' contributions....................... 68,000 0 62,733 227,800
Financing fees paid........................... 0 (222) (940) (3,675)
-------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES................ 66,913 (1,214) 225,363 389,791
-------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (12,307) (40,764) 55,085 3,799
CASH AND CASH EQUIVALENTS:
Beginning of period........................... 16,106 56,870 1,785 0
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
End of period................................. $ 3,799 $ 16,106 $ 56,870 $ 3,799
======== ========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid................................. $ 23,965 $ 24,060 $ 347 $ 48,797
======== ========= ========= =========
Non-cash capital expenditures................. 29,700 16,452 0 46,152
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE> 47
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
TELEGLOBE ORBITAL
MOBILE COMMUNICATIONS
PARTNERS CORPORATION
------------------------------------ ------------------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
PARTNERS COMPREHENSIVE PARTNERS COMPREHENSIVE
CAPITAL INCOME TOTAL CAPITAL INCOME TOTAL TOTAL
-------- -------------- -------- -------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions.................. $ 10,000 $ 0 $ 10,000 $ 38,149 $ 0 $ 38,149 $ 48,149
Net loss............................... 0 0 0 0 0 0 0
Financing fees......................... (242) 0 (242) (242) 0 (242) (484)
-------- ---- -------- -------- ---- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1993..... 9,758 0 9,758 37,907 0 37,907 47,665
Capital contributions.................. 0 0 0 10,853 0 10,853 10,853
Net loss............................... (4) 0 (4) (5) 0 (5) (9)
-------- ---- -------- -------- ---- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1994..... 9,754 0 9,754 48,755 0 48,755 58,509
Capital contributions.................. 24,750 0 24,750 13,315 0 13,315 38,065
Net income............................. 27 0 27 28 0 28 55
Financing fees......................... (1,014) 0 (1,014) (1,014) 0 (1,014) (2,028)
-------- ---- -------- -------- ---- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1995..... 33,517 0 33,517 61,084 0 61,084 94,601
Capital contributions.................. 49,775 0 49,775 12,958 0 12,958 62,733
Net loss............................... (9,740) 0 (9,740) (9,740) 0 (9,740) (19,480)
Unrealized holding gains on
investments, net..................... 0 44 44 0 44 44 88
-------- ---- -------- -------- ---- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1996..... 73,552 44 73,596 64,302 44 64,346 137,942
Net loss............................... (15,718) 0 (15,718) (15,718) 0 (15,718) (31,436)
Reclassification adjustments for net
holding gains on sales of investments
included in net loss................. 0 (44) (44) 0 (44) (44) (88)
-------- ---- -------- -------- ---- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1997..... 57,834 0 57,834 48,584 0 48,584 106,418
Capital contributions.................. 33,500 0 33,500 34,500 0 34,500 68,000
Net loss............................... (34,814) 0 (34,814) (34,814) 0 (34,814) (69,628)
-------- ---- -------- -------- ---- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1998..... $ 56,520 $ 0 $ 56,520 $ 48,270 $ 0 $ 48,270 $104,790
======== ==== ======== ======== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE> 48
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization
In 1993, Orbital Communications Corporation ("OCC"), a majority-owned
subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile
Partners ("Teleglobe Mobile"), a partnership established by affiliates of
Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the
"Company"), a Delaware limited partnership. Each of OCC and Teleglobe Mobile
holds a 50% partnership interest in the Company, with the result that the
approval of both OCC and Teleglobe Mobile is generally necessary for the Company
to act.
OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM
USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM
International"), to market services using the ORBCOMM low-Earth orbit satellite
communications system (the "ORBCOMM System") in the United States and
internationally, respectively. In 1995, the Company became a 98% general partner
in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating
Teleglobe Mobile's direct partnership interest entirely. Simultaneously, the
Company became a 98% general partner in ORBCOMM International, reducing
Teleglobe Mobile's direct partnership interest to 2% and eliminating OCC's
direct partnership interest entirely.
In October 1998, the Company purchased the assets of Dolphin Software
Systems Inc. and established two wholly owned subsidiaries. Dolphin Information
Services Inc. ("Dolphin") distributes outside Canada software products that
enable our customers to better access and manage information obtained from or
regarding their remote or mobile assets (collectively, the "Dolphin Software").
Dolphin Software Services, ULC ("Dolphin ULC") develops, and distributes within
Canada, the Dolphin Software. The value attributed to assets acquired from
Dolphin Software Systems Inc. is not material to the Company's total assets.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space assets currently consist
of a constellation of 28 on-orbit satellites. The ground and control assets
consist of gateways strategically located throughout the world and the
facilities to monitor and manage all network elements to ensure continuous,
consistent operations in the provision of quality service. In addition, ORBCOMM
operates a network control center, which is designed to support the full
constellation of ORBCOMM System satellites. The subscriber assets consist of
various models of subscriber units, some of which are intended for general use,
while others are designed to support specific applications.
The System Charge
OCC is obligated to pay to the Company a system charge that is equal to 23%
of ORBCOMM USA's total service revenues (the "Output Capacity Charge") minus
1.15% of total aggregate revenues, defined as the aggregate of ORBCOMM USA's and
ORBCOMM International's total service revenues ("Total Aggregate Revenues"), for
a calendar quarter in consideration of the construction and financing of the
ORBCOMM System assets by the Company. Teleglobe Mobile is obligated to pay to
the Company a system charge that is equal to 23% of ORBCOMM International's
total service revenues (the "International Output Capacity Charge") minus 1.15%
of Total Aggregate Revenues for a calendar quarter in consideration of the
Company's grant to Teleglobe Mobile of the right to market, sell, lease and
franchise all ORBCOMM System output capacity outside the United States. If the
Output Capacity Charge as described above is less than
46
<PAGE> 49
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) NATURE OF OPERATIONS -- (CONTINUED)
1.15% of Total Aggregate Revenues, then OCC is not required to pay and does not
owe any portion of the system charge to ORBCOMM. If the International Output
Capacity Charge as described above is less than 1.15% of Total Aggregate
Revenues, then Teleglobe Mobile is not required to pay and does not owe any
portion of the system charge to ORBCOMM.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
entities who become international licensees.
Risks and Uncertainties
The Company's operations are subject to certain risks and uncertainties
that are inherent in satellite communication companies and development stage
enterprises. The Company expects to have continuing losses for the next several
quarters and is dependent upon additional financing to fund operations, complete
construction of additional system capacity and to further develop its marketing
infrastructure. Although they are not required to do so, the Partners are
continuing to fund the financing needs of the Company.
Given the inherent technical, commercial, regulatory and financial risks
within the space communications industry, it is possible that the recoverability
of the ORBCOMM system could be adversely affected.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company expects to emerge from its development stage by the first half
of 1999. The accompanying consolidated financial statements have been prepared
on the accrual basis of accounting in conformity with generally accepted
accounting principles in the United States. They include the accounts of the
Company and two of its subsidiaries, Dolphin and Dolphin ULC. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated 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 as
well as disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investments
The Company maintains two investment portfolios characterized by
management's intentions as to future investment activity. Investments classified
as "held-to-maturity" are not intended to be sold prior to maturity
47
<PAGE> 50
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
and are carried at cost. Investments not intended to be held until maturity or
traded to capitalize on market gains are classified as "available-for-sale" and
are carried at fair value with temporary unrealized gains (losses) charged
directly to partners' capital. Investments maturing after one year are
classified as long-term investments. The Company uses the average cost method in
determining the basis of investments sold when computing realized gains
(losses).
Inventory
Inventory is stated at the lower of cost, determined on the specific
identification basis, or market and primarily represents subscriber
communicators available for sale to customers.
Depreciation and Recoverability of Long-Lived Assets
The Company depreciates its operational assets over the estimated economic
useful life using the straight-line method as follows:
<TABLE>
<S> <C>
Space Segment Assets: generally 8 years
Ground Segment Assets: 3 to 10 years
</TABLE>
The Company's policy is to review its long-lived assets, including its
Mobile Communications Satellite System, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company recognizes impairment losses when the sum of the
expected future cash flows is less than the carrying amount of the assets. With
regard to satellites, the Company recognizes impairment losses on a
satellite-by-satellite basis. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Given the inherent
technical and commercial risks within the space communications industry, it is
possible that the Company's current estimate for recovery of the carrying amount
of its assets may change.
Other Assets, net
Other assets principally consist of deferred debt issuance costs. These
costs are amortized as a component of interest expense and other financial
charges over the term of the related debt.
Investments in Affiliates
The Company uses the equity method of accounting for its investments in and
earnings of affiliates in which the Company has the ability to exercise
significant influence over, but not control, such affiliates' operations. In
accordance with the equity method of accounting, the Company's carrying amount
of an investment in affiliates is initially recorded at cost, and is increased
to reflect its share of the affiliates' income and reduced to reflect its share
of the affiliates' losses. The Company's investment is also increased to reflect
contributions to, and decreased to reflect distributions received from,
affiliates. Investments in which the Company does not have the ability to
exercise significant influence over operating and financial policies are
accounted for under the cost method of accounting.
Pursuant to the terms of the relevant partnership agreements: (i) Teleglobe
Mobile and OCC share equal responsibility for the operational and financial
affairs of ORBCOMM; (ii) Teleglobe Mobile controls the operational and financial
affairs of ORBCOMM International; and (iii) OCC controls the operational and
financial affairs of ORBCOMM USA. Since the Company is unable to control, but is
able to exercise significant influence over ORBCOMM International's and ORBCOMM
USA's operating and financial
48
<PAGE> 51
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
policies, the Company is accounting for its investments in OBCOMM International
and ORBCOMM USA using the equity method of accounting. However, since the
Company is unable either to control or to exercise significant influence over
ORBCOMM Japan's operating and financial policies, the Company is accounting for
its investment in ORBCOMM Japan using the cost method of accounting.
Each year, the Company reviews the underlying value of its investments by
comparing their carrying amount to their net recoverable amount. The
determination of the net recoverable amount consists of evaluating forecasted
income and cash flows. Any permanent impairment of such value would be written
off to expense.
Goodwill
Goodwill, which represents the excess costs over the fair value of
identifiable assets acquired from Dolphin Software Systems Inc. at the date of
acquisition, will be amortized on a straight-line basis over 10 years, starting
January 1, 1999.
Each year, the Company reviews the underlying value of its goodwill by
comparing its carrying amount to its net recoverable amount. The determination
of the net recoverable amount consists of evaluating forecasted income and cash
flows. Any permanent impairment of such value would be written off to expense.
Partners' Capital
In accordance with the Partnership Agreement, Teleglobe Mobile and OCC are
both general and limited partners in the Company. Therefore, limited and general
partner accounts are combined into one single capital account and presented as
such in the consolidated balance sheets and consolidated statements of partners'
capital.
Revenue Recognition
Revenues are generally recognized when products are shipped or when
customers have accepted the products, depending on contractual terms. Service
revenues are generally recognized as such services are rendered. Distributions
fees and license fees from service license or similar agreements are recognized
ratably over the term of the agreements.
Foreign Currency Translation
The Company has determined the functional currency of its Canadian
subsidiary, Dolphin ULC, to be the U.S. dollar. Consequently, Dolphin ULC's
financial statements are remeasured into U.S. dollars on the following basis:
-- monetary assets and liabilities are remeasured at the current exchange
rate;
-- all non-monetary items that reflect prices from past transactions are
remeasured using historical exchange rates, while all non-monetary items
that reflect prices from current transactions are remeasured using the
current exchange rate; and
-- revenues and expenses are remeasured at the average exchange rates
prevailing at the time the transactions occurred, except those expenses
related to non-monetary items, which are remeasured at historical
exchange rates.
Translation gains/losses resulting from the remeasurement process are
reported on the consolidated statements of operations under "Other Income and
Expenses".
49
<PAGE> 52
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within the accompanying consolidated financial statements.
Segment Information
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segment of an Enterprise and Related Information",
establishes standards for reporting financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company's operations for 1998 are a
single segment, and further segmentation under SFAS No. 131 is not required.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive loss consists of net loss and net unrealized
gains on securities and is presented in the consolidated statements of
operations and comprehensive loss. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior years' consolidated
financial statements have been reclassified to conform with the requirements of
SFAS No. 130.
Recent Accounting Pronouncements
Computer Software -- In March 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Development or Obtained for
Internal Use". SOP 98-1 must be adopted no later than January 1, 1999, and
defines internal-use software and requires that the cost of such software be
capitalized and amortized over its useful life. Presently, the Company's policy
is to capitalize the costs of computer software developed or obtained for
internal use. Based on the Company's current policy, SOP 98-1 is not expected to
have an impact on the Company's consolidated results of operations or financial
condition.
Cost of Start-Up Activities -- In April 1998, the AICPA also issued SOP
98-5, "Reporting on the Costs of Start-Up Activities", to provide guidance to
all non-governmental entities on financial reporting of costs of start-up
activities. SOP 98-5 must be adopted no later than January 1, 1999, and requires
that costs of start-up activities be expensed as incurred. Based on the
Company's current policy for costs of start-up activities, SOP 98-5 is not
expected to have an impact on the Company's consolidated results of operations
or financial condition.
Reclassification of Prior Years' Balances
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the current year presentation.
(3) INVESTMENTS
Included in cash and cash equivalents is $5,420,000 of commercial paper as
of December 31, 1997 (none as of December 31, 1998). The fair value of the
commercial paper approximated carrying value.
50
<PAGE> 53
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS -- (CONTINUED)
The following table sets forth the aggregate costs and fair values and
gross unrealized gains of available-for-sale and held-to-maturity short-term
investments as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
(IN THOUSANDS) (IN THOUSANDS)
------------------------------ ---------------------------------
UNREALIZED UNREALIZED
COST GAINS FAIR VALUE COST GAINS FAIR VALUE
---- ---------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
- - - ----------------------------------------------
Commercial Paper.............................. $ 0 $0 $ 0 $ 1,278 $ 0 $ 1,278
---- -- ---- ------- ------ -------
Total available-for-sale investments........ 0 0 0 1,278 0 1,278
---- -- ---- ------- ------ -------
HELD-TO-MATURITY
- - - ----------------------------------------------
U.S. Treasury Notes........................... 390 5 395 21,478 1,841 23,319
---- -- ---- ------- ------ -------
Total held-to-maturity investments.......... 390 5 395 21,478 1,841 23,319
---- -- ---- ------- ------ -------
TOTAL INVESTMENTS........................... $390 $5 $395 $22,756 $1,841 $24,597
==== == ==== ======= ====== =======
</TABLE>
Unrealized gains on held-to-maturity investments represent accrued interest
income as of December 31, 1998 and 1997, respectively. As of December 31, 1998,
all Treasury Notes held mature within one year.
(4) MOBILE COMMUNICATIONS SATELLITE SYSTEM
The Mobile Communications Satellite System comprises the following assets:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS)
--------------------
1998 1997
-------- --------
<S> <C> <C>
Space assets......................................... $288,648 $225,942
Ground assets........................................ 63,892 50,983
-------- --------
Total................................................ 352,540 276,925
Less accumulated depreciation........................ (24,594) (13,546)
-------- --------
Total, net........................................... $327,946 $263,379
======== ========
</TABLE>
During construction of the Mobile Communications Satellite System, the
Company is capitalizing substantially all construction costs. The Company also
is capitalizing the portion of the engineering direct labor costs that relates
to hardware and system design development and coding of the software products
that enhance the operation of the Mobile Communications Satellite System. For
the years ended December 31, 1998, 1997, and 1996, $5,041,000, $4,641,000 and
$1,244,000, respectively, of such costs have been capitalized. For the years
ended December 31, 1998, 1997 and 1996, total interest expenses were
$24,550,000, $24,060,000 and $10,030,000, respectively, of which $22,573,000,
$24,060,000 and $10,030,000 have been capitalized as a part of the historical
cost of the Mobile Communications Satellite System.
(5) LONG-TERM DEBT
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
51
<PAGE> 54
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT -- (CONTINUED)
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International,
except that the guarantees are non-recourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the net
proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes in 1997 and 1998.
The Company also has a $5,000,000 secured note with a financial institution
of which $1,190,000 was outstanding as of December 31, 1998 as the current
portion of long-term debt. As of December 31, 1997 $2,277,000 was outstanding of
which $1,087,000 and $1,190,000 were due in 1998 and 1999, respectively. The
note bears interest at 9.2% per annum and is secured by equipment located at
certain of the U.S. gateway Earth stations and the network control center, and
is guaranteed by Orbital.
(6) RELATED PARTY TRANSACTIONS
The Company paid Orbital $5,641,000, $41,843,000 and $56,177,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. Payments were made
for work performed pursuant to the ORBCOMM System Design, Development, and
Operations Agreement, the ORBCOMM System Procurement Agreement (the "Procurement
Agreement") and the Administrative Services Agreement (for provision of ongoing
administrative support to the Company). Additionally, Orbital has deferred
$50,800,000 and $21,100,000 as of December 31, 1998 and 1997, respectively, and
has indicated that it will continue to defer invoicing of certain amounts under
the Procurement Agreement until other funding arrangements for the Company are
secured.
The Company paid ORBCOMM Canada Inc., a majority owned subsidiary of
Teleglobe, $208,000 pursuant to a consulting agreement dated March 18, 1998, in
consideration for services provided by an employee of ORBCOMM Canada.
The Company sold $1,008,000, $487,000 and $268,000 of product to ORBCOMM
USA and ORBCOMM International for the years ended December 31, 1998, 1997 and
1996, respectively (none in 1995).
Certain provisions of the Partnership Agreement require ORBCOMM to
reimburse OCC for OCC's repurchase of shares of OCC common stock acquired
pursuant to the OCC 1998 Stock Option Plan ("Stock Option Plan"). During 1997
and 1996, ORBCOMM reimbursed OCC approximately $598,000 and $1,100,000,
respectively, under the Stock Option Plan (none during 1998). In 1996, Orbital
contributed approximately $100,000 to OCC to repurchase such shares (none in
1998 and 1997).
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, receivables,
accounts payable and current portion of long term debt approximates fair value
since all such instruments are short-term in nature.
52
<PAGE> 55
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Fair value for the Company's long-term debt is determined based on quoted market
rates. The table set below compares the carrying and the fair value of the
Company's long-term debt as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
(IN THOUSANDS) (IN THOUSANDS)
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt.............................. $170,000 $175,100 $170,000 $183,600
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
System Procurement Agreement
Pursuant to the System Procurement Agreement with Orbital, the Company's
remaining obligation to purchase satellites, launch services and ground system
is approximately $31,500,000.
Lease Commitments
In 1998, ORBCOMM entered into a six-year operating lease agreement for
approximately 21,500 square feet of office space. ORBCOMM has an option to renew
the lease for another five-year period immediately upon the expiration of the
original operating lease. Rental expense for 1998, 1997 and 1996 amounted to
$2,074,000, $951,000 and $393,000, respectively, of which $939,000, $825,000 and
$393,000, respectively, were paid to Orbital as part of the Administrative
Services Agreement. The future minimum rental payments under non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
PERIODS IN THOUSANDS
------- ------------
<S> <C>
1999........................................................ $1,769
2000........................................................ 1,852
2001........................................................ 1,866
2002........................................................ 1,916
2003........................................................ 842
Thereafter.................................................. 624
------
Total minimum lease commitments........................... $8,869
======
</TABLE>
(9) SUBSEQUENT EVENTS
From January 1, 1999 to March 30, 1999, OCC and Teleglobe Mobile paid to
the Company an additional $20,950,000 and $21,950,000 in capital contributions,
respectively.
The Company has negotiated a new procurement agreement with Orbital under
which it will procure, at a minimum, eight additional satellites and two
separate Pegasus launch vehicles, at a total cost of approximately $70,000,000.
In addition, the Company has the option under this agreement to procure up to 22
additional satellites and associated launch services using the Pegasus launch
vehicle. Amounts due under this agreement are payable by the Company as work is
performed by Orbital.
In late February 1999, the Company consummated the purchase of additional
shares of ORBCOMM Japan, Ltd., our International Licensee for Japan, increasing
our equity interest in ORBCOMM Japan, Ltd. to approximately 32%.
53
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
The Partners
ORBCOMM USA. L.P.:
We have audited the accompanying balance sheets of ORBCOMM USA. L.P. (a
development stage enterprise) as of December 31, 1998 and 1997, and the related
statements of operations, partners' capital, and cash flows for each of the
years in the three-year period ended December 31, 1998 and for the period from
June 30, 1993 (date of inception) to December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 ORBCOMM USA. L.P. (a
development stage enterprise) as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1998 and for the period June 30, 1993 (date of
inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Washington, D.C.
March 30, 1999
54
<PAGE> 57
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable....................................... $ 220 $ 65
Prepaid contract costs.................................... 991 123
-------- -------
TOTAL ASSETS...................................... $ 1,211 $ 188
======== =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities.................. $ 717 $ 803
-------- -------
Total Current Liabilities.............................. 717 803
Amount due to affiliates.................................. 13,342 8,635
-------- -------
Total Liabilities...................................... 14,059 9,438
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
ORBCOMM Global, L.P....................................... (12,591) (9,065)
Orbital Communications Corporation........................ (257) (185)
-------- -------
Total Partners' Capital................................ (12,848) (9,250)
-------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $ 1,211 $ 188
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE> 58
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
-------------------------------------- DECEMBER 31,
1998 1997 1996 1998
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales................................ $ 580 $ 127 $ 229 $ 936
Contract revenues............................ 0 0 0 4,203
Service revenues............................. 179 45 11 235
------- ------- ------- --------
Total revenues....................... 759 172 240 5,374
EXPENSES:
Cost of sales................................ 798 383 262 1,443
Marketing expenses........................... 3,559 5,173 2,984 16,789
------- ------- ------- --------
Total expenses....................... 4,357 5,556 3,246 18,232
------- ------- ------- --------
NET LOSS....................................... $(3,598) $(5,384) $(3,006) $(12,858)
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE> 59
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1998 1997 1996 1998
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(3,598) $(5,384) $(3,006) $(12,858)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Increase in accounts receivable................. (155) (11) (54) (220)
Increase in prepaid contract costs.............. (868) (123) 0 (991)
Increase (decrease) in accounts payable and
accrued liabilities.......................... (86) 461 133 717
------- ------- ------- --------
NET CASH USED IN OPERATING ACTIVITIES... (4,707) (5,057) (2,927) (13,352)
------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amount due to affiliates............ 4,707 5,057 2,917 13,342
Partners' contributions......................... 0 0 0 10
------- ------- ------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................ 4,707 5,057 2,917 13,352
------- ------- ------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... 0 0 (10) 0
CASH AND CASH EQUIVALENTS:
Beginning of period............................. 0 0 10 0
------- ------- ------- --------
CASH AND CASH EQUIVALENTS:
End of period................................... $ 0 $ 0 $ 0 $ 0
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
57
<PAGE> 60
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
TELEGLOBE ORBITAL ORBCOMM
MOBILE COMMUNICATIONS GLOBAL,
PARTNERS CORPORATION L.P. TOTAL
--------- -------------- -------- --------
<S> <C> <C> <C> <C>
Capital contributions......................... $2 $ 8 $ 0 $ 10
Net loss...................................... 0 0 0 0
-- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1993............ 2 8 0 10
Net loss...................................... 0 0 0 0
-- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1994............ 2 8 0 10
Capital transfer.............................. (2) (8) 10 0
Net loss...................................... 0 (17) (853) (870)
-- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1995............ 0 (17) (843) (860)
Net loss...................................... 0 (60) (2,946) (3,006)
-- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1996............ 0 (77) (3,789) (3,866)
Net loss................................... 0 (108) (5,276) (5,384)
-- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1997............ 0 (185) (9,065) (9,250)
Net loss................................... 0 (72) (3,526) (3,598)
-- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1998............ $0 $(257) $(12,591) $(12,848)
== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
58
<PAGE> 61
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization
In 1993, Orbital Communications Corporation ("OCC"), a majority-owned
subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile
Partners ("Teleglobe Mobile"), a partnership established by affiliates of
Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the
"Company"), a Delaware limited partnership. Each of OCC and Teleglobe Mobile
holds a 50% partnership interest in the Company, with the result that the
approval of both OCC and Teleglobe Mobile is generally necessary for the Company
to act.
OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM
USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM
International"), to market services using the ORBCOMM low-Earth orbit satellite
communications system (the "ORBCOMM System") in the United States and
internationally, respectively. In 1995, the Company became a 98% general partner
in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating
Teleglobe Mobile's direct partnership interest entirely. Simultaneously, the
Company became a 98% general partner in ORBCOMM International, reducing
Teleglobe Mobile's direct partnership interest to 2% and eliminating OCC's
direct partnership interest entirely.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space assets currently consist
of a constellation of 28 on-orbit satellites. The ground and control assets
consist of gateways strategically located throughout the world and the
facilities to monitor and manage all network elements to ensure continuous,
consistent operations in the provision of quality service. In addition, ORBCOMM
operates a network control center, which is designed to support the full
constellation of ORBCOMM System satellites. The subscriber assets consist of
various models of subscriber units, some of which are intended for general use,
while others are designed to support specific applications.
The System Charge
Pursuant to the terms of the system charge agreement between OCC and
ORBCOMM USA, ORBCOMM USA has agreed to pay OCC an output capacity charge that is
a quarterly fee equal to 23% of its total service revenues for such calendar
quarter in exchange for the exclusive right to market, sell, lease and franchise
all ORBCOMM System output capacity in the United States and for the exclusive
use of the system assets in the United States. For the year ended December 31,
1998, the output capacity charge was $41,000 and is included as part of cost of
sales (none in 1997 and 1996).
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
entities who become international licensees.
59
<PAGE> 62
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company and ORBCOMM USA expect to emerge from their development stage
by the first half of 1999. The accompanying financial statements have been
prepared on the accrual basis of accounting in conformity with generally
accepted accounting principles in the United States.
Use of Estimates
The preparation of 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 as well
as disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Pursuant to banking arrangements, ORBCOMM USA has no cash or cash
equivalents in accordance with the zero balance agreement with ORBCOMM. However,
ORBCOMM considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Prepaid Contract Costs
Prepaid contract costs consist primarily of advance payments to
manufacturers for assembling asset monitoring subscriber communicators.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within the accompanying financial statements.
Revenue Recognition
ORBCOMM USA provides subscriber communicator hardware to commercial
customers. Revenues are recognized when products are shipped or when customers
have accepted the products, depending on contractual terms. Service revenues are
recognized as such services are rendered.
Segment Information
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segment of an Enterprise and Related Information",
establishes standards for reporting financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. ORBCOMM USA's operations for 1998 are a
single segment, and further segmentation under SFAS No. 131 is not required.
(3) RELATED PARTY TRANSACTIONS
As of December 31, 1998 and 1997, ORBCOMM USA had a payable of $13,660,000
and $8,635,000, respectively, to ORBCOMM for amounts advanced to support ORBCOMM
USA's efforts to establish commercial and government markets in the United
States. ORBCOMM USA is currently in development stage, and still obtains funds
to support operations through non-interest bearing advances from ORBCOMM.
60
<PAGE> 63
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATED PARTY TRANSACTIONS -- (CONTINUED)
As of December 31, 1998, ORBCOMM USA had a receivable of $318,000 from
ORBCOMM International (none as of December 31, 1997).
ORBCOMM USA purchased $757,000, $383,000 and $262,000 of product from
ORBCOMM for the years ended December 31, 1998, 1997 and 1996, respectively (none
in 1995).
(4) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International,
except that the guarantees are non-recourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the net
proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes in 1997 and 1998.
61
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
The Partners
ORBCOMM International Partners, L.P.:
We have audited the accompanying balance sheets of ORBCOMM International
Partners, L.P. (a development stage enterprise) as of December 31, 1998 and
1997, and the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended December 31, 1998 and
for the period from June 30, 1993 (date of inception) to December 31, 1998.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 ORBCOMM International
Partners, L.P. (a development stage enterprise) as of December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 1998 and for the period June 30,
1993 (date of inception) to December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Washington, DC
March 30, 1999
62
<PAGE> 65
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable....................................... $ 1,023 $ 0
Deferred and prepaid contract costs....................... 20,879 19,580
------- -------
TOTAL ASSETS...................................... $21,902 $19,580
======= =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities.................. $ 530 $ 1,200
Deferred revenue.......................................... 20,094 13,270
------- -------
Total Current Liabilities.............................. 20,624 14,470
Amount due to affiliates.................................. 7,389 9,990
------- -------
Total Liabilities...................................... 28,013 24,460
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners................................. (122) (98)
ORBCOMM Global, L.P....................................... (5,989) (4,782)
------- -------
Total Partners' Capital................................ (6,111) (4,880)
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $21,902 $19,580
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
63
<PAGE> 66
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
----------------------------------- DECEMBER 31,
1998 1997 1996 1998
------- ------- ------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales............................. $10,943 $ 56 $ 8 $11,007
EXPENSES:
Cost of product sales..................... 10,943 104 6 11,053
Marketing expenses........................ 1,231 3,152 1,692 6,075
------- ------- ------- -------
Total expenses......................... 12,174 3,256 1,698 17,128
------- ------- ------- -------
NET LOSS.................................... $(1,231) $(3,200) $(1,690) $(6,121)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
64
<PAGE> 67
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
---------------------------- DECEMBER 31,
1998 1997 1996 1998
------- -------- ------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(1,231) $ (3,200) $(1,690) $ (6,121)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Decrease (increase) in accounts receivable....... (1,023) 15 (15) (1,023)
Increase in deferred and prepaid contract
costs......................................... (1,299) (15,709) (3,871) (20,879)
Increase (decrease) in accounts payable and
accrued liabilities........................... (670) 472 728 530
Increase in deferred revenue..................... 6,824 7,123 6,147 20,094
------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. 2,601 (11,299) 1,299 (7,399)
------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in amount due from an
affiliate..................................... 0 1,309 (1,309) 0
------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................. 0 1,309 (1,309) 0
------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amount due to
affiliates.................................... (2,601) 9,990 0 7,389
Partners' contributions.......................... 0 0 0 10
------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. (2,601) 9,990 0 7,399
------- -------- ------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... 0 0 (10) 0
CASH AND CASH EQUIVALENTS:
Beginning of period.............................. 0 0 10 0
------- -------- ------- --------
CASH AND CASH EQUIVALENTS:
End of period.................................... $ 0 $ 0 $ 0 $ 0
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
65
<PAGE> 68
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORBITAL TELEGLOBE ORBCOMM
COMMUNICATIONS MOBILE GLOBAL,
CORPORATION PARTNERS L.P. TOTAL
-------------- --------- ------- -------
<S> <C> <C> <C> <C>
Capital transfer............................... $ 8 $ 2 $ 0 $ 10
Net loss....................................... 0 0 0 0
--- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1993............. 8 2 0 10
Net loss....................................... 0 0 0 0
--- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1994............. 8 2 0 10
Net loss....................................... 0 0 0 0
Capital transfer............................... (8) (2) 10 0
--- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1995............. 0 0 10 10
Net loss....................................... 0 (34) (1,656) (1,690)
--- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1996............. 0 (34) (1,646) (1,680)
Net loss....................................... 0 (64) (3,136) (3,200)
--- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1997............. 0 (98) (4,782) (4,880)
Net loss....................................... 0 (24) (1,207) (1,231)
--- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1998............. $ 0 $(122) $(5,989) $(6,111)
=== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
66
<PAGE> 69
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization
In 1993, Orbital Communications Corporation ("OCC"), a majority-owned
subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile
Partners ("Teleglobe Mobile"), a partnership established by affiliates of
Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the
"Company"), a Delaware limited partnership. Each of OCC and Teleglobe Mobile
holds a 50% partnership interest in the Company, with the result that the
approval of both OCC and Teleglobe Mobile is generally necessary for the Company
to act.
OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM
USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM
International"), to market services using the ORBCOMM low-Earth orbit satellite
communications system (the "ORBCOMM System") in the United States and
internationally, respectively. In 1995, the Company became a 98% general partner
in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating
Teleglobe Mobile's direct partnership interest entirely. Simultaneously, the
Company became a 98% general partner in ORBCOMM International, reducing
Teleglobe Mobile's direct partnership interest to 2% and eliminating OCC's
direct partnership interest entirely.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space assets currently consist
of a constellation of 28 on-orbit satellites. The ground and control assets
consist of gateways strategically located throughout the world and the
facilities to monitor and manage all network elements to ensure continuous,
consistent operations in the provision of quality service. In addition, ORBCOMM
operates a network control center, which is designed to support the full
constellation of ORBCOMM System satellites. The subscriber assets consist of
various models of subscriber units, some of which are intended for general use,
while others are designed to support specific applications.
The System Charge
Pursuant to the terms of the international system charge agreement between
ORBCOMM, Teleglobe Mobile and ORBCOMM International, ORBCOMM International has
agreed to pay Teleglobe Mobile an international output capacity charge that is a
quarterly fee equal to 23% of its total service revenues for such calendar
quarter in exchange for the exclusive right to market, sell, lease and franchise
all ORBCOMM System output capacity outside the United States and for the
exclusive use of the system assets outside the United States. No such charge has
been incurred.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
entities who become international licensees.
67
<PAGE> 70
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company and ORBCOMM International expect to emerge from their
development stage by the first half of 1999. The accompanying financial
statements have been prepared on the accrual basis of accounting in conformity
with generally accepted accounting principles in the United States.
Use of Estimates
The preparation of 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 as well
as disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Pursuant to banking arrangements, ORBCOMM International has no cash and
cash equivalents in accordance with the zero balance agreement with ORBCOMM.
However, ORBCOMM considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Deferred and Prepaid Contract Costs
Deferred and prepaid contract costs consist primarily of work-in-process
for construction of gateway Earth stations for sale to international licensees.
Revenue Recognition
Revenues under the gateway procurement contracts with international
licensees or the sale of subscriber communicator hardware are generally
recognized when contracts are completed, products are shipped or when customers
have accepted the products or services, depending on contractual terms. License
fees from service license or similar agreements are recognized ratably over the
term of the agreements.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within the accompanying financial statements.
Segment Information
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segment of an Enterprise and Related Information",
establishes standards for reporting financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. ORBCOMM International's operations for
1998 are a single segment, and further segmentation under SFAS No. 131 is not
required.
(3) RELATED PARTY TRANSACTIONS
As of December 31, 1998 and 1997, ORBCOMM International had a payable of
$7,071,000 and $9,990,000, respectively, to ORBCOMM for amounts advanced to
support ORBCOMM International's efforts to establish commercial markets outside
the United States. ORBCOMM International is currently in development stage, and
still obtains funds to support operations through non-interest bearing advances
from ORBCOMM.
68
<PAGE> 71
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATED PARTY TRANSACTIONS -- (CONTINUED)
As of December 31, 1998, ORBCOMM International had a payable of $318,000 to
ORBCOMM USA (none as of December 31, 1997).
ORBCOMM International purchased $251,000, $104,000 and $6,000 of product
from ORBCOMM for the years ended December 31, 1998, 1997 and 1996, respectively
(none in 1995).
As of December 31, 1997, ORBCOMM International had a payable of $87,000 to
Teleglobe Canada Inc., an affiliate of Teleglobe Mobile, for a contracted
employee to provide international marketing services (none as of December 31,
1998).
(4) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International,
except that the guarantees are non-recourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the net
proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes in 1997 and 1998.
Construction of Gateways
In October 1996, ORBCOMM International entered into agreements with certain
manufacturers for the construction of twenty gateway Earth stations around the
globe. During 1998, installation and final acceptance of gateways in South
Korea, Japan and Italy occurred. Additionally, as of December 31, 1998 and 1997,
ORBCOMM International had $20,879,000 and $19,580,000, respectively, of deferred
and prepaid contract costs of which $12,718,000 and $11,016,000, respectively,
represent advance payments to those manufacturers. Total commitments under these
manufacturing agreements approximate $22,000,000. Included in deferred and
prepaid contract costs is the portion of engineering direct labor costs that
relates to the construction of gateways. As of December 31, 1998 and 1997,
$1,114,000 and $1,609,000, respectively, of such costs had been included in
deferred and prepaid contract costs.
(5) SERVICE LICENSE OR SIMILAR AGREEMENTS
As of December 31, 1998, ORBCOMM International had signed 12 service
license or similar agreements ("SLAs") with international licensees, eight of
which had associated gateway procurement contracts and software license
agreements. The SLAs authorize the international licensees to use the ORBCOMM
System to provide two-way data and messaging communications services. As of
December 31, 1998 and 1997, $30,868,000 and $13,270,000, respectively, had been
received under these agreements and the associated gateway procurement
agreements, of which $20,094,000 and $13,270,000, respectively, were recorded as
deferred revenue. ORBCOMM International is obligated to construct and deliver
eight gateways to certain international licensees under certain of these
agreements (see note 4).
69
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Communications Corporation:
We have audited the accompanying consolidated balance sheets of Orbital
Communications Corporation and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orbital
Communications Corporation and subsidiary as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Washington, D.C.
February 16, 1999, except as to note 9
which is as of March 15, 1999
70
<PAGE> 73
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10 $ 34
Accounts receivable....................................... 269 65
Other current assets...................................... 978 123
-------- -------
Total current assets................................... 1,257 222
Investments in affiliates................................... 56,111 54,663
-------- -------
TOTAL ASSETS...................................... $ 57,368 $54,885
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Accounts payable and accrued expenses..................... $ 724 $ 806
Promissory notes.......................................... 0 331
-------- -------
Total current liabilities.............................. 724 1,137
Due to affiliates......................................... 123,677 84,160
-------- -------
Total liabilities...................................... 124,401 85,297
Non-controlling interest in net assets of consolidated
subsidiary................................................ (6,296) (4,533)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, par value $0.01; 8,000,000 shares
authorized; 4,783,892 and 4,751,292 shares issued;
4,688,320 and 4,656,720 shares outstanding,
respectively........................................... 48 48
Additional paid-in capital................................ 452 350
Treasury stock, at cost, 95,572 and 94,572 shares,
respectively........................................... (770) (730)
Accumulated deficit....................................... (60,467) (25,547)
-------- -------
Total stockholders' deficit............................ (60,737) (25,879)
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 57,368 $54,885
======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
71
<PAGE> 74
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
SERVICE REVENUES............................................ $ 759 $ 172 $ 240
EXPENSES:
Costs of product sales.................................... 775 383 265
Marketing, administrative and other expenses.............. 3,617 5,202 2,959
-------- -------- -------
Total expenses......................................... 4,392 5,585 3,224
-------- -------- -------
Loss from operations................................... (3,633) (5,413) (2,984)
OTHER INCOME AND (EXPENSES):
Equity in net losses of affiliates........................ (33,050) (13,004) (8,268)
Non-controlling interest in net losses of consolidated
subsidiary............................................. 1,763 2,639 1,473
-------- -------- -------
Loss before provision for income taxes.................... (34,920) (15,778) (9,779)
Provision for income taxes................................ 0 0 0
-------- -------- -------
NET LOSS.................................................... $(34,920) $(15,778) $(9,779)
======== ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
72
<PAGE> 75
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(34,920) $(15,778) $ (9,779)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Equity in net losses of affiliates........................ 33,050 13,004 8,268
Non-controlling interest in net losses of consolidated
subsidiary............................................. (1,763) (2,639) (1,473)
Decrease (increase) in accounts receivable................ (204) (36) 873
Decrease (increase) in other current assets............... (855) (123) 0
Increase (decrease) in accounts payable and accrued
liabilities............................................ (82) 301 (18)
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES............. (4,774) (5,271) (2,129)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates................................. (34,498) 0 (12,958)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (34,498) 0 (12,958)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to employees........... 102 141 124
Purchases of treasury stock, net of reimbursement from
ORBCOMM Global, L.P.................................... (40) (575) (104)
Repayments of promissory notes............................ (331) (166) 0
Net borrowings from affiliates............................ 39,517 5,763 15,209
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 39,248 5,163 15,229
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (24) (108) 142
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 34 142 0
-------- -------- --------
CASH AND CASH EQUIVALENTS:
End of year............................................... $ 10 $ 34 $ 142
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
73
<PAGE> 76
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK ACCUMULATED
------------------ PAID-IN --------------- EARNINGS
SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) TOTAL
--------- ------ ---------- ------ ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............ 4,663,122 $47 $ 86 3,012 $ (51) $ 10 $ 92
Shares issued to employees............ 67,270 0 124 0 0 0 124
Treasury stock purchased............ 0 0 0 47,760 (104) 0 (104)
Net loss............................ 0 0 0 0 0 (9,779) (9,779)
--------- --- ---- ------ ----- -------- --------
BALANCE, DECEMBER 31, 1996............ 4,730,392 47 210 50,772 (155) (9,769) (9,667)
Shares issued to employees.......... 20,900 1 140 0 0 0 141
Treasury stock purchased............ 0 0 0 43,800 (575) 0 (575)
Net loss............................ 0 0 0 0 0 (15,778) (15,778)
--------- --- ---- ------ ----- -------- --------
BALANCE, DECEMBER 31, 1997............ 4,751,292 48 350 94,572 (730) (25,547) (25,879)
Shares issued to employees.......... 32,600 0 102 0 0 0 102
Treasury stock purchased............ 0 0 0 1,000 (40) 0 (40)
Net loss............................ 0 0 0 0 0 (34,920) (34,920)
--------- --- ---- ------ ----- -------- --------
BALANCE, DECEMBER 31, 1998............ 4,783,892 $48 $452 95,572 $(770) $(60,467) $(60,737)
========= === ==== ====== ===== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
74
<PAGE> 77
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization
Orbital Communications Corporation ("OCC") is a majority owned and
controlled subsidiary of Orbital Sciences Corporation ("Orbital") and is
included in Orbital's consolidated financial statements. In 1993, OCC and
Teleglobe Mobile Partners ("Teleglobe Mobile"), a partnership established by
affiliates of Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P.
("ORBCOMM"), a Delaware limited partnership, and two marketing partnerships,
ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P.
("ORBCOMM International"). Each of OCC and Teleglobe Mobile is a 50% general
partner in ORBCOMM, and ORBCOMM is a 98% general partner in each of the two
marketing partnerships. Additionally, OCC is a 2% general partner in ORBCOMM
USA, and Teleglobe Mobile is a 2% general partner in ORBCOMM International.
Directly and indirectly, OCC currently holds and controls 51% and 49% of ORBCOMM
USA and ORBCOMM International, respectively.
Pursuant to the terms of the relevant partnership agreements: (i) OCC and
Teleglobe Mobile share equal responsibility for the operational and financial
affairs of ORBCOMM; (ii) OCC controls and consolidates the operational and
financial affairs of ORBCOMM USA; and (iii) Teleglobe Mobile controls the
operational and financial affairs of ORBCOMM International. Since OCC is unable
to control, but is able to exercise significant influence over ORBCOMM's and
ORBCOMM International's operating and financial policies, OCC is accounting for
its investments in ORBCOMM and ORBCOMM International using the equity method of
accounting.
The ORBCOMM System Description
ORBCOMM was formed for the design, development, construction, integration,
testing and operation of the ORBCOMM low-Earth orbit satellite communications
system (the "ORBCOMM System"). The ORBCOMM System comprises three operational
segments: (i) a space segment consisting of a constellation of 28 LEO
satellites; (ii) a ground and control segment consisting of a network control
center which serves as the global control for the satellites' gateway Earth
stations which send signals to and receive signals from the satellites, and
(iii) a subscriber segment consisting of gateway control centers which serve as
message switching systems that process the message traffic. ORBCOMM USA has been
granted the exclusive right to market, sell, lease and franchise the ORBCOMM
System output capacity in the U.S. and the exclusive use of the ORBCOMM System
assets in the U.S.
The System Charge
In consideration for the construction and financing of the ORBCOMM System
assets by ORBCOMM, OCC is obligated to pay ORBCOMM a system charge equal to a
contracted percentage of ORBCOMM USA's total service revenues (the "Output
Capacity Charge") minus a percentage of aggregate system service revenues,
defined as the total of ORBCOMM USA and ORBCOMM International total system
service revenues. If the Output Capacity Charge is less than 1.15% of the
aggregate system service revenues as described above, OCC is not required to pay
any portion of the system charge to ORBCOMM.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
the entities that become international licensees.
75
<PAGE> 78
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preparation of Consolidated Financial Statements
The preparation of consolidated 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
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates. Certain
reclassifications have been made to the 1997 and 1996 consolidated financial
statements to conform to the 1998 consolidated financial statement presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of OCC and
ORBCOMM USA. All material transactions and accounts between consolidated
entities have been eliminated.
Revenue Recognition
ORBCOMM USA provides subscriber communicator hardware to commercial
customers. Revenues are recognized when products are shipped or when customers
have accepted the products, depending on contractual terms. Service revenues are
recognized when rendered.
Income Taxes
OCC is included in Orbital's consolidated Federal income tax returns. OCC
determines its provision for income taxes as if it were filing on a separate
return basis. OCC recognizes income taxes using the asset and liability method.
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. 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.
Cash and Cash Equivalents
OCC considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investments in Affiliates
OCC uses the equity method of accounting for its investments in and equity
in earnings (losses) of affiliates in which OCC has the ability to significantly
influence, but not control such affiliate's operations. In accordance with the
equity method of accounting, OCC's carrying amount of such investments is
initially recorded at cost and is increased to reflect its share of the
affiliates' income and is reduced to reflect its share of the affiliates'
losses. OCC's investments are also increased to reflect contributions to, and
decreased to reflect distributions from, each affiliate. Any excess of the
amount of OCC's investment and the amount of OCC's underlying equity in each
affiliate's net assets is amortized over a period of twenty years.
OCC's policy is to review its long-lived assets, including investments in
affiliates, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. OCC recognizes an
impairment loss when the sum of expected future cash flows is less than the
carrying amount of the asset.
76
<PAGE> 79
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Fair Value of Financial Instruments
The carrying value of OCC's current assets and current liabilities
approximate fair value since all such instruments are short-term in nature.
Stock Based Compensation
OCC accounts for stock-based compensation in accordance with Statement of
Financial Accounting Standards 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which requires companies to (i) recognize as expense the fair
value of all stock-based awards on the date of grant, or (ii) continue to apply
the provisions of Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25") and provide pro forma net income (loss)
data for employee stock option grants as if the fair-value-based method defined
in SFAS 123 had been applied. OCC has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS
123.
(3) INVESTMENTS IN AFFILIATES
At December 31, 1998 and 1997, OCC had approximately $56,111,000 and
$54,663,000, respectively in investments in affiliates relating to ORBCOMM. At
December 31, 1998 and 1997, ORBCOMM had $346,634,000 and $316,969,000 in total
assets, $241,844,000 and $210,551,000 in total liabilities and $104,790,000 and
$106,418,000 of total partners' capital, respectively. The difference between
OCC's investment in ORBCOMM and the amount of OCC's underlying equity in ORBCOMM
is primarily due to ORBCOMM accounting for its interests in ORBCOMM USA using
the equity method of accounting, while OCC consolidates its interests in ORBCOMM
USA. ORBCOMM recorded $1,262,000 and $527,000 in revenues and $69,628,000 and
$31,436,000 in net losses for the years ended December 31, 1998 and 1997,
respectively. Based on its current assessment of the overall business prospects
of the ORBCOMM partnerships and the ORBCOMM System, OCC currently believes its
investments in ORBCOMM and ORBCOMM International are fully recoverable. If in
the future, the ORBCOMM business is not successful, OCC may be required to
expense part or all of its investments.
(4) RELATED PARTY TRANSACTIONS
OCC obtains virtually all of its funding for its operations and for its
capital investments in ORBCOMM from Orbital via a non-interest bearing
intercompany borrowing arrangement. As of December 31, 1998 and 1997, OCC owed
Orbital $110,287,000 and $75,513,000, respectively, none of which is currently
payable. As of December 31, 1998 and 1997 OCC owed ORBCOMM $48,000 and $12,000,
respectively.
ORBCOMM USA currently obtains all of its funding from ORBCOMM via a
non-interest bearing intercompany borrowing arrangement. As of December 31, 1998
and 1997, ORBCOMM USA owed ORBCOMM $13,342,000 and $8,635,000, respectively,
none of which is currently payable.
(5) INCOME TAXES
OCC had no current or deferred provision for income taxes for the years
ended December 31, 1998, 1997, and 1996.
77
<PAGE> 80
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES -- (CONTINUED)
The differences between the actual taxes and taxes computed at the U.S.
Federal income tax rate of 35% are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory rate............................ (35%) (34%) (34%)
Change in valuation allowance.......................... 35% 34% 34%
---- ---- ----
Effective rate......................................... 0% 0% 0%
==== ==== ====
</TABLE>
The tax effects of significant temporary differences at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS)
-------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforward and other............. $ 35,994 $ 12,127
Valuation allowance................................... (21,283) (8,119)
-------- --------
Tax assets net................................ 14,711 4,008
Deferred Tax Liabilities:
Book/Tax difference attributable to partnership
items.............................................. (14,711) (4,008)
-------- --------
Net deferred tax assets....................... $ 0 $ 0
======== ========
</TABLE>
OCC provides a valuation allowance against its net deferred tax assets
given the trend of taxable losses in prior years.
(6) COMMITMENTS AND CONTINGENCIES
In August 1996, ORBCOMM and ORBCOMM Global Capital Corp. issued
$170,000,000 senior unsecured notes due in 2004 (the "Notes") to institutional
investors. The Notes bear interest at a fixed rate of 14% and provide for
noteholder participation in future ORBCOMM service revenues. The Notes are fully
and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe
Mobile, ORBCOMM USA and ORBCOMM International. The guarantees are non-recourse
to OCC's shareholders (including Orbital) and Teleglobe Mobile's partners
(including Teleglobe and Technology Resources Industries Bhd.).
(7) STOCK OPTION PLAN
OCC adopted a stock option plan in 1992 (the "OCC Plan"). The OCC Plan
provides for grants of incentive and non-qualified stock options to purchase OCC
common stock to officers and employees of OCC, ORBCOMM, ORBCOMM USA, ORBCOMM
International and Orbital. Under the terms of the ORBCOMM Plan, incentive stock
options may not be granted at less than 100% of the fair market value at the
date of grant and non-qualified options may not be granted at less than 85% of
the fair market value of OCC common stock at the date of grant as determined by
a committee consisting of two OCC Board members and two members appointed by
Teleglobe Mobile. The options vest at a rate set forth by the Board of Directors
in each individual option agreement, generally in one-fourth increments over a
four-year period.
Certain provisions of the OCC Plan require OCC to repurchase, with cash or
promissory notes, the common stock acquired pursuant to the options. The total
amount of cash for stock repurchases and promissory note repayments is
restricted to $1,000,000 per year, in accordance with the terms of the Notes
78
<PAGE> 81
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK OPTION PLAN -- (CONTINUED)
(See Note 6). During 1998 and 1997, OCC repurchased 1,000 and 43,800 common
shares by paying $41,000 and $829,000 in cash, respectively. Promissory notes
totaling $331,000 were also issued in 1997. The 1997 promissory notes were
repaid in 1998. These repurchases were funded by (i) reimbursements from ORBCOMM
pursuant to the terms of the Restated Agreement of Limited Partnership of
ORBCOMM Global, L.P. and (ii) contributions from Orbital.
The following two tables summarize information regarding options under the
OCC Plan for the last three years:
<TABLE>
<CAPTION>
WEIGHTED OUTSTANDING
NUMBER OPTION PRICE AVERAGE AND
OF SHARES PER SHARE EXERCISE PRICE EXERCISABLE
--------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
OUTSTANDING AT DECEMBER 31,
1995............................ 545,900 $ 1.50 -- 14.00 $ 5.56 411,086
Granted......................... 154,500 $17.00 -- $25.00 $20.50
Exercised....................... (67,270) $ 1.50 -- $13.00 $ 2.43
Canceled or Expired............. (34,300) $ 1.50 -- $17.00 $13.81
--------- --------------- ------
OUTSTANDING AT DECEMBER 31,
1996............................ 598,830 $ 1.50 -- $25.00 $ 9.40 393,903
Granted......................... 284,500 $26.50 $26.50
Exercised....................... (20,900) $ 1.50 -- $25.00 $ 6.68
Canceled or Expired............. (112,600) $ 1.50 -- $25.00 $14.86
--------- --------------- ------
OUTSTANDING AT DECEMBER 31,
1997............................ 749,830 $ 1.50 -- $26.50 $15.22 415,804
Granted......................... 305,300 $26.50 -- $39.75 $32.37
Exercised....................... (32,600) $ 1.50 -- $13.00 $ 3.15
Canceled or Expired............. (17,700) $ 1.50 -- $26.50 $23.94
--------- --------------- ------
OUTSTANDING AT DECEMBER 31,
1998............................ 1,004,830 $ 1.50 -- $39.75 $20.40 520,864
========= =============== ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT DEC. 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1998 EXERCISE PRICE
- - - --------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.50 -- $13.00.. 345,530 4.10 $ 4.96 345,530 $ 4.96
$17.00 -- $25.00.. 77,500 7.19 $20.35 43,750 $19.97
$26.50 -- $39.75.. 581,800 8.83 $29.58 131,584 $26.50
- - - --------------- --------- ---- ------ ------- ------
$ 1.50 -- $39.75.. 1,004,830 7.08 $20.40 520,864 $11.66
=============== ========= ==== ====== ======= ======
</TABLE>
(8) STOCK BASED COMPENSATION
OCC uses the Black-Scholes option-pricing model to determine the pro forma
impact of stock option grants under SFAS 123 on OCC's net loss. The model
utilizes certain information, such as the interest rate on a risk-free security
maturing generally at the same time as the option being valued, and requires
certain assumptions, such as the expected amount of time an option will be
outstanding until it is exercised or it expires, to calculate the
weighted-average fair value per share of stock options granted. This information
and the assumptions used in the option pricing model for 1998, 1997 and 1996
respectively, are as follows: volatility 30%; dividend yield, zero percent;
average expected life, 4.5 years; risk free interest rate, 5.4%, 6.1% and 5.6%;
additional shares available, 56,925, 48,878 and 20,778; and weighted-average
exercise price per option grant, $32.37, $26.50 and $20.50.
79
<PAGE> 82
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) STOCK BASED COMPENSATION -- (CONTINUED)
Had the company determined compensation cost based on the fair value at the
grant date for its stock options in accordance with the fair value method
prescribed by SFAS 123, OCC's net loss would have been $36,666,000, $16,460,000
and $10,200,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(9) SUBSEQUENT EVENTS
For the period from January 1, 1999 through March 15, 1999, OCC paid
$18,450,000 in additional capital contributions to ORBCOMM.
80
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
To the Partners of
Teleglobe Mobile Partners
We have audited the consolidated balance sheets of Teleglobe Mobile
Partners (the "Partnership") (a development stage enterprise) as of December 31,
1998 and 1997, and the consolidated statements of operations and comprehensive
loss, partners' capital and cash flows for each of the years in the three-year
period ended December 31, 1998, and for the period from July 21, 1993 (date of
inception), through December 31, 1998. These consolidated financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on the financial statements based on our audits. We did not
audit the financial statements of ORBCOMM International Partners, L.P., a 51
percent subsidiary, the statements of which reflect total assets constituting 27
percent and 24 percent at December 31, 1998 and 1997, respectively, of the
related consolidated totals. Those statements were audited by other auditors,
whose reports thereon have been furnished to us and our opinion insofar as it
relates to the amounts included for ORBCOMM International Partners, L.P., is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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, based on our audit and the reports of the other auditors,
these consolidated financial statements referred to above, present fairly, in
all material respects, the financial position of the Partnership (a development
stage enterprise) as at December 31, 1998 and 1997, and the results of its
operations, partners' capital and cash flows for each of the years in the
three-year period ended December 31, 1998, and for the period from July 21, 1993
(date of inception), through December 31, 1998, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Vienna, Virginia
March 5, 1999
81
<PAGE> 84
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 11 $ 1,439
Accounts receivable....................................... 1,023 40
Deferred and prepaid contract costs....................... 20,879 19,580
------- -------
Total Current Assets................................... 21,913 21,059
Investments in affiliates................................... 58,467 59,645
------- -------
TOTAL ASSETS...................................... $80,380 $80,704
======= =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities.................. $ 651 $ 1,565
Deferred revenue.......................................... 20,094 13,270
------- -------
Total Current Liabilities.............................. 20,745 14,835
Amount due to affiliates.................................. 7,389 9,990
------- -------
Total Liabilities...................................... 28,134 24,825
Non-controlling interest in net assets of ORBCOMM
International Partners, L.P. ............................. (2,994) (2,391)
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile, L.P..................................... 54,688 40,381
TR (U.S.A.) Ltd........................................... 0 17,481
Teleglobe Mobile Investment Inc........................... 552 408
------- -------
Total Partners' Capital................................ 55,240 58,270
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $80,380 $80,704
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
82
<PAGE> 85
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
----------------------------- DECEMBER 31,
1998 1997 1996 1998
-------- -------- ------- -------------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales............................... $ 10,943 $ 56 $ 8 $ 11,007
EXPENSES:
Cost of product sales....................... 10,943 104 6 11,053
Marketing, administrative and other
expenses................................. 1,408 3,565 1,967 8,621
-------- -------- ------- --------
Total expenses......................... 12,351 3,669 1,973 19,674
-------- -------- ------- --------
Loss from operations................... (1,408) (3,613) (1,965) (8,667)
OTHER INCOME AND EXPENSES:
Interest income............................. 53 78 905 2,289
Financial charges........................... 0 0 (288) (288)
Equity in net losses of ORBCOMM Global,
L.P. .................................... (34,678) (14,672) (8,975) (58,544)
Non-controlling interest in net losses of
ORBCOMM International Partners, L.P. .... 603 1,568 828 2,999
-------- -------- ------- --------
NET LOSS...................................... (35,430) (16,639) (9,495) (62,211)
OTHER COMPREHENSIVE INCOME:
Share of unrealized holding gains on
investments of ORBCOMM Global, L.P.,
net...................................... 0 0 44 44
Less: Share of reclassification adjustments
for net holding gains on sales of
investments of ORBCOMM Global, L.P.
included in net loss.................. 0 (44) 0 (44)
-------- -------- ------- --------
COMPREHENSIVE LOSS............................ $(35,430) $(16,683) $(9,451) $(62,211)
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
83
<PAGE> 86
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
1998 1997 1996 1998
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(35,430) $(16,639) $ (9,495) $ (62,211)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Equity in net losses of ORBCOMM Global, L.P. ... 34,678 14,672 8,975 58,544
Non-controlling interest in net losses of
ORBCOMM International Partners, L.P. ........ (603) (1,568) (828) (2,999)
Increase in accounts receivable................. (983) (23) (17) (1,023)
Increase in deferred and prepaid contract
costs........................................ (1,299) (15,709) (3,871) (20,879)
Increase (decrease) in accounts payable and
accrued liabilities.......................... (914) 666 628 651
Increase in deferred revenue.................... 6,824 7,123 6,147 20,094
-------- -------- -------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................ 2,273 (11,478) 1,539 (7,823)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates....................... (33,500) 0 (49,780) (118,025)
Decrease (increase) in amount due from an
affilate..................................... 0 1,309 (1,309) 0
-------- -------- -------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................ (33,500) 1,309 (51,089) (118,025)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amount due to
affiliates................................... (2,601) 9,990 0 7,389
Partners' contributions......................... 32,400 0 17,000 118,465
Non-controlling interest in net assets of
ORBCOMM International Partners, L.P. ........ 0 0 0 5
-------- -------- -------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................ 29,799 9,990 17,000 125,859
-------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (1,428) (179) (32,550) 11
CASH AND CASH EQUIVALENTS:
Beginning of period............................. 1,439 1,618 34,168 0
-------- -------- -------- ---------
CASH AND CASH EQUIVALENTS:
End of period................................... $ 11 $ 1,439 $ 1,618 $ 11
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
84
<PAGE> 87
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
TELEGLOBE
TELEGLOBE MOBILE
MOBILE, L.P. INVESTMENT INC.
----------------------------------- --------------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
PARTNERS COMPREHENSIVE PARTNERS COMPREHENSIVE
CAPITAL INCOME TOTAL CAPITAL INCOME TOTAL
-------- ------------- -------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Capital contributions............ $ 9,903 $ 0 $ 9,903 $ 100 $0 $ 100
Net loss......................... (480) 0 (480) (5) 0 (5)
-------- ---- -------- ----- -- -----
PARTNERS' CAPITAL, DECEMBER 31,
1993............................. 9,423 0 9,423 95 0 95
Net loss......................... (449) 0 (449) (4) 0 (4)
-------- ---- -------- ----- -- -----
PARTNERS' CAPITAL, DECEMBER 31,
1994............................. 8,974 0 8,974 91 0 91
Capital contributions............ 27,719 0 27,719 281 0 281
Excess of contributions from a
new partner to the existing
partners....................... 10,587 0 10,587 106 0 106
Net income....................... 134 0 134 1 0 1
Share of financing fees of
ORBCOMM Global, L.P. .......... (703) 0 (703) (7) 0 (7)
-------- ---- -------- ----- -- -----
PARTNERS' CAPITAL, DECEMBER 31,
1995............................. 46,711 0 46,711 472 0 472
Capital contributions............ 9,256 0 9,256 94 0 94
Excess of contributions from a
new partner to the existing
partners....................... 2,525 0 2,525 25 0 25
Net loss......................... (6,580) 0 (6,580) (67) 0 (67)
Share of unrealized holding gains
on investments of ORBCOMM
Global, L.P., net.............. 0 30 30 0 1 1
-------- ---- -------- ----- -- -----
PARTNERS' CAPITAL, DECEMBER 31,
1996............................. 51,912 30 51,942 524 1 525
Net loss......................... (11,531) 0 (11,531) (116) 0 (116)
Share of reclassification
adjustments for net holding
gains on sales of investments
of ORBCOMM Global, L.P.
included in net loss........... 0 (30) (30) 0 (1) (1)
-------- ---- -------- ----- -- -----
PARTNERS' CAPITAL, DECEMBER 31,
1997............................. 40,381 0 40,381 408 0 408
Capital contributions............ 25,896 0 25,896 261 0 261
Excess of contributions from a
new partner to the existing
partners....................... 1,726 0 1,726 17 0 17
Net loss......................... (25,368) 0 (25,368) (256) 0 (256)
Reallocation of TR (U.S.A.) 30%
partnership interest........... 12,053 0 12,053 122 0 122
-------- ---- -------- ----- -- -----
PARTNERS' CAPITAL, DECEMBER 31,
1998............................. $ 54,688 $ 0 $ 54,688 $ 552 $0 $ 552
======== ==== ======== ===== == =====
<CAPTION>
TR (U.S.A.)
LTD.
-----------------------------------
ACCUMULATED
OTHER
PARTNERS COMPREHENSIVE
CAPITAL INCOME TOTAL TOTAL
-------- ------------- -------- -------
<S> <C> <C> <C> <C>
Capital contributions............ $ 0 $ 0 $ 0 $10,003
Net loss......................... 0 0 0 (485)
-------- ---- -------- -------
PARTNERS' CAPITAL, DECEMBER 31,
1993............................. 0 0 0 9,518
Net loss......................... 0 0 0 (453)
-------- ---- -------- -------
PARTNERS' CAPITAL, DECEMBER 31,
1994............................. 0 0 0 9,065
Capital contributions............ 31,062 0 31,062 59,062
Excess of contributions from a
new partner to the existing
partners....................... (10,693) 0 (10,693) 0
Net income....................... 156 0 156 291
Share of financing fees of
ORBCOMM Global, L.P. .......... (304) 0 (304) (1,014)
-------- ---- -------- -------
PARTNERS' CAPITAL, DECEMBER 31,
1995............................. 20,221 0 20,221 67,404
Capital contributions............ 7,650 0 7,650 17,000
Excess of contributions from a
new partner to the existing
partners....................... (2,550) 0 (2,550) 0
Net loss......................... (2,848) 0 (2,848) (9,495)
Share of unrealized holding gains
on investments of ORBCOMM
Global, L.P., net.............. 0 13 13 44
-------- ---- -------- -------
PARTNERS' CAPITAL, DECEMBER 31,
1996............................. 22,473 13 22,486 74,953
Net loss......................... (4,992) 0 (4,992) (16,639)
Share of reclassification
adjustments for net holding
gains on sales of investments
of ORBCOMM Global, L.P.
included in net loss........... 0 (13) (13) (44)
-------- ---- -------- -------
PARTNERS' CAPITAL, DECEMBER 31,
1997............................. 17,481 0 17,481 58,270
Capital contributions............ 6,243 0 6,243 32,400
Excess of contributions from a
new partner to the existing
partners....................... (1,743) 0 (1,743) 0
Net loss......................... (9,806) 0 (9,806) (35,430)
Reallocation of TR (U.S.A.) 30%
partnership interest........... (12,175) 0 (12,175) 0
-------- ---- -------- -------
PARTNERS' CAPITAL, DECEMBER 31,
1998............................. $ 0 $ 0 $ 0 $55,240
======== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
85
<PAGE> 88
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization
Teleglobe Mobile Partners, a Delaware general partnership (the
"Partnership"), is a majority-owned indirect subsidiary of Teleglobe Inc.
("Teleglobe") and is included in Teleglobe's consolidated financial statements.
The Partnership was originally formed July 21, 1993, in accordance with the
provisions of the Delaware Uniform Partnership Law. As of June 29, 1994, the
original Partnership was amended and restated by admitting TR (U.S.A.) as a new
partner to the Partnership. On December 1, 1998, TR (U.S.A.) Ltd. sold its
entire partnership interest in the Partnership to Teleglobe Mobile Investment
Inc., a Delaware corporation and Teleglobe Mobile L.P., a Delaware limited
partnership (collectively, the "Partners"). Consequently, as of December 1,
1998, the partners' capital attributable to TR (U.S.A.) Ltd. was reallocated to
the Partners and the Partnership agreement was amended and restated. The
Partnership's term commenced on June 29, 1994 and shall terminate on December
31, 2015.
In 1993, the Partnership and Orbital Communications Corporation ("OCC"), a
majority-owned subsidiary of Orbital Sciences Corporation ("Orbital"), formed
ORBCOMM Global, L.P. ("ORBCOMM" or the "Company"), a Delaware limited
partnership.
The Partnership and OCC also formed two marketing partnerships, ORBCOMM
USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM
International"), to market services using the ORBCOMM low-Earth orbit satellite
communications system (the "ORBCOMM System") in the United States and
internationally, respectively. Each of the Partnership and OCC is a 50% general
partner in ORBCOMM, and ORBCOMM is a 98% general partner in each of the two
marketing partnerships. Additionally, the Partnership is a 2% direct general
partner in ORBCOMM International, and OCC is a 2% direct general partner in
ORBCOMM USA. Directly and indirectly, the Partnership currently holds 51% and
49% of ORBCOMM International and ORBCOMM USA, respectively.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space assets currently consist
of a constellation of 28 on-orbit satellites. The ground and control assets
consist of gateways strategically located throughout the world and the
facilities to monitor and manage all network elements to ensure continuous,
consistent operations in the provision of quality service. In addition, ORBCOMM
operates a network control center, which is designed to support the full
constellation of ORBCOMM System satellites. The subscriber assets consist of
various models of subscriber units, some of which are intended for general use,
while others are designed to support specific applications.
The System Charge
The Partnership is obligated to pay quarterly to ORBCOMM a system charge in
consideration of ORBCOMM's grant to the Partnership of the right to market,
sell, lease and franchise all ORBCOMM System output capacity outside the United
States. Such system charge is calculated as 23% of ORBCOMM International's total
service revenues for such quarter (the "International Output Capacity Charge")
minus 1.15% of aggregate system service revenues, defined as the total of
ORBCOMM International's and ORBCOMM USA's total system service revenues. If the
International Output Capacity Charge is less than 1.15% of aggregate system
service revenues as described above, then the Partnership is not required to pay
and does not owe any portion of the system charge to ORBCOMM. No such charge has
been incurred.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the
86
<PAGE> 89
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) NATURE OF OPERATIONS -- (CONTINUED)
ORBCOMM System by the FCC. Similar licenses are required from foreign regulatory
authorities to permit ORBCOMM System services to be offered outside the United
States. Primary responsibility for obtaining licenses outside the United States
will reside with entities who become international licensees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company and the Partnership expect to emerge from their development
stage by the first half of 1999. The accompanying consolidated financial
statements have been prepared on the accrual basis of accounting in conformity
with generally accepted accounting principles in the United States. They include
the accounts of the Partnership and its subsidiary, ORBCOMM International. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated 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 as
well as the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Deferred and Prepaid Contract Costs
Deferred and prepaid contract costs consist primarily of work-in-process
for construction of gateway Earth stations for sale to international licensees.
Investments in Affiliates
The Partnership uses the equity method of accounting for its investments in
and earnings of affiliates in which the Partnership has the ability to exercise
significant influence, but not control, such affiliates' operations. In
accordance with the equity method of accounting, the Partnership carrying amount
of an investment in affiliates is initially recorded at cost and is increased to
reflect its share of the affiliates' income and is reduced to reflect its share
of the affiliates' losses. The Partnership's investment is also increased to
reflect contributions to, and decreased to reflect distributions received from,
affiliates.
Goodwill, consisting of the excess of the cost of the Partnership's
investment over its equity in the underlying net assets of ORBCOMM at the
acquisition date, is included in "Investments in Affiliates". Goodwill is
amortized on a straight-line basis, over the estimated economic useful life of
the ORBCOMM System.
Each year, the Partnership reviews the underlying value of its investments
by comparing their carrying amount to their net recoverable amount. The
determination of the net recoverable amount consists of evaluating forecasted
income and cash flows. Any permanent impairment of such value would be written
off to expense when that determination is made.
Revenue Recognition
Revenues under the gateway procurement contracts with international
licensees or the sale of subscriber communicator hardware are generally
recognized when contracts are completed, products are shipped or when
87
<PAGE> 90
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
customers have accepted the products or services, depending on contractual
terms. License fees from service license or similar agreements are recognized
ratably over the term of the agreements.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within the accompanying consolidated financial statements.
Fair Value of Financial Instruments
The carrying value of the Partnership's cash and cash equivalents,
receivables and accounts payable approximates fair value since all such
instruments are short-term in nature.
Segment Information
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segment of an Enterprise and Related Information",
establishes standards for reporting financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Partnership's operations for 1998 are
a single segment, and further segmentation under SFAS No. 131 is not required.
Comprehensive Income
As of January 1, 1998, the Partnership adopted SFAS No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive loss consists of net loss and net unrealized
gains on securities and is presented in the consolidated statements of
operations and comprehensive loss. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Partnership's financial position or results of operations. Prior years'
consolidated financial statements have been reclassified to conform with the
requirements of SFAS No. 130.
(3) INVESTMENTS IN AFFILIATES
As of December 31, 1998, goodwill, net of accumulated amortization in the
amount of $1,053,000 ($585,000 as of December 31, 1997), included in
"Investments in Affiliates" amounts to $3,572,000 ($4,040,000 as of December 31,
1997).
Pursuant to the terms of the relevant partnership agreements: (i) the
Partnership and OCC share equal responsibility for the operational and financial
affairs of ORBCOMM; (ii) the Partnership controls the operational and financial
affairs of ORBCOMM International; and (iii) OCC controls the operational and
financial affairs of ORBCOMM USA. Since the Partnership is unable to control,
but is able to exercise significant influence over ORBCOMM's and ORBCOMM USA's
operating and financial policies, the Partnership is accounting for its
investments in ORBCOMM and ORBCOMM USA using the equity method of accounting.
88
<PAGE> 91
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS IN AFFILIATES -- (CONTINUED)
The following tables summarize the information concerning the income,
assets and liabilities of ORBCOMM, including ORBCOMM's equity interests in
ORBCOMM USA and ORBCOMM International.
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
(IN THOUSANDS) DECEMBER 31,
------------------------------ 1998
1998 1997 1996 (IN THOUSANDS)
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................................. $ 1,262 $ 527 $ 420 $ 3,109
Net loss................................. (69,628) (31,436) (19,480) (120,498)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS)
--------------------
1997 1996
-------- --------
<S> <C> <C>
BALANCE SHEET DATA
Total Assets.............................................. $346,634 $316,969
Total Liabilities......................................... 241,844 210,551
Partners' capital
Teleglobe Mobile Partners.............................. 56,520 57,834
Orbital Communications Corporation..................... 48,270 48,584
</TABLE>
Based on its current assessment of the overall business prospects of
ORBCOMM's marketing partnerships and the ORBCOMM System, the Partnership
currently believes its investments in ORBCOMM and ORBCOMM USA are fully
recoverable. If in the future the ORBCOMM business is not successful, the
Partnership may be required to expense part or all of its investments.
(4) RELATED PARTY TRANSACTIONS
As of December 31, 1998 and 1997, ORBCOMM International had a payable of
$7,071,000 and $9,990,000, respectively, to ORBCOMM for amounts advanced to
support ORBCOMM International's efforts to establish commercial markets outside
the United States. ORBCOMM International is currently in the development stage,
and still obtains funds to support operations through non-interest bearing
advances from ORBCOMM.
As of December 31, 1998, ORBCOMM International had a payable of $318,000 to
ORBCOMM USA (none as of December 31, 1997).
As of December 31, 1997, ORBCOMM International had a payable of $87,000 to
Teleglobe Canada Inc., an affiliate of the Partnership, for a contracted
employee to provide international marketing services (none as of December 31,
1998).
ORBCOMM International purchased $251,000, $104,000 and $6,000 of product
from ORBCOMM for the years ended December 31, 1998, 1997 and 1996, respectively
(none in 1995).
As of December 31, 1997, the Partnership had a payable of $200,000 to
ORBCOMM Canada Inc., an affiliate of the Partnership, for an employee to provide
management services to ORBCOMM on behalf of the Partnership (none as of December
31, 1998).
89
<PAGE> 92
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) RELATED PARTY TRANSACTIONS -- (CONTINUED)
In 1996, the Partnership entered into an administrative services agreement
with Teleglobe. Under this agreement, Teleglobe provides management services to
the Partnership. Teleglobe invoices the Partnership for those services on a
monthly basis. As of December 31, 1998 and 1997, the Partnership owed Teleglobe
$74,000 and $141,000, respectively.
(5) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by the Partnership, OCC, ORBCOMM USA and ORBCOMM International,
except that the guarantees are non-recourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the net
proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes in 1997 and 1998.
Construction of Gateways
In October 1996, ORBCOMM International entered into agreements with certain
manufacturers for the construction of twenty gateway Earth stations around the
globe. During 1998, installation and final acceptance of gateways in South
Korea, Japan and Korea occurred. Additionally, as of December 31, 1998 and 1997,
ORBCOMM International had $20,879,000 and $19,580,000, respectively, of deferred
and prepaid contract costs of which $12,718,000 and $11,016,000, respectively,
represent advance payments to those manufacturers. Total commitments under these
manufacturing agreements approximate $22,000,000. Included in deferred and
prepaid contract costs is the portion of engineering direct labor costs that
relates to the construction of gateways. As of December 31, 1998 and 1997,
$1,114,000 and $1,609,000, respectively, of such costs had been included in
deferred and prepaid contract costs.
(6) SERVICE LICENSE OR SIMILAR AGREEMENTS
As of December 31, 1998, ORBCOMM International had signed 12 service
license or similar agreements ("SLAs") with international licensees, eight of
which had associated gateway procurement contracts and software license
agreements. The SLAs authorize the international licensees to use the ORBCOMM
System to provide two-way data and messaging communications services. As of
December 31, 1998 and 1997, $30,868,000 and $13,270,000 had been received under
these agreements and the associated gateway procurement agreements, of which
$20,094,000 and $13,270,000 were recorded as deferred revenue. ORBCOMM
International is obligated to construct and deliver eight gateways to certain
international licensees under certain of these agreements (see note 5).
(7) SUBSEQUENT EVENTS (UNAUDITED)
From January 1, 1999 to March 31, 1999, the Partnership and OCC paid to the
Company an additional $21,950,000 and $20,950,000 in capital contributions,
respectively.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ORBCOMM Corporation:
We have audited the accompanying balance sheet of ORBCOMM Corporation as of
December 31, 1998. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of ORBCOMM Corporation as of December
31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Washington, DC
March 30, 1999
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ORBCOMM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Cash........................................................ $100
----
TOTAL ASSETS...................................... $100
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities................................................. $ 0
Stockholder's Equity:
Common Stock, par value $0.01; 150,000,000 shares
authorized;
100 shares issued and outstanding...................... 1
Additional paid-in capital................................ 99
Retained earnings......................................... 0
----
Total Stockholder's Equity............................. 100
----
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $100
====
</TABLE>
The accompanying note is an integral part of this financial statement.
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<PAGE> 95
ORBCOMM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTE TO FINANCIAL STATEMENT
(1) ORGANIZATION
ORBCOMM Corporation was incorporated under the laws of the State of
Delaware on March 23, 1998. ORBCOMM Corporation was formed for the sole purpose
of investing in and acting as a general partner of ORBCOMM Global, L.P. (the
"Company"), a Delaware limited partnership. ORBCOMM Corporation is authorized to
issue 150,000,000 shares of common stock of $.01 par value, of which 100 shares
are issued and outstanding and held by the Company.
On July 1, 1998, a registration statement (the "Registration Statement")
filed by ORBCOMM Corporation with the Securities and Exchange Commission (the
"Commission") for the registration of 6,900,000 shares of common stock of
ORBCOMM Corporation was declared effective by the Commission. No shares of
common stock were sold by ORBCOMM Corporation under this Registration Statement.
On October 26, 1998, the Commission declared effective a post-effective
amendment to deregister 6,900,000 shares of ORBCOMM Corporation's common stock.
Effective March 23, 1999, ORBCOMM Corporation was merged with and into the
Company.
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<PAGE> 96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS
The Partnership Agreement provides that the management of ORBCOMM is the
exclusive responsibility of the General Partners. Our officers are nominated by
the President of ORBCOMM and elected by the General Partners and exercise such
authority as they are granted by the General Partners.
DIRECTORS, EXECUTIVE OFFICERS AND PARTNER REPRESENTATIVES
(a) ORBCOMM.
Executive Officers. The following are our executive officers as of March
31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - -------------------- --- ----------------------------------------------
<S> <C> <C>
Scott L. Webster 46 Chairman and Chief Executive Officer
Vice Chairman-Strategic Relationships and Vice
William J. Meder 56 President, Strategic Relations
Robert F. Latham 56 President and Chief Operating Officer
Senior Vice President, Product Management and
Abdul H. Rana 48 Development
Senior Vice President, International Market
Andre Halley 49 Development and Managing Director
Senior Vice President, General Counsel and
Mary Ellen Seravalli 40 Secretary
</TABLE>
Scott L. Webster has been our Chairman and Chief Executive Officer since
February 1998. Mr. Webster has been the President of OCC since 1997. Mr. Webster
is a co-founder of Orbital, and served in various consulting capacities with
Orbital from 1993 to 1996. He served as President of Orbital's Space Data
Division from 1990 to 1993 and was Executive Vice President of that organization
from 1989 to 1990. Mr. Webster served as Orbital's Vice President and Senior
Vice President of Marketing from Orbital's inception in 1982 until 1989.
Previously, he held technical and management positions at Advanced Technology
Laboratories and Litton Industries.
William J. Meder has been our Vice Chairman-Strategic Relationships and
Vice President, Strategic Relations since February 1998, and prior to that was
our Vice President, Special Projects from July 1997 to January 1998. Mr. Meder
also has been President of ORBCOMM Canada Inc., a majority-owned subsidiary of
Teleglobe, since August 1994 and is also a part-owner of ORBCOMM Canada Inc.
From 1993 to 1994, Mr. Meder was a business consultant and, from 1990 to 1993,
Chief Operating Officer of Henry Birks and Sons Ltd. From 1982 to 1989, Mr.
Meder was the Chief Executive Officer of Comp-u-Card Canada, Inc. and, from 1978
to 1982, Chief Executive Officer of Imperial Manufacturing Inc. Prior to that,
Mr. Meder spent 13 years with IBM in various senior management positions. Mr.
Meder was formerly a chairman of Syscor, an information services company serving
hospitals in the Montreal area, and President of the Young Presidents
Association.
Robert F. Latham has been our President and Chief Operating Officer since
February 1998 and was our Executive Vice President and Chief Operating Officer
from May 1997 to February 1998. From April 1997 to May 1997, we employed Mr.
Latham as an independent consultant. From February 1996 to February 1997, Mr.
Latham was Managing Director, Telecom for Bell Canada International Management
Ltd., UK ("BCIM"). From April 1996 until November 1996, Mr. Latham was secunded
to Mercury Communications, Limited in London, England as the Managing Director,
Commercial Services. Prior to joining BCIM,
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<PAGE> 97
Mr. Latham spent 28 years with Bell Canada, most recently as Group Vice
President ("GVP"), Gateways and Public Telephony. From July 1992 to February
1995, Mr. Latham held the positions of GVP, Business Sales and Services, and
GVP, Signature Service, with responsibility for Bell Canada's business accounts.
From 1986 to 1991, Mr. Latham led the development of Bell Cellular as President
and Chief Executive Officer. Prior to 1986, Mr. Latham held a variety of
positions with Bell Canada, including in the areas of Business Development,
Customer Services, Regulatory Matters, Cost and Performance and Forecasting and
Planning.
Abdul H. Rana has been our Senior Vice President, Product Management and
Development since December 1997. From January 1997 to December 1997, Dr. Rana
was Vice President of Engineering and Technology Services for GE LogistiCom,
where he provided technical leadership for development and launch of a low-cost
mobile satellite communications product for asset management. From 1984 to 1996,
Dr. Rana held several positions at GTE in the areas of product development and
program management, where, among other achievements, he managed the launch of
several successful commercial data and video products, was three times the
recipient of the GTE Leslie Warner Award, GTE's highest technical honor, and
twice the recipient of President's Awards for personal, technical and
professional achievements. Prior to 1984, Dr. Rana held technical and management
positions at COMSAT Labs and ENSCO Incorporated in the areas of satellite
communications and signal processing. Dr. Rana received his Ph.D. in engineering
in 1977 and has 20 years of engineering and product development experience in
telecommunications, satellite and cellular communications and wireless data
networks. Dr. Rana has published over 30 articles in professional journals and
currently is a member of the Institute of Electrical and Electronics Engineers
Inc.
Andre Halley has been our Senior Vice President, International Market
Development and Managing Director since April 1998. From April 1996 to April
1998, Mr. Halley was employed by both Teleglobe Canada Inc. ("Teleglobe Canada")
and Teleglobe GmbH and was secunded to ORBCOMM International to provide it with
management consulting services for international market development projects as
Managing Director. From 1994 to 1996, Mr. Halley was Vice President, Europe,
Middle East and Africa for Teleglobe Canada. From 1992 to 1994, Mr. Halley was
President of Optinet Communications, a value-added carrier involved in the
design, engineering and operation of multimedia networks and from 1990 to 1992,
he was President of Cellular Canada, a national supplier of cellular equipment
and related services. From 1986 to 1989, Mr. Halley was Vice President,
Operations, Eastern Region for Bell Cellular, where he was responsible for,
among other things, the expansion of Bell Cellular's client base and deployment
of its system infrastructure. From 1988 to 1989, he was also President of
Cellnet Canada, a Canadian association of cellular operators. Prior to 1987, Mr.
Halley held various positions with Bell Canada, including Division Sales
Manager, National Accounts, Sales and Marketing and Account Representative.
Mary Ellen Seravalli has been our Senior Vice President, General Counsel
and Secretary since January 1997, and from January 1996 to December 1996 she was
our Vice President and General Counsel. From 1991 to 1995, Ms. Seravalli was
Assistant General Counsel of Orbital and from January 1995 to December 1995 she
was also a Vice President of Orbital. Prior to 1991, Ms. Seravalli was an
associate in the law firm of Jones, Day, Reavis & Pogue, where she worked on
mergers and acquisitions, with an emphasis on the telecommunications industry,
and where she gained significant experience representing both lenders and
borrowers in connection with the establishment of various types of credit
facilities.
PARTNER REPRESENTATION
Pursuant to our partnership agreement and the partnership agreements of
each of ORBCOMM USA and ORBCOMM International, each general partner is
represented at the meetings of the general partners by up to three authorized
representatives. Each general partner may by notice to the other change its
designated authorized representatives. Set forth below is information as of
March 31, 1999 regarding each of the general partners' representatives.
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<PAGE> 98
OCC:
David W. Thompson, 45, is a founder of Orbital and has been Chairman of the
Board, President and Chief Executive Officer of Orbital since 1982. From 1981 to
1982, Mr. Thompson was Special Assistant to the President at Hughes Aircraft
Company's Missile Systems Group. From 1977 to 1979, Mr. Thompson was employed by
NASA at the Marshall Space Flight Center as a project manager and engineer.
Prior to that, he worked on the Space Shuttle's autopilot design at the Charles
Stark Draper Laboratory.
Jeffrey V. Pirone, 38, has been Executive Vice President and Chief
Financial Officer of Orbital since January 1998. Prior to January 1998, Mr.
Pirone held a number of positions at Orbital, including Senior Vice President
and Chief Financial Officer and Vice President and Controller. Mr. Pirone has
also been the Vice President and Chief Financial Officer of OCC since June 1996.
Prior to joining Orbital in 1991, Mr. Pirone was a Senior Manager at KPMG LLP.
Scott L. Webster is a representative of OCC.
Teleglobe Mobile:
Claude Seguin, 49, is Chairman of the Board and Chief Executive Officer of
Teleglobe Mobile Investment Inc., the managing partner of Teleglobe Mobile. He
is also the Executive Vice-President, Finance and Chief Financial Officer of
Teleglobe. Mr. Seguin served the Quebec Finance Ministry as Deputy Minister from
1987 to 1992. Mr. Seguin sits on the boards of Telesystem International Wireless
Corporation, Levesque Beaubien Geoffrion Inc. and La Societe generale de
financement du Quebec. He is also a former governor of the Montreal Exchange and
director of Caisse de depot et placement du Quebec.
William J. Meder is a representative of Teleglobe Mobile.
Marc J.E. Leroux, 48, has been President and Chief Operating Officer of
Teleglobe World Mobility, a division of Teleglobe, since 1994. From 1992 to
December 1998, Mr. Leroux also served as Vice President, Technology of
Teleglobe. Prior to 1992, Mr. Leroux was Senior Manager, Services Development
with Bell-Northern Research Ltd., a telecommunications research and development
company.
(b) Capital.
Executive Officers and Directors. The following are Capital's executive
officers and directors as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - -------------------- --- ----------------------
<S> <C> <C>
Scott L. Webster 46 President and Director
Mary Ellen Seravalli 40 Secretary
</TABLE>
Scott L. Webster has been President and Director of Capital since July
1996.
Mary Ellen Seravalli has been Vice President and Secretary of Capital since
July 1996.
(c) ORBCOMM Corporation.
Executive Officers and Directors. The following are ORBCOMM Corporation's
executive officers and directors as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - ----------------- --- ----------------------------------------------
<S> <C> <C>
President, Chief Executive Officer and
Scott L. Webster 46 Director
Mary Ellen
Seravalli 40 Secretary
David W. Thompson 45 Director
Jeffrey V. Pirone 38 Director
Claude Seguin 49 Director
William J. Meder 56 Director
Marc J.E. Leroux 48 Director
</TABLE>
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<PAGE> 99
Scott L. Webster has been President, Chief Executive Officer and Director
of ORBCOMM Corporation since March 1998.
Mary Ellen Seravalli has been Secretary of ORBCOMM Corporation since March
1998.
David W. Thompson, Jeffrey V. Pirone, Claude Seguin, William J. Meder and
Marc J.E. Leroux have each been a Director of ORBCOMM Corporation since March
1998.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of all compensation earned,
awarded or paid in the fiscal years ended December 31, 1998, 1997 and 1996, as
applicable, to those persons who were at December 31, 1998, our Chief Executive
Officer and our four other most highly compensated executive officers
(collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- ---------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(1) COMPENSATION(2)
- - - -------------------------------- ------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Scott L. Webster................ 1998 $250,000 $287,500(3) 100,000 $ 49,575(4)
Chairman and Chief Executive 1997(5) -- -- 30,000 --
Officer 1996(5) -- -- -- --
Alan L. Parker.................. 1998 219,000 73,700 10,000 7,229
President, Global
Development(6) 1997 210,000 73,500 -- 14,404
1996 200,000 60,000 -- 16,655
William J. Meder................ 1998 -- 235,000(7) 20,000 258,000(8)
Vice Chairman-Strategic 1997 -- -- -- 31,574(9)
Relationships and Vice
President, 1996 -- -- -- --
Strategic Relations
Robert F. Latham................ 1998 220,000 73,700 40,000 7,121
Executive Vice President and 1997(10) 108,692 157,800(11) 70,000 32,250(12)
Chief Operating Officer 1996(5) -- -- -- --
Andre Halley.................... 1998 170,000 59,683 20,000 17,873(13)
Senior Vice President, 1997(5) -- -- -- --
International Market 1996(5) -- -- -- --
Development and Managing
Director
</TABLE>
- - - ------------------------------
(1) Represents shares of common stock of OCC subject to options granted under
the Orbital Communications Corporation 1992 Stock Option Plan (the "OCC
Stock Option Plan"). Securities underlying options granted to Mr. Meder do
not include securities underlying options to purchase 90,000 shares of
common stock of DIS pursuant to the Dolphin Information Services, Inc. 1998
Stock Option Plan (the "DIS Stock Option Plan").
(2) The 1998 and 1997 amounts for all officers except Mr. Meder and Mr. Halley
include matching and profit sharing contributions made under our 401(k)
plan and our Group Term Life Insurance premiums paid by us, respectively,
in the following amounts: Mr. Webster, $3,077 and $498; Mr. Parker, 1998,
$6,400 and $829, and 1997, $11,178 and $3,226; Mr. Latham, 1998, $6,400 and
$721, 1997, $4,638 and $1,218; and Mr. Halley, $373 (Group Term Life
Insurance premium payments only, see note 12). The 1996 amounts represent
matching and profit-sharing contributions made under our 401(k) plan.
(3) Includes an amount paid to Mr. Webster as consideration for Mr. Webster
becoming our Chairman and Chief Executive Officer, as well as a year-end
bonus.
(4) This amount includes $46,000 in moving expenses paid by us.
(5) No compensation is reported where the individual did not serve as one of
our executive officers during a given fiscal year.
(6) In February 1998, Mr. Parker ceased being our President and Chief Executive
Officer and became our President, Global Development. In January 1999, Mr.
Parker ceased being our President, Global Development.
(7) Includes an amount paid to Mr. Webster as consideration for Mr. Webster
becoming our Chairman and Chief Executive Officer, as well as a year-end
bonus.
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(8) Of this amount, $50,000 represents consideration paid to Mr. Meder in his
capacity as President of DSS, a subsidiary of ours and $208,000 represents
amounts paid by us to ORBCOMM Canada pursuant to a consulting agreement
dated March 18, 1998, in consideration for the services provided by Mr.
Meder as our Vice Chairman-Strategic Relationships and Vice President,
Strategic Relations.
(9) Represents amounts paid to ORBCOMM Canada pursuant to a consulting
agreement dated January 1998 for certain services Mr. Meder provided to us
during 1997.
(10) Represents compensation beginning in May 1997 when Mr. Latham started his
employment with us.
(11) Includes an amount paid to Mr. Latham as consideration for Mr. Latham
becoming our President and Chief Operating Officer, as well as a year-end
bonus.
(12) This amount includes $10,385 in consulting fees earned prior to Mr.
Latham's employment with us, and $14,008 in moving expenses and $2,000 in
legal fees paid by us.
(13) Of this amount, $17,500 was paid to Mr. Halley as additional compensation
in lieu of other benefits.
OCC OPTION GRANTS IN LAST FISCAL YEAR
Shown below is information on grants of stock options to the Named Officers
pursuant to the OCC Stock Option Plan for the fiscal year ended December 31,
1998, which options are reflected in the Summary Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZED VALUE
NUMBER OF AT ASSUMED RATES OF
SECURITIES % OF TOTAL PRICE ON STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE DATE OF FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE GRANT EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott Webster........ 100,000 32.75 $26.50 $26.50 1/16/08 1,666,571 4,223,418
Alan L. Parker....... 10,000 3.28 26.50 26.50 1/16/08 166,657 422,342
William J.
Meder(1)........... 20,000 6.55 26.50 26.50 1/16/08 333,314 844,684
Robert F. Latham..... 40,000 13.10 26.50 26.50 1/16/08 666,628 1,689,367
Andre Halley......... 20,000 6.55 39.75 39.75 2/06/08 499,971 1,267,025
</TABLE>
- - - ------------------------------
(1) In addition to the options granted to Mr. Meder pursuant to the OCC Stock
Option Plan, in December 1998, Mr. Meder also received a grant of 90,000
options pursuant to the DIS Stock Option Plan.
EMPLOYMENT ARRANGEMENTS
Scott L. Webster was appointed our Chairman and Chief Executive Officer in
February 1998. In January 1998, Mr. Webster was granted options to purchase
100,000 shares of OCC common stock at an exercise price of $26.50 per share,
with one-third of such options vested on the date of grant, and one-third of
such options to vest on each of the first and second anniversaries of the date
of grant. The options are otherwise governed by the terms of the OCC Stock
Option Plan. In July 1997, Mr. Webster was granted options to purchase 30,000
shares of common stock of OCC at an exercise price of $26.50 per share, with
one-quarter of such options to vest on each of the first four anniversaries of
the date of grant. In addition, in 1992, Mr. Webster was granted options to
purchase 7,500 shares of common stock of OCC at exercise prices ranging from
$1.50 to $4.00.
Andre Halley became our Senior Vice President, International Market
Development and Managing Director in April 1998. Prior to this date, Mr. Halley
was employed by both Teleglobe Canada and Teleglobe GmbH and was secunded to
ORBCOMM International to provide it with management consulting services for
international market development projects as Managing Director. In February
1998, Mr. Halley was granted options to purchase 20,000 shares of OCC common
stock at an exercise price of $39.75 per share, with one-half of such options
vested on each of the first and second anniversaries of the date of grant.
On May 15, 1997, we entered into an employment agreement with Robert F.
Latham that sets forth the terms and conditions of Mr. Latham's employment with
us. The employment agreement is for a term of three years commencing on May 15,
1997 and is automatically extended from year to year thereafter unless
terminated either by us or by Mr. Latham. Pursuant to the terms of this
agreement, Mr. Latham received a $75,000 signing bonus and is entitled to a base
salary of $180,000 per year. In addition to the signing bonus and base salary,
Mr. Latham is eligible to receive from us, among other things, an annual bonus
of up to 50% of his base salary, relocation expenses of up to $50,000 and a loan
of up to $50,000. Mr. Latham was also
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<PAGE> 101
awarded options to purchase 55,000 shares of OCC common stock at a price of
$26.50 per share. The options vest, pro rata, over a period of four years, with
one-fourth vested on the date of grant, and are generally governed by the terms
of the OCC Stock Option Plan. In the event of a termination of Mr. Latham's
employment, either: (i) by us without cause (as defined in the agreement); or
(ii) by Mr. Latham within three months following a change of control (as defined
in the agreement), Mr. Latham will be entitled to receive from us:
- a lump sum severance payment of twelve months annual base salary (in
the case of a termination without cause) or a lump sum severance
payment of the remaining balance of Mr. Latham's base salary (in the
case of a change of control);
- accelerated vesting of OCC stock options; and
- relocation expenses of up to $50,000.
Pursuant to the terms of the employment agreement, Mr. Latham has an
obligation not to solicit any of our employees for a period of one year
following termination of his employment with us.
STOCK OPTION PLANS
We have granted options under two separate stock option plans, the OCC
Stock Option Plan and the DIS Stock Option Plan. Pursuant to the OCC Stock
Option Plan, which was adopted in 1992, there are 1,100,000 shares available to
be optioned and sold. Pursuant to the DIS Stock Option Plan, which was adopted
in 1998, there are 3,000,000 shares available to be optioned and sold.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our partnership interests as of March 31, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS PARTNERSHIP INTEREST
---------------- --------------------
<S> <C>
Orbital Communications Corporation.......................... 50%
21700 Atlantic Boulevard
Dulles, Virginia 20166
Teleglobe Mobile Partners................................... 50%
c/o Teleglobe Inc.
1000, rue de La Gauchetiere ouest
Montreal, Quebec H3B 4X5
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of ORBCOMM, OCC, Teleglobe Mobile and Orbital have entered into a
series of agreements or arrangements for the development, construction,
operation and marketing of the ORBCOMM system. The following paragraphs are a
summary of the material provisions of certain of these agreements and are
qualified in their entirety by reference to the actual agreements, which are
filed as exhibits to or incorporated by reference in this report.
MASTER AGREEMENT
As of June 30, 1993, Orbital, OCC, Teleglobe and Teleglobe Mobile entered
into the Master Agreement that sets forth the principles upon which the parties
have agreed to develop, construct and operate the
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<PAGE> 102
ORBCOMM system. The Master Agreement subsequently has been amended and restated
and currently provides for the following:
Covenants Relating to OCC. Orbital and OCC have agreed:
- to preserve OCC's corporate existence;
- to use all commercially reasonable efforts to obtain and maintain all
material U.S. operating licenses and permits necessary for the
construction, operation and marketing of the ORBCOMM system;
- to ensure that so long as OCC holds any FCC licenses, OCC will:
- remain a subsidiary of Orbital, other than as a result of options
exercised under the OCC Stock Option Plan;
- carry on no business other than the construction, operation and
marketing of the ORBCOMM system or businesses that are in furtherance
of, or in connection with, the expansion of the ORBCOMM system; or
- remain the sole holder of all FCC licenses required for the
construction, launch and operation of the ORBCOMM system (other than
FCC licenses for individual user transceivers and FCC licenses held
by us);
- subject to certain exceptions, that OCC will not grant, create,
assume, incur or suffer to exist any lien affecting OCC or any of its
property, rights, revenues or assets and that in no circumstances will
OCC grant, create, assume, incur or suffer to exist any lien on any
FCC licenses held by OCC;
- subject to certain exceptions, that Orbital will not dispose of any
debt interest in OCC and that OCC will not sell, transfer, convey,
lease or otherwise dispose of any assets;
- that OCC will not consolidate, merge or amalgamate with any other
person;
- subject to certain exceptions in accordance with the Definitive
Agreements (as defined), that Orbital and OCC will not create, amend
or repeal any by-laws or modify the OCC certificate of incorporation;
- subject to certain exceptions in accordance with the Definitive
Agreements, that OCC will not make any loans or give any financial
guarantees for the obligations of any other party; and
- that Orbital and OCC will not make any assignment for the benefit of
creditors or subject OCC to any proceedings under any bankruptcy or
insolvency law or take steps to wind up or terminate OCC's corporate
existence or engage in any financial restructuring.
Covenant Relating to Teleglobe Mobile. Teleglobe and Teleglobe Mobile have
agreed to preserve Teleglobe Mobile's corporate existence.
Guarantees. Teleglobe has unconditionally and absolutely guaranteed the
full and punctual payment of all of Teleglobe Mobile's payment obligations under
the Definitive Agreements to which Teleglobe Mobile is a party. Orbital has
unconditionally and absolutely guaranteed the full and punctual payment of all
of OCC's payment obligations under the Definitive Agreements to which OCC is a
party.
Change of Control. In the event of a Change of Control (as defined in the
Master Agreement) of Orbital or Teleglobe (the "Change of Control Party"),
Teleglobe Mobile or OCC, as the case may be (the "Non-Change of Control Party"),
has the option:
- for a period of 180 days from such Change of Control (the "Option
Period") to require the Change of Control Party to purchase the
Non-Change of Control Party's interest in us at an aggregate price
equal to the greater of:
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- the Non-Change of Control Party's aggregate Unrecouped Capital
Preferences (as defined in the Master Agreement) in such
partnerships; and
- the Non-Change of Control Party's direct and indirect Participation
Percentage (as defined in the Master Agreement) in each such
partnership multiplied by the fair market value (as defined in the
Master Agreement) of each such partnership; or
- to cause our General Partners to adopt a resolution providing that, in
the event there is a deadlock on a matter requiring the approval of a
Majority in Interest (as defined in the Master Agreement) of the
Partners, our President shall be entitled to decide on such matter by
way of casting a vote or otherwise, as deemed appropriate by the
Non-Change of Control Party, notwithstanding any contrary provision
set forth in the Partnership Agreement. Subject to the receipt of all
necessary government approvals, upon a Change of Control of Orbital,
Orbital agrees to cause OCC to transfer to us all FCC licenses then
held by OCC relating to the construction, launch or operation of the
ORBCOMM system.
SYSTEM CONSTRUCTION AGREEMENT
Under the terms of the System Construction Agreement, restated as of
September 12, 1995 and subsequently amended, we have agreed to develop,
construct, deploy, manage and operate, subject to OCC's ultimate control, the
ORBCOMM System satellites and the System Assets, in consideration for which OCC
is obligated to remit to us, on a quarterly basis, a system charge calculated in
accordance with our partnership agreement, provided, however, that, if the
output capacity charge for any quarter is less than 1.15% of Total Aggregate
Revenues, then OCC shall not be required to pay any portion of the system charge
for such calendar quarter.
OCC has granted to us under the System Construction Agreement the right to
market, sell, lease and franchise all output capacity outside the United States.
We have agreed to indemnify OCC from and against any claim with respect to
an infringement or other violation of any copyright, trademark or patent or
other validly registered enforceable intellectual property right of any third
party for any items constructed by us pursuant to the authority granted in the
System Construction Agreement, but only to the same extent as the
indemnification received by us from Orbital pursuant to the Procurement
Agreement.
PROCUREMENT AGREEMENT
As of September 12, 1995, we entered into the Procurement Agreement with
Orbital pursuant to which Orbital has undertaken the overall design,
development, construction, integration, test and operation of the ORBCOMM
system. The Procurement Agreement was the result of arm's-length negotiations
between Orbital and Teleglobe Mobile that took place prior to Teleglobe Mobile's
decision to exercise an option to invest an approximately $75,000,000 in
additional equity in us. The Procurement Agreement has subsequently been amended
and currently provides for the following:
Under the Procurement Agreement, Orbital will develop, construct and
deliver and launch 34 ORBCOMM satellites (28 of which have been successfully
launched) and complete the construction and design of the U.S. Ground Segment.
Under the Procurement Agreement, we expect Orbital to launch seven additional
satellites using a single Pegasus launch vehicle in 1999. Orbital will also
provide in-orbit check-out support for up to 120 days after such satellite
launch.
We have agreed to pay Orbital approximately $196,400,000 for satellite
construction, launch services and other work specified in the Procurement
Agreement, not including certain incentive fees. On execution of the Procurement
Agreement, we paid to Orbital approximately $17,000,000 representing
reimbursement for certain costs incurred through the date thereof. Under the
Procurement Agreement, Orbital is entitled to invoice us monthly for a maximum
of 90% of certain costs incurred during each month. The remaining ten percent of
costs incurred in any month may be invoiced only on completion of certain
specified project milestones referred to in the Procurement Agreement as
Category B Milestones.
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The remaining balance of the fixed price contract amount is generally
allocated to Category A Milestones as defined in the Procurement Agreement. In
the event that Orbital fails to achieve any Category A Milestone on or before
the scheduled completion date, we are relieved of our obligation to pay the
applicable amounts specified for such Category A Milestone until such time as
Orbital achieves such Category A Milestone or obtains a waiver in writing from
ur for such achievement; provided, however, that Orbital's failure to timely
complete any milestone shall not relieve us of our obligation to pay for other
achieved milestones.
Incentive Payments. In addition to the above prices for work and service,
Orbital is entitled to receive certain in-orbit performance incentive payments.
Payments are to be made on a per-plane basis with the incentive to be earned
monthly for each complete month that there are a specified minimum number of
working satellites in the plane. The minimum number of working satellites in a
plane is seven during the first 30 months of the in-orbit performance incentive
period and six during the second 30 months of the in-orbit performance period.
Regulatory Matters. Under the terms of the Procurement Agreement, Orbital
is required to use all commercially reasonable efforts directly or through OCC:
- to obtain and maintain the required U.S. regulatory authority needed
to construct, launch and operate the satellites and operate the
ORBCOMM system;
- to obtain and maintain FCC regulatory authority for the operation of
subscriber units for use in connection with the ORBCOMM system; and
- to take reasonable actions in any regulatory proceedings to defend any
claims against any regulatory authority granted to Orbital or OCC in
connection with the ORBCOMM system or to oppose any application by
competing systems that use frequencies below 1 GHz.
We have agreed to pay or reimburse Orbital or OCC for all out-of-pocket
expenses and internal costs incurred in connection with Orbital's or OCC's
efforts.
Delivery; Title and Risk of Loss. Under the Procurement Agreement, with
respect to a satellite launch using the Pegasus launch vehicle, delivery of the
launch vehicle and satellites occurs on separation of the launch vehicle from
Orbital's L-1011 aircraft. With respect to a satellite launch using a Taurus
launch vehicle, delivery of the satellites occurs on intentional ignition of the
Taurus launch vehicle. At such time, title to and risk of loss or damage passes
to us and our sole remedy for launch failure, defects, failures to conform to
applicable specifications or any other requirements is limited to:
- non-payment to Orbital of the specified milestone payment and any
satellite performance incentive payment; and
- termination of the Procurement Agreement.
Limitation of Liability. Under no circumstances, regardless of fault,
shall Orbital be liable for any damage greater than $10,000,000 excluding:
- any unpaid portion of Category A Milestone payments; and
- any unpaid portion of the in-orbit performance incentive payment.
Stop Work. We may at any time by written order to Orbital require Orbital
to stop all or any part of the work called for by the Procurement Agreement for
a period of 60 days or for any further period to which the parties may agree.
Within a period of 60 days after a stop-work is delivered to Orbital, or within
any extension of that period to which the parties agree, we will either cancel
the stop-work order and make an equitable adjustment to the Procurement
Agreement for the delay or terminate the work as provided in the Procurement
Agreement or if Orbital otherwise agrees to terminate.
Intellectual Property. In general, all designs, inventions, processes,
technical data, drawings and/or confidential information related to the
satellites, launch vehicle launch services, the Network Control Center and U.S.
Gateway Earth Stations are the exclusive property of Orbital and its
subcontractors. All rights, title and interest in and to all underlying
intellectual property relating to the work to be performed pursuant to the
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Procurement Agreement will remain exclusively in Orbital and its subcontractors,
notwithstanding Orbital's disclosure of any information or delivery of any data
items to us or our payment to Orbital for engineering or non-recurring charges.
We will not use or disclose such information or property to any third party
without the prior written consent of Orbital.
Termination. We may, by written notice of termination to Orbital,
terminate the Procurement Agreement upon the failure of Orbital:
- to achieve any of the Category A Milestones within 56 weeks after the
scheduled completion date set forth in the Milestone Payment Schedule
(as defined in the Procurement Agreement) provided that scheduled
completion dates can be extended by any excusable delays as a result
of a force majeure event; or
- to comply in any material respect with any of the provisions of the
Procurement Agreement and to correct such failure, within 60 days from
the date of Orbital's receipt of written notice thereof from us,
setting forth in detail our basis for termination of the Procurement
Agreement.
New Procurement Agreement. We have negotiated a new procurement agreement
with Orbital under which we will procure, at a minimum, eight additional
satellites and two separate Pegasus launch vehicles, at a total cost of
approximately $70,000,000. In addition, under the agreement we have the option
to procure up to 22 additional satellites and associated launch services using
the Pegasus launch vehicle. Amounts due under this agreement are payable by us
as work is performed by Orbital.
SYSTEM CHARGE AGREEMENT
OCC and ORBCOMM USA have entered into the System Charge Agreement, restated
as of September 12, 1995, for the purpose of providing for the use by ORBCOMM
USA of all of the output capacity of the ORBCOMM system within the United States
and for the exclusive use by ORBCOMM USA of certain System Assets located within
the United States. The term of the System Charge Agreement commenced on June 30,
1993 and continues until June 30, 2013.
Exclusive Use of U.S. System Capacity. OCC has granted to ORBCOMM USA the
exclusive right in the United States to market, sell, lease and franchise all
ORBCOMM system output capacity and exclusive use of the System Assets located in
the United States. ORBCOMM USA is permitted to grant ORBCOMM International use
of the U.S. Gateway for the limited purpose of operating the ORBCOMM system in
Canada, Mexico and any other country proximate to the United States.
Notwithstanding these provisions of the System Charge Agreement, OCC has
retained all rights in and to, and ORBCOMM USA has been granted no rights to,
the ORBCOMM system.
Output Capacity Charge. In consideration of the grant by OCC to ORBCOMM
USA of the exclusive right to market, sell, lease and franchise all ORBCOMM
System output capacity in the United States, ORBCOMM USA agrees:
- within 30 days of the end of each calendar quarter, to notify OCC of
the total aggregate revenues invoiced by it during such calendar
quarter; and
- to remit to OCC 23% of the total aggregate revenues invoiced by it
during each calendar quarter. ORBCOMM USA retains sole discretion to
set the fees to be paid by its subscribers, VARs and International
Licensees for use of the ORBCOMM system.
Indemnification. OCC and ORBCOMM USA agree to indemnify, defend and hold
harmless each other and their respective successors and assigns against any
liability, damage, loss or expense incurred by or imposed upon them in
connection with any claims, suits, actions, demands or judgments arising out of
any breach of the party's obligations under the System Charge Agreement. In
addition, OCC agrees to indemnify and hold harmless ORBCOMM USA and its
respective successors and assigns from and against any claim with respect to an
infringement or other violation of any copyright, trademark or patent or other
validly registered enforceable intellectual property right of any third party
for any items OCC has authorized ORBCOMM USA to use under the System Charge
Agreement (but only to the same extent as the
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indemnification received by OCC from ORBCOMM, if any, under the terms of the
System Construction Agreement).
INTERNATIONAL SYSTEM CHARGE AGREEMENT
ORBCOMM, ORBCOMM International and Teleglobe Mobile have entered into the
International System Charge Agreement, restated as of September 12, 1995, for
the purpose of our granting to Teleglobe Mobile the exclusive right in the all
areas outside the United States to market, sell, lease and franchise all ORBCOMM
System output capacity and exclusive use of the System Assets located in the
non-U.S. area. Teleglobe Mobile, in turn, has granted to ORBCOMM International
the exclusive right in the Non-U.S. Area to market, sell, lease and franchise
all ORBCOMMsystem output capacity and exclusive use of the System Assets located
in the Non-U.S. Area. OCC ultimately has retained all rights in and to, and
neither Teleglobe Mobile nor ORBCOMM International has been granted rights to,
the ORBCOMM system.
System Charge. In consideration of the grant to Teleglobe Mobile of the
exclusive right to market, sell, lease and franchise all ORBCOMM System output
capacity in the Non-U.S. Area, Teleglobe Mobile agrees to remit to ORBCOMM
Teleglobe Mobile's allocated portion of the System Charge for that calendar
quarter calculated in accordance with our partnership agreement. If the
International Output Capacity Charge for such calendar quarter is less than
1.15% of Total Aggregate Revenues, then Teleglobe Mobile is not required to pay
any portion of the System Charge for such calendar quarter.
International Output Capacity Charge. In consideration of the grant by
Teleglobe Mobile to ORBCOMM International of the exclusive right to market,
sell, lease and franchise all ORBCOMM System output capacity in the non-U.S.
area, ORBCOMM International agrees:
- within 30 days of the end of each calendar quarter, to notify us of
the total aggregate revenues invoiced by it during such calendar
quarter; and
- to remit to Teleglobe Mobile 23% of the total aggregate revenues
invoiced by it during each calendar quarter. ORBCOMM International
retains sole discretion to set the fees to be paid by its subscribers,
VARs and International Licensees for use of the ORBCOMM system.
Indemnification. With regard to patent infringement claims, we agree to
defend, indemnify and hold harmless Teleglobe Mobile and ORBCOMM International
and their respective successors and assigns from and against any claim with
respect to an infringement or other violation of any copyright, trademark or
patent or other validly registered enforceable intellectual property right of
any third party for any items we have authorized Teleglobe Mobile and ORBCOMM
International to use under the International System Charge Agreement but only to
the same extent as the indemnification received by us from Orbital, if any,
under the Procurement Agreement.
PROPRIETARY INFORMATION AND NON-COMPETITION AGREEMENT
ORBCOMM, Orbital, OCC, Teleglobe and Teleglobe Mobile have entered into the
Proprietary Information and Non-Competition Agreement to protect any
confidential and proprietary information that may be disclosed to one another in
connection with the development, construction, operation and marketing of the
ORBCOMM system. The parties to the agreement that are in receipt of proprietary
information agree that they will not, during and for a period of five years
after the term of the agreement, use, disclose or otherwise disseminate such
proprietary information to any person or make any use of the proprietary
information for their own benefit or for the benefit of any other person.
Orbital and Teleglobe entered into the agreement for the additional purpose of
prohibiting direct competition between the two entities in the provision of
certain LEO satellite services during the term of the agreement and for a period
of one year thereafter.
Orbital and Teleglobe agree that for the duration of the agreement and for
one year thereafter, they will not, directly or indirectly or in any capacity:
- except in connection with the fulfillment of their respective
obligations under any of the Definitive Agreements, carry on, engage,
participate, invest or have an equity or any financial interest in the
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marketing, construction, development or management of any business or
enterprise that competes with Orbital or Teleglobe or their respective
affiliates in offering commercial, LEO, non-voice satellite
communications services operating in the 137-150 MHz band or such
other frequency allocated to the Little LEO MSS below 1 GHz, provided,
however, that OCC and Orbital are permitted to:
- sell satellites, launch vehicles, launch services and communications
services to non-commercial entities without limitation; and
- provide all other entities up to two satellites every two years and
launch vehicles or launch services for up to two satellites every two
years;
- assist in or influence the hiring by any person who competes with
Orbital or Teleglobe or their respective affiliates of any salesman,
distributor, or employee of Orbital or Teleglobe or their respective
affiliates, or otherwise cause any person having a business
relationship with Orbital or Teleglobe or their respective affiliates
to sever such relationship; or
- employ any person to work on or represent the ORBCOMM system who will
also work on or represent another mobile communications system,
without first notifying our President.
Neither of Orbital or Teleglobe will be in default of its obligations under
this portion of the Proprietary Information and Non-Competition Agreement by
virtue of holding for portfolio purposes as a passive investor no more than five
percent of the issued and outstanding public equity securities of a corporation.
Indemnification. Orbital and Teleglobe agree to indemnify and save
harmless one another and their respective affiliates and representatives (an
"indemnified party") from and against any claims, demands, actions, causes of
action, judgments, damages, losses, liabilities, costs or expenses that may be
made against any of them as a result of, arising out of or relating to any
violation, contravention or breach of the Proprietary Information and
Non-Competition Agreement by a party who is not an indemnified party.
Termination. The Proprietary Information and Non-Competition Agreement
will terminate on the earlier of OCC or Teleglobe Mobile ceasing to be both a
general partner and a limited partner of ours.
AMENDED AND RESTATED ADMINISTRATIVE SERVICES AGREEMENT
As of January 1, 1997, we entered into an Amended and Restated
Administrative Services Agreement with Orbital (the "Administrative Services
Agreement") that sets forth the terms on which Orbital has agreed to provide
office space and certain administrative and other services to us. The
Administrative Services Agreement currently provides for the following:
Under the terms of the Administrative Services Agreement, Orbital has
agreed to provide us with defined office space for a total price per month that
is based on our occupied useable square footage as a percentage of total useable
square footage in any Orbital facility occupied by us, and is equal to our pro
rata portion of all Orbital's monthly costs and expenses relating to the
applicable facility, including but not limited to rent, mortgage (including
interest), operating expenses, taxes, building maintenance, utilities,
janitorial services, landscaping, management fees and leasehold improvement
amortization for interior buildout. Orbital also has agreed to provide us with
certain use and occupancy services on a cost reimbursable basis (as specified
therein). The use and occupancy services to be provided by Orbital include
management information systems services, security and facilities support,
telephone switchboard and communication services, employee training services and
other support services. Finally, Orbital has agreed to provide various
administrative and executive management services to us on a cost reimbursable
basis (as specified therein). The administrative and executive management
services to be provided by Orbital include accounting support, payroll
processing, miscellaneous purchasing services, personnel services and other
administrative services.
Orbital also has agreed to provide to us certain insurance on a cost
reimbursable basis, including property and casualty insurance, auto liability
insurance, general liability insurance, fiduciary liability insurance, employee
dishonesty insurance, transit insurance and aviation products insurance. Orbital
shall be required to provide such insurance to us until such time as we can
commercially procure its own insurance at a rate
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comparable to Orbital's, or until such time as our partners determine that we
should procure our own insurance.
We have agreed to indemnify Orbital, its directors, officers or employees
against any liability in connection with any actions arising out of the
performance of the services except to the extent that such liability arises from
Orbital's gross negligence or willful misconduct.
The Administrative Services Agreement continues in effect so long as any of
the categories of office space or administrative services are being provided by
Orbital, provided that we have the right to terminate any or all of the
administrative services being provided by Orbital on 90 days prior written
notice to Orbital, and provided further that we have the right to terminate the
provision by Orbital of any office space occupied by us only upon the expiration
of the lease relating to such office space.
ORBCOMM CANADA CONSULTING AGREEMENT
As of March 18, 1998, we entered into a Consulting Agreement with ORBCOMM
Canada, which provides that ORBCOMM Canada will furnish us with certain business
and industry consultancy services including:
- arranging meetings with senior executives of Fortune 100 companies
with the objective of developing business relationships for our
services;
- providing advice and counsel to our marketing executives to build and
extend our business partner relationships;
- acting as the executive contact for certain application developers,
manufacturers and related vendors;
- providing advice and counsel to our management as it develops and
improves business processes, with a particular focus on sales and
pricing policies and practices; and
- establishing strategic relationships with key partners on a global
basis.
In consideration for these consultancy services, we agreed to pay ORBCOMM
Canada one thousand dollars per day, not to exceed four thousand dollars in any
calendar week. Either party may terminate the Consulting Agreement by giving ten
days written notice to the other party.
RESELLER AGREEMENT WITH ORBITAL
On March 3, 1997, we entered into a Reseller Agreement with Orbital. The
agreement has subsequently been amended and currently provides, subject to
certain exclusions, for a grant by us to Orbital of a non-exclusive right to
market and resell our products and services for Intelligent Transportation
System monitoring, tracking and messaging applications to Federal, state and
local government and commercial accounts. The agreement provides that Orbital
will pay us an activation fee for each new subscriber and monthly access and
usage fees for each new and current subscriber solicited by Orbital to use the
ORBCOMM system.
The term of the agreement is for one year renewable automatically for
additional terms of one year each unless either party gives 60 days' written
notice to the other party.
SERVICE LICENSE AGREEMENTS WITH ORBCOMM CANADA
On December 19, 1995, we entered into a Service License Agreement with an
International Licensee, ORBCOMM Canada, a majority-owned subsidiary of
Teleglobe. Under the terms of this agreement, which provides for an initial ten
year term and is renewable for up to an additional ten years, we granted to the
International Licensee an exclusive license to market our services throughout
its territory and a nonexclusive license to market our services in international
waters.
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The agreement provides that the International Licensee will obtain the
necessary regulatory approvals, procure the necessary ground infrastructure and
use commercially reasonable efforts to advertise, promote and market the ORBCOMM
system throughout the territory. In addition, the International Licensee has
agreed to pay certain license fees according to the provisions of the agreement.
Finally, the International Licensee pays to ORBCOMM a monthly satellite usage
fee based on the greater of a percentage of gross operating revenues and a data
throughput fee.
SUBSCRIBER UNIT MANUFACTURE AGREEMENT WITH MAGELLAN
As of July 31, 1996, and for a ten-year term, we entered into a Subscriber
Unit Manufacture Agreement with Magellan, a majority-owned subsidiary of
Orbital. Under the terms of the agreement, Magellan agrees to manufacture,
distribute and service subscriber units to be used with the ORBCOMM system
according to our specifications and technical requirements. Under the terms of
the agreement, we authorize Magellan to use our subscriber unit software in
subscriber units Magellan offers for sale to us or to any other buyer. We also
authorize Magellan to manufacture and sell subscriber units that have been type
approved by us. Under the terms of the agreement, we do not remit any payments
to Magellan for the development, manufacture or delivery of any subscriber units
not specifically purchased by us. Moreover, the agreement provides that Magellan
shall pay us a per-subscriber unit royalty for each unit that Magellan sells.
THE PARTNERSHIP AGREEMENTS
The following paragraphs are a summary of certain provisions of the
Partnership Agreements, restated as of September 12, 1995, of each of ORBCOMM,
ORBCOMM USA, and ORBCOMM International and such summary is qualified in its
entirety by reference to such Partnership Agreements. Each of the Partnership
Agreements are substantially identical. Unless otherwise described herein,
references to the "Partnership" constitute references to ORBCOMM, ORBCOMM USA
and ORBCOMM International, collectively, and references to the "Partnership
Agreement" constitute references to the Partnership Agreements of ORBCOMM,
ORBCOMM USA and ORBCOMM International, collectively.
Organization and Duration. The Partnership will dissolve on December 31,
2013, unless sooner dissolved on the written consent of all of the General
Partners or upon removal, withdrawal, resignation, liquidation or bankruptcy of
the last remaining General Partner (unless a new General Partner is appointed
within 90 days with the unanimous consent of the remaining partners).
General Partners; Management. OCC and Teleglobe Mobile are our general
partners. ORBCOMM and OCC are the general partners of ORBCOMM USA and ORBCOMM
and Teleglobe Mobile are the general partners of ORBCOMM International. The
management of the Partnership is the exclusive responsibility of the General
Partners and, except as provided by law or except as specified in the
Partnership Agreement and summarized below, the act of the General Partners
holding a majority of the Participation Percentages of the Partnership (a
"Majority in Interest") is the act of the Partnership.
The Partnership Agreement provides for meetings of the General Partners to
be called by any General Partner. It is the current practice of the Partnerships
to hold regular meetings of the General Partners on at least a quarterly basis.
Each General Partner is represented at the meetings by up to three authorized
representatives, although one representative of each general partner is entitled
to vote such General Partner's Participation Percentage.
The Partnership Agreement provides for the election of officers to provide
for the day-to-day operation of the Partnership. Officers are nominated by the
President of the Partnership and elected by the General Partners. Officers
exercise the authority granted to such officers by the General Partners. Under
the terms of the ORBCOMM Partnership Agreement, the General Partners are
required to appoint one or more officers to
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have authority to act for the Partnership with respect to the Procurement
Agreement. Officers are subject to removal for any reason by approval of the
General Partners.
Certain Actions. Under the Partnership Agreement, the approval of at least
86% of the Participation Percentages held by the General Partners is required
to:
- transfer all or substantially all the assets of the Partnership;
- merge or consolidate the Partnership with any other person;
- permit the entry by the Partnership into any additional lines of
business;
- admit any new Partner to the Partnership;
- subject to certain exceptions in furtherance of the business of the
Partnership, cause the Partnership to borrow any amount on a recourse
basis or any amount in excess of $5,000,000 on a non-recourse basis;
- subject to certain exceptions set forth in the Partnership Agreement,
enter into any transaction with an affiliate of a General Partner
(excluding the Definitive Agreements);
- select or remove the independent certified public accountant for the
Partnership or adopt, or modify in any material respect, any
significant accounting policy or tax policy;
- make on behalf of the Partnership an assignment for the benefit of
creditors, decide on behalf of the Partnership to subject the
Partnership to any proceedings under any bankruptcy or insolvency law,
decide to avail the Partnership of the benefit of any other
legislation for the benefit of debtors, or take steps to wind up or
terminate the existence of the Partnership;
- delegate any of the powers of the Partnership;
- determine the value of the Partnership for purposes of the Master
Agreement; and
- amend any provision of the Partnership Agreement.
No amendment to the Partnership Agreement may:
- decrease the capital account or increase the amount required to be
contributed by a Partner without the consent of such Partner; or
- amend the provisions of, or adopt any provisions inconsistent with,
Sections 6.2, 6.3 and 6.4 of the Partnership Agreement, which
provisions regard super-majority approval requirements for certain
actions of the Company, enforcement of the Definitive Agreements and
meetings of the General Partners, respectively.
The Partnership Agreement also provides that:
- any action of the Partnership with respect to the enforcement by it of
its rights under any Definitive Agreement or other contract or
agreement to which any General Partner or any affiliate thereof is a
party with respect to a breach, default or dispute by such General
Partner or affiliate, requires the approval of General Partners having
a majority of the Participation Percentages held by the General
Partners other than such General Partner; and
- subject to the limitations set forth in above, in the event that a
Majority in Interest of the General Partners, each acting in the best
interests of the Partnership, shall be unable to agree on exercising
or enforcing the rights of the Partnership under the Procurement
Agreement including, without limitation, the rights to exercise the
options thereunder, to stop work, to request changes and to send
notices to preserve or exercise any such rights, then the President of
the Partnership shall decide on the appropriate action with respect to
such rights, and the Partnership shall then act upon such decision.
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The Partnership Agreement also provides that so long as we hold voting
rights in either of ORBCOMM USA or ORBCOMM International, each General Partner
shall be entitled to exercise directly a fraction of our rights determined by
dividing such General Partner's Participation Percentage by the total
Participation Percentages held by all General Partners.
Capital Contributions. Pursuant to the terms of the Partnership Agreement,
OCC is obligated to contribute up to approximately $75,000,000, and Teleglobe
Mobile is obligated to contribute up to approximately $85,000,000, of capital to
ORBCOMM, all of which has been contributed.
Under the terms of the ORBCOMM USA Partnership Agreement, OCC and ORBCOMM
together were obligated to contribute nominal capital to ORBCOMM USA in the
amount of $10,000. Under the terms of the ORBCOMM International Partnership
Agreement, Teleglobe Mobile and ORBCOMM together were obligated to contribute
nominal capital to ORBCOMM International in the amount of $10,000 in the
aggregate. Pursuant to a resolution adopted by our General Partners on September
12, 1995, we agreed that we would provide interest-free loans to each of ORBCOMM
USA and ORBCOMM International in an amount equal to their monthly net cash
requirements so long as such cash requirements are generally in accordance with
a budget approved by us or our executive management.
System Charge. The Partnership Agreement provides for the remittance of
the system charge by OCC and Teleglobe to ORBCOMM each calendar quarter. OCC's
allocated portion of the system charge for a calendar quarter is equal to the
output capacity charge for such calendar quarter minus 1.15% of the Total
Aggregate Revenues. Teleglobe Mobile's allocated portion of the system charge
for a calendar quarter is equal to the international output capacity charge for
such calendar quarter minus 1.15% of the Total Aggregate Revenues.
Indemnification. The Partnership has agreed to indemnify its General
Partners and all of their respective officers, directors, partners, employees,
and agents (each an "Indemnitee") from and against any and all claims or
liabilities arising out of or in connection with any action taken or omitted by
the General Partners or the officers of the Partnership pursuant to authority
granted by the Partnership Agreement so long as such Indemnitee's conduct did
not constitute gross negligence, willful or wanton misconduct or bad faith. The
Partnership Agreement further provides that the General Partners and all of
their respective officers, directors, partners, employees and agents (each a
"General Partner Person") will not be liable to the Partnership or the limited
partners for any act or omission by such General Partner Person, except as such
act or omission results from gross negligence, willful or wanton misconduct or
bad faith.
Liquidation and Distribution of Proceeds. Upon the dissolution of the
Partnership, the General Partners, or, in the case of the removal, withdrawal,
resignation, liquidation or bankruptcy of the last remaining General Partner,
one of the limited partners elected by a majority vote of the limited partners,
shall act as liquidator to wind up the Partnership. The liquidator shall have
full power and authority to sell, assign and encumber any or all of the
Partnership's assets and to wind up and liquidate the affairs of the Partnership
in an orderly and business-like manner. All proceeds from liquidation shall be
distributed in the following order of priority:
- to the payment of the debts and liabilities of the Partnership and
expenses of liquidation;
- to the setting up of such reserves as the liquidator may reasonably
deem necessary for any contingent liability of the Partnership; and
- the balance to the Partners in the proportions of their positive
capital account balances, if any (determined after taking into account
all allocations of net income and net loss for the year of
liquidation).
Allocations and Distributions. Allocations of Net Income and Net Loss of
the Partners shall generally be allocated to the capital accounts of Partners in
proportion to their participation percentage. Except as set forth below, or in
the case of liquidating distributions, the amount and timing of distributions by
the Partnership are determined in the discretion of the General Partners. All
distributions will be made to Partners first to return to the Partners their
capital preference and, thereafter, to the Partners in proportion to their
109
<PAGE> 112
participation percentages. The Partnership Agreement provides for a minimum
distribution each year in an amount sufficient to ensure that each Partner shall
have received at least an amount equal to the product of:
- 40% multiplied by
- the lesser of:
- such Partner's distributive share of the Partnership's taxable income
for the preceding year, and
- the excess, if any, of cumulative Net Income over cumulative Net Loss
allocated to such Partner since the inception of the Partnership.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The Financial Statements listed in the index to the Financial
Statements that appears on page 40 of this Report on Form 10-K are
filed as part of this Report.
2. Financial Statement Schedules
Financial statement schedules have been omitted because they are
inapplicable or are not required.
(b) Reports on Form 8-K
On February 2, 1999, ORBCOMM and Capital filed a Report on Form 8-K in
connection with the solicitation of consents of the holders of the Notes
(the "Holders") to make certain changes to the Indenture governing the
Notes. On February 16, 1999, ORBCOMM and Capital filed a Report on Form
8-K reporting that they had received the consents of the requisite
number of Holders to make certain changes to the Indenture.
(c) Exhibits.
<TABLE>
<S> <C>
3 Organizational Documents.
3.1(a) Certificate of Limited Partnership of ORBCOMM.
3.2(a) Restated Agreement of Limited Partnership of ORBCOMM.
3.2.1(d) Amendment No. 1 to Restated Agreement of Limited Partnership
of ORBCOMM dated December 2, 1996.
3.3(a) Certificate of Limited Partnership of ORBCOMM USA.
3.4(a) Restated Agreement of Limited Partnership of ORBCOMM USA.
3.5(a) Certificate of Limited Partnership of ORBCOMM International.
3.6(a) Restated Agreement of Limited Partnership of ORBCOMM
International.
4(a) Indenture, dated as of August 7, 1996, by and among ORBCOMM,
Capital, ORBCOMM USA, ORBCOMM International, OCC, Teleglobe
Mobile and Marine Midland Bank.
10 Material Contracts.
10.2(a) Pledge Agreement, dated as of August 7, 1996, by and among
ORBCOMM, Capital, and Marine Midland Bank as Collateral
Agent.
10.3(a) International System Charge Agreement, restated as of
September 12, 1995, by and among ORBCOMM, Teleglobe Mobile
and ORBCOMM International.
10.4(a) Master Agreement, restated as of September 12, 1995, by and
among ORBCOMM, Orbital, ORBCOMM, Teleglobe and Teleglobe
Mobile.
10.4.1(b) Amendment No. 1 to Master Agreement, dated as of February 5,
1997 by and among OCC, Orbital, Teleglobe and Teleglobe
Mobile.
</TABLE>
110
<PAGE> 113
<TABLE>
<S> <C>
10.5(a) Procurement Agreement, dated as of September 12, 1995, by
and between ORBCOMM and Orbital (provided that Appendix I is
incorporated by reference to Exhibit 10.24.6 to the
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1993 filed by Orbital on August 13, 1993).
10.5.1(c) Amendment No. 1 to Procurement Agreement dated December 9,
1996 between Orbital and ORBCOMM.
10.5.2(b) Amendment No. 2 to Procurement Agreement dated March 24,
1997 between Orbital and ORBCOMM.
10.5.3(e) Amendment No. 3 to ORBCOMM System Procurement Agreement,
dated as of March 31, 1998 by and between ORBCOMM and
Orbital.
10.5.4(e) Amendment No. 4 to ORBCOMM System Procurement Agreement,
dated as of March 31, 1998 by and between ORBCOMM and
Orbital.
10.5.5* Amendment No. 5 to ORBCOMM System Procurement Agreement,
dated as of July 30, 1998 by and between ORBCOMM and
Orbital.
10.5.6* Amendment No. 6 to ORBCOMM System Procurement Agreement,
dated as of September 21, 1998 between ORBCOMM and Orbital.
10.5.7* Amendment No. 7 to ORBCOMM System Procurement Agreement,
dated as of December 31, 1998 by and between ORBCOMM and
Orbital.
10.6(a) Proprietary Information and Non-Competition Agreement,
restated as of September 12, 1995, by and among ORBCOMM,
Orbital, OCC, Teleglobe, Teleglobe Mobile, ORBCOMM USA, and
ORBCOMM International.
10.7(a) System Charge Agreement, restated as of September 12, 1995,
by and between OCC and ORBCOMM USA.
10.8(a) System Construction Agreement, restated as of September 12,
1995, by and between ORBCOMM and OCC.
10.9(a) Amendment No. 1 to System Construction Agreement, dated as
of July 1, 1996, by and between ORBCOMM and OCC.
10.10(a) Service License Agreement, dated as of December 19, 1995,
between ORBCOMM International and ORBCOMM Canada Inc.
10.12(a) Service License Agreement, dated as of October 15, 1996,
between ORBCOMM International and European Company for
Mobile Communicator Services, B.V., ORBCOMM Europe.
10.14(a) Ground Segment Facilities Use Agreement, dated as of
December 19, 1995, between ORBCOMM International and ORBCOMM
Canada Inc.
10.15(a) Ground Segment Procurement Contract, dated as of October 15,
1996, between ORBCOMM International and European Company for
Mobile Communicator Services, B.V., ORBCOMM Europe.
10.16(f) Orbital Communications Corporation 1992 Stock Option Plan.
10.17(f) Amended and Restated Administrative Services Agreement,
dated as of January 1, 1997 by and between ORBCOMM and
Orbital.
10.19(f) Subscriber Communicator Manufacture Agreement dated as of
July 31, 1996 by and between ORBCOMM and Magellan
Corporation.
10.20(f) Reseller Agreement dated as of March 3, 1997 by and between
ORBCOMM USA and Orbital Sciences Corporation (the "Reseller
Agreement").
10.20.1(f) Amendment No. 1 to the Reseller Agreement dated as of
September 2, 1997.
10.21(f) Employment Agreement dated as of May 15, 1997 by and between
ORBCOMM and Robert F. Latham.
10.22(f) Consulting Agreement dated as of March 18, 1998 by and
between ORBCOMM and ORBCOMM Canada Inc.
10.23* Dolphin Information Services, Inc. 1998 Stock Option Plan
21* Subsidiaries of the Registrants.
27* Financial Data Schedule.
</TABLE>
- - - ---------------
111
<PAGE> 114
* Filed herewith.
(a) Incorporated by reference to the identically numbered exhibit to our
Registration Statement on Form S-4, as amended (Reg. No. 333-11149).
(b) Incorporated by reference to the identically numbered exhibit to our
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 filed by
us on May 14, 1997.
(c) Incorporated by reference to the identically numbered exhibit to our Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 filed by us
on March 28, 1997.
(d) Incorporated by reference to Exhibit 10.16.1 of the Annual Report on Form
10-K for the fiscal year ended December 31, 1996 (the "Orbital 1996 Form
10-K") of Orbital, filed by Orbital on March 27, 1997.
(e) Incorporated by reference to the identically numbered exhibit to Amendment
No. 1 to our Registration Statement on Form S-1, as amended (Reg.
333-50599).
(f) Incorporated by reference to the identically numbered exhibit to our Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, filed by us
on March 31, 1998.
112
<PAGE> 115
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON
FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HERNDON, COMMONWEALTH OF VIRGINIA, ON MARCH 31, 1999.
ORBCOMM GLOBAL, L.P.
By: ORBITAL COMMUNICATIONS
CORPORATION, a general partner
By: /s/ SCOTT L. WEBSTER
------------------------------------
Scott L. Webster,
President
By: TELEGLOBE MOBILE PARTNERS,
a general partner
By: TELEGLOBE MOBILE INVESTMENT INC.,
its managing partner
By: /s/ CLAUDE SEGUIN
------------------------------------
Claude Seguin
Chief Executive Officer
113
<PAGE> 116
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ SCOTT L. WEBSTER Chief Executive Officer of ORBCOMM March 31, 1999
- - - ----------------------------------------------------- Global, L.P.
Scott L. Webster (Principal Executive Officer)
/s/ JAMES SWOBODA Vice President and Corporate March 31, 1999
- - - ----------------------------------------------------- Controller
James Swoboda (Principal Financial Officer and
Principal Accounting Officer)
/s/ DAVID W. THOMPSON Director, Orbital Communications March 31, 1999
- - - ----------------------------------------------------- Corporation
David W. Thompson
/s/ SCOTT L. WEBSTER Director, Orbital Communications March 31, 1999
- - - ----------------------------------------------------- Corporation
Scott L. Webster
/s/ CLAUDE SEGUIN Director, Teleglobe Mobile Investment March 31, 1999
- - - ----------------------------------------------------- Inc.
Claude Seguin
/s/ GUTHRIE J. STEWART Director, Teleglobe Mobile Investment March 31, 1999
- - - ----------------------------------------------------- Inc.
Guthrie J. Stewart
</TABLE>
114
<PAGE> 117
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON
FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HERNDON, COMMONWEALTH OF VIRGINIA, ON MARCH 31, 1999.
ORBCOMM GLOBAL CAPITAL CORP.
By: /s/ SCOTT L. WEBSTER
------------------------------------
Scott L. Webster
President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ SCOTT L. WEBSTER President and Director of ORBCOMM March 31, 1999
- - - ----------------------------------------------------- Global Capital Corp.
Scott L. Webster (Principal Executive Officer)
/s/ JAMES SWOBODA (Principal Financial Officer and March 31, 1999
- - - ----------------------------------------------------- Principal Accounting Officer)
James Swoboda
</TABLE>
115
<PAGE> 1
EXHIBIT 10.5.5
AMENDMENT NO. 5 TO
ORBCOMM SYSTEM PROCUREMENT AGREEMENT
This Amendment No. 5 ("Amendment No. 5") to the ORBCOMM System
Procurement Agreement is entered into this 30th day of July, 1998 between
ORBCOMM Global, L.P. ("ORBCOMM Global") and Orbital Sciences Corporation
("Orbital").
W I T N E S S E T H
WHEREAS, the parties previously entered into the ORBCOMM System
Procurement Agreement dated September 12, 1995 (the "Procurement Agreement") and
Amendments No. 1, No. 2, No. 3, and No. 4 thereto dated December 9, 1996, March
24, 1997, and March 31, 1998 and March 31, 1998 respectively;
WHEREAS, the parties wish to set forth their agreement on orbit parameter
changes to the launch of ORBCOMM planes B and C.
NOW THEREFORE, the parties agree as follows:
ARTICLE 1 - DEFINITIONS
Terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Procurement Agreement.
ARTICLE 2 - AMENDMENTS
Section 2.1 The Table in Section 3.1.1 of Exhibit A, Part 1B Satellite
Specifications of the Procurement Agreement shall be deleted in its entirety and
replaced with the following:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------
Parameter Plane A Plane B Plane C
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Target mean altitude 825 km, circular 818.5 km 810 to 840 km{1}
Maximum apogee altitude 882 km Target + 15 km Target + 15 km
Minimum perigee altitude 767 km Target - 15 km Target - 15 km
Target inclination 45 deg. 45.02 deg. 43 to 46 deg.{1}
Inclination accuracy +/- 0.3 deg. +/- 0.1 deg. +/- 0.1 deg
Target right ascension Unconstrained 120 deg. East or West of Plane A 110-130 deg. West of Plane A{1}
of ascending nodes
Accuracy of ascending N/A +/- 2.5 deg. +/- 2.5 deg.
node
</TABLE>
<PAGE> 2
(1) Target shall be selected by ORBCOMM Global from this range based on
actual insertion parameters of previous planes.
Section 2.2 Table 3.1 in Section 3.1.1 of Exhibit A, Part 2 Statement
of Work and Specification for ORBCOMM Constellation Launch Services of the
Procurement Agreement shall be deleted in its entirety and replaced with the
following:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------
Parameter Plane A Plane B Plane C
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Target mean altitude 825 km, circular 818.5 km 810 to 840 km{1}
Maximum apogee altitude 882 km Target + 15 km Target + 15 km
Minimum perigee altitude 767 km Target - 15 km Target - 15 km
Target inclination 45 deg. 45.02 deg. 43 to 46 deg.{1}
Inclination accuracy +/- 0.3 deg. +/- 0.1 deg. +/- 0.1 deg
Target right ascension Unconstrained 120 deg. East or West of Plane A 110-130 deg. West of Plane A{1}
of ascending nodes
Accuracy of ascending N/A +/- 2.5 deg. +/- 2.5 deg.
node
</TABLE>
Table 3-1 Mission Orbital Requirements
(1) Target shall be selected by ORBCOMM Global from this range based on
actual insertion parameters of previous planes.
SECTION 3 - MISCELLANEOUS
Section 3.1 This Amendment No. 5 shall be construed in accordance with
and governed by the laws of the Commonwealth of Virginia, without giving effect
to the provisions, policies or principles thereof related to choice or conflict
of laws.
Section 3.2 No changes to the Procurement Agreement are authorized
hereby except as otherwise specified in this Amendment No. 5.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Amendment No. 5 as
of the day and year first above written.
ORBCOMM GLOBAL, L.P.
By:
-------------------------------------------
Name: Scott L. Webster
Title: Chairman and Chief Executive Officer
ORBITAL SCIENCES CORPORATION
By:
-------------------------------------------
Name:
Title:
3
<PAGE> 1
EXHIBIT 10.5.6
AMENDMENT NO. 6 TO
ORBCOMM SYSTEM PROCUREMENT AGREEMENT
This Amendment No.6 ("Amendment No. 6") to the ORBCOMM System
Procurement Agreement is entered into this 21st day of September, 1998 between
ORBCOMM Global, L.P. ("ORBCOMM Global") and Orbital Sciences Corporation
("Orbital").
WITNESSETH
WHEREAS, the parties previously entered into the ORBCOMM System
Procurement Agreement dated September 12, 1995 (the "Procurement Agreement") and
Amendments No. 1, No. 2, No. 3, No. 4, and No. 5 thereto dated December 9, 1996,
March 24, 1997, March 31, 1998, March 31, 1998, and July 30, 1998 respectively;
WHEREAS, the parties wish to set forth their agreement on orbit
parameter changes to the launch of ORBCOMM Plane C.
NOW THEREFORE, the parties agree as follows:
ARTICLE 1 - DEFINITIONS
Terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Procurement Agreement.
ARTICLE 2 - AMENDMENTS
Section 2.1 The Table in Section 3.1.1 of Exhibit A, Part 1B Satellite
Specifications of the Procurement Agreement shall be deleted in its entirety and
replaced with the following:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------
Parameter Plane A Plane B Plane C
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Target mean altitude 825 km, circular 818.5 km 818.5 km
Maximum apogee altitude 882 km Target + 15 km Target + 15 km
Minimum perigee altitude 767 km Target - 15 km Target - 15.8 km
Target inclination 45 deg. 45.02 deg. 45.02 deg.
Inclination accuracy +/- 0.3 deg. +/- 0.1 deg. +/- 0.1 deg
Target right ascension Unconstrained 120 deg. East of Plane A 120 deg. West of Plane A
of ascending nodes
Accuracy of ascending N/A +/- 2.5 deg. +/- 2.5 deg.
node
</TABLE>
<PAGE> 2
Section 2.2 Table 3.1 in Section 3.1.1 of Exhibit A, Part 2 Statement
of Work and Specification for ORBCOMM Constellation Launch Services of the
Procurement Agreement shall be deleted in its entirety and replaced with the
following:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------
Parameter Plane A Plane B Plane C
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Target mean altitude 825 km, circular 818.5 km 818.5 km
Maximum apogee altitude 882 km Target + 15 km Target + 15 km
Minimum perigee altitude 767 km Target - 15 km Target - 15 km
Target inclination 45 deg. 45.02 deg. 45.02 deg.
Inclination accuracy +/- 0.3 deg. +/- 0.1 deg. +/- 0.1 deg
Target right ascension Unconstrained 120 deg. East or West of Plane A 120 deg. West of Plane A
of ascending nodes
Accuracy of ascending N/A +/- 2.5 deg. +/- 2.5 deg.
node
</TABLE>
Table 3-1 Mission Orbital Requirements
SECTION 3 - MISCELLANEOUS
Section 3.1 This Amendment No. 6 shall be construed in accordance with
and governed by the laws of the Commonwealth of Virginia, without giving effect
to the provisions, policies or principles thereof related to choice or conflict
of laws.
Section 3.2 No changes to the Procurement Agreement are authorized
hereby except as otherwise specified in this Amendment No. 6.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Amendment No. 6 as
of the day and year first above written.
ORBCOMM GLOBAL, L.P.
By:
------------------------------------------
Name: Scott L. Webster
Title: Chairman and Chief Executive Officer
ORBITAL SCIENCES CORPORATION
By:
------------------------------------------
Name:
Title:
3
<PAGE> 1
AMENDMENT NO. 7 TO
ORBCOMM SYSTEM PROCUREMENT AGREEMENT
This Amendment No. 7 ("Amendment No. 7") to the ORBCOMM System
Procurement Agreement is entered into as of 31st day of December, 1998 between
ORBCOMM Global, L.P. ("ORBCOMM Global") and Orbital Sciences Corporation
("Orbital").
WITNESSETH:
WHEREAS, the parties previously entered into the ORBCOMM System
Procurement Agreement dated September 12, 1995 (the "Procurement Agreement") and
Amendments No. 1, No. 2, No. 3, No. 4, No. 5 and No. 6 thereto; and
WHEREAS, the parties wish to set forth their agreement pertaining to an
equitable price adjustment to the Procurement Agreement for changes made and
associated costs incurred by Orbital under the Procurement Agreement October 1,
1997 to December 31, 1998.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1 - DEFINITIONS
Terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Procurement Agreement.
ARTICLE 2 - AMENDMENTS
Section 2.1 Section 3.1(a) of the Procurement Agreement shall be amended
to add a new subparagraph (v) immediately following subparagraph (iv) that reads
as follows:
"(v) Price Adjustment Changes From
October 1, 1997 To December 31, 1998
Outside the General Scope of the Agreement" $4,951,678
Section 2.2 Section 3.1(a) of the Procurement Agreement shall be amended
to delete the "TOTAL" price of $161,372,143 set forth therein and to replace it
with the new "TOTAL" price of $166,323,821.
Section 2.3 Section 4.1(b)(i) of the Procurement Agreement shall be
deleted in its entirety and replaced with the following:
"(i) Orbital shall be entitled to invoice ORBCOMM Global on a monthly
basis for a maximum of 90% of its costs incurred during such month, other
than costs associated with Sections 3.1(a)(iv), 3.1(a)(v), 3.1(c) and
3.1(d), plus to the extent permitted by Section 4.1(f), such portion of
the cost in excess of the maximum
<PAGE> 2
amount to be invoiced to ORBCOMM Global in accordance with such Section
4.1(f) and not previously invoiced and paid; provided, however, that
Orbital shall not be entitled to invoice ORBCOMM Global under Section
4.1(a) and this Section 4.1(b)(i) in a cumulative total amount greater
than $125,884,929."
Section 2.4 Section 4.4 of the Procurement Agreement shall be deleted in
its entirety and replaced with the following:
"(i) Subject to the foregoing, Orbital shall be entitled to submit to
ORBCOMM Global at the address below monthly invoices covering the amounts
as described in Section 4.1(b)(i), invoices covering the amounts set
forth in Sections 4.1(b)(ii) and 4.1(b)(iii) or invoices for Category A
and Category B Milestone payments, in each case certified by the Vice
President and Controller of Orbital or by any other officer designated by
the Vice President and Controller of Orbital in the form provided for in
Schedule 4.4. Subject to the provisions of Section 4.3, ORBCOMM Global
shall pay such invoices within thirty (30) days from the date of their
receipt:
ORBCOMM Global, L.P.
Attn: Controller
2455 Horse Pen Road, Suite 100
Herndon, Virginia 20171
(ii) Notwithstanding anything in this Section 4 to the contrary, ORBCOMM
Global agrees to pay to Orbital the principal amount of $48,773,822 for
work performed from October 1, 1997 to December 31, 1998 but not yet
invoiced, which amounts include the costs set forth in Section 3.1(a)(v),
on the earlier of
(a) within thirty (30) days from the date of receipt of
invoice;
(b) December 31, 1999; or
(c) five (5) days after receipt of net proceeds by ORBCOMM
Global of at least $100,000,000 from any equity issuance
(excluding stock options) or debt financings of ORBCOMM
Global or ORBCOMM Corporation."
SECTION 3 - MISCELLANEOUS
Section 3.1 This Amendment No. 7 shall be construed in accordance with
and governed by the laws of the Commonwealth of Virginia, without giving effect
to the provisions, policies or principles thereof related to choice or conflict
of laws.
Section 3.2 No changes to the Procurement Agreement are authorized hereby
except as otherwise specified in this Amendment No. 7.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 7 as of
the day and year first above written.
<PAGE> 3
ORBCOMM GLOBAL, L.P.
By:
-------------------------------------------
Name: Scott L. Webster
Title: Chairman and Chief Executive Officer
ORBITAL SCIENCES CORPORATION
By:
-------------------------------------------
Name: Jeffrey V. Pirone
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.23
DOLPHIN INFORMATION SERVICES, INC.
1998 STOCK OPTION PLAN
Dolphin Information Services, Inc., a Delaware corporation (the
"Company"), sets forth herein the terms of its 1998 Stock Option Plan (the
"Plan") as follows:
ARTICLE I
PURPOSE OF PLAN
The Plan is intended to enhance the Company's ability to attract and
retain highly qualified officers, key employees and Outside Directors (as
defined herein), and to motivate such officers, key employees and Outside
Directors to serve the Company, ORBCOMM Global, L.P. and their respective
affiliates (as defined herein) and to expend maximum effort to improve the
business results and earnings of the Company, by providing to such officers, key
employees and Outside Directors an opportunity to acquire or increase a direct
proprietary interest in the operations and future success of the Company. To
this end, the Plan provides for the grant of stock options in accordance with
the terms hereof. Stock options granted under the Plan may be non-qualified
stock options or incentive stock options, as provided herein, except that stock
options granted to Outside Directors shall in all cases be non-qualified stock
options.
ARTICLE II
DEFINITIONS
For purposes of interpreting the Plan and related documents
(including Option Agreements), the following definitions shall apply:
2.01 Affiliate. The term "affiliate" of, or "affiliated" with, a person
shall mean any company or other trade or business that controls, is controlled
by or is under common control with such person within the meaning of Rule 405 of
Regulation C under the Securities Act, including a "Subsidiary" (as defined
herein).
2.02 Benefit Arrangement. The term "Benefit Arrangement" shall have the
meaning set forth in Article 12 hereof.
2.03 Board. The term "Board" shall mean the Board of Directors of the
Company.
2.04 Code. The term "Code" shall mean the Internal Revenue Code of 1986,
as now in effect or as hereafter amended.
1
<PAGE> 2
2.05 Committee. The term "Committee" shall mean a committee of, and
designated from time to time by resolution of, the Board, which shall consist of
no fewer than two members of the Board.
2.06 Company. The term "Company" shall mean Dolphin Information Services,
Inc., a Delaware corporation.
2.07 Effective Date. The term "Effective Date" shall mean the date on
which the Plan is approved by the sole stockholder of the Company.
2.08 Exchange Act. The term "Exchange Act" shall mean the Securities
Exchange Act of 1934, as now in effect or as hereafter amended.
2.09 Fair Market Value. The term "Fair Market Value" shall mean the value
of a share of Stock, determined as follows: if on the Grant Date or other
determination date the shares of Stock are listed on an established national or
regional stock exchange, are admitted to quotation on the Nasdaq National
Market, or are publicly traded on an established securities market, the Fair
Market Value of a share shall be the closing price of the shares of Stock on
such exchange or in such market (the highest such closing price if there is more
than one such exchange or market) on the trading day prior to the Grant Date or
such other determination date (or if there is no such reported closing price,
the Fair Market Value shall be the mean between the highest bid and lowest asked
prices or between the high and low sale prices on such trading day) or, if no
sale of shares of Stock are reported for such trading day, on the next preceding
day on which any sale shall have been reported. If the shares of Stock are not
listed on such an exchange, quoted on such system or traded on such a market,
Fair Market Value shall be the value of the shares of Stock as determined by the
Board in good faith, which determination shall be final, conclusive and binding;
provided that, any time when at least a majority of the voting power of the
Company's capital stock is beneficially owned by ORBCOMM Global, L.P., any such
determination of Fair Market Value shall only be effective upon the approval of
the designated representatives of the General Partners of ORBCOMM Global, L.P.
2.10 Grant. The term "Grant" shall mean an award of an Option under the
Plan.
2.11 Grant Date. The term "Grant Date" shall mean, as determined by the
Board or authorized Committee (a) the date as of which the Board or such
Committee approves a Grant or (b) the date on which the recipient of a Grant
first becomes eligible to receive a Grant under Article 6 hereof.
2.12 Incentive Stock Option. The term "Incentive Stock Option" shall mean
an "incentive stock option" within the meaning of Section 422 of the Code, or
the corresponding provision of any subsequently enacted tax statute, as amended
from time to time.
2.13 Option. The term "Option" shall mean an option to purchase one or
more shares of Stock pursuant to the Plan.
2
<PAGE> 3
2.14 Option Agreement. The term "Option Agreement" shall mean the written
agreement between the Company and an Optionee that evidences and sets forth the
terms and conditions of a Grant.
2.15 Optionee. The term "Optionee" shall mean a person who receives or
holds an Option under the Plan.
2.16 Option Period. The term "Option Period" shall have the meaning set
forth in Section 10.01 hereof.
2.17 Option Price. The term "Option Price" shall mean the purchase price
for each share of Stock subject to an Option.
2.18 Other Agreement. The term "Other Agreement" shall have the meaning
set forth in Section 12 hereof.
2.19 Outside Director. The term "Outside Director" shall mean a member of
the Board who is not an officer or employee of the Company.
2.20 Plan. The term "Plan" shall mean this Dolphin Information Services,
Inc. 1998 Stock Option Plan.
2.21 Reporting Person. The term "Reporting Person" shall mean a person
who is required to file reports under Section 16(a) of the Exchange Act.
2.22 Securities Act. The term "Securities Act" shall mean the Securities
Act of 1933, as now in effect or as hereafter amended.
2.23 Stock. The term "Stock" shall mean the common stock, par value $.001
per share, of the Company.
2.24 Subsidiary. The term "Subsidiary" shall mean any "subsidiary
corporation" of the Company within the meaning of Section 424(f) of the Code.
2.25 Termination Date. The term "Termination Date" shall have the meaning
set forth in Section 10.02 hereof.
ARTICLE III
ADMINISTRATION OF PLAN
3.01 Administration by Board. The Board shall have such powers and
authorities related to the administration of the Plan as are consistent with the
Company's Certificate of Incorporation, Bylaws and applicable law. The Board
shall have full power and authority to take all actions and to make all
determinations required or provided for under the Plan, any Grant or
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any Option Agreement, and shall have full power and authority to take all such
other actions and make all such other determinations not inconsistent with the
specific terms and provisions of the Plan that the Board deems to be necessary,
appropriate or desirable to the administration of the Plan, any Grant or any
Option Agreement. All such actions and determinations shall be by the
affirmative vote of a majority of the members of the Board present at a meeting
or by unanimous consent of the Board executed in writing in accordance with the
Company's Certificate of Incorporation, Bylaws and applicable law. The
interpretation and construction by the Board of any provision of the Plan, any
Grant or any Option Agreement shall be final, binding and conclusive. At any
time when at least a majority of the voting power of the Company's capital stock
is beneficially owned by ORBCOMM Global, L.P., prior to the Grant of any Option
and each other action taken with respect to the Plan, the Board shall consult
with the designated representatives of the General Partners of ORBCOMM Global,
L.P. (except to the extent otherwise authorized by such representatives) with
respect to such intended Grant or other action.
3.02 Administration by Committee. The Board from time to time may
delegate to a Committee such powers and authorities related to the
administration and implementation of the Plan, as set forth in Section 3.01
hereof and in other applicable provisions, as the Board shall determine,
consistent with the Company's Certificate of Incorporation, Bylaws and
applicable law. In the event that the Plan, any Grant or any Option Agreement
entered into hereunder provides for any action to be taken by or determination
to be made by the Board, such action may be taken by or such determination may
be made by the Committee if the power and authority to do so has been delegated
to the Committee by the Board as provided for in this Section. Unless otherwise
expressly determined by the Board, any such action or determination by the
Committee shall be final, binding and conclusive.
3.03 Grants. Subject to the other terms and conditions of the Plan, the
Board shall have full and final authority to (a) designate Optionees, (b)
determine the type or types of Grants to be made to an Optionee, (c) determine
the number of shares of Stock to be subject to a Grant, (d) establish the terms
and conditions of each Grant (including, but not limited to, the Option Price of
any Option, the nature and duration of any restriction or condition (or
provision for lapse thereof) relating to the vesting, exercise, transfer or
forfeiture of a Grant or the shares of Stock subject thereto, and any terms or
conditions that may be necessary to qualify Options as Incentive Stock Options),
(e) prescribe the form of each Option Agreement evidencing a Grant, (f) make
Grants alone, in addition to, in tandem with, or in substitution or exchange for
any other Grant or any other award granted under another plan of the Company or
an affiliate of the Company, and (g) amend, modify, or supplement the terms of
any outstanding Grant. The Company may retain the right in an Option Agreement
to cause a forfeiture of any rights of an Optionee pursuant to a Grant
(including, but not limited to, the gain realized by an Optionee) on account of
the Optionee taking actions in "competition with the Company," as defined in the
applicable Option Agreement. Furthermore, the Company may annul a Grant if the
Optionee is an employee of the Company or an affiliate and is terminated "for
cause" as defined in the applicable Option Agreement. The Board's authority
hereunder specifically includes the authority, to effectuate the purposes of the
Plan but without amending the Plan, to modify Grants to eligible individuals who
are foreign nationals or are individuals who are employed outside the United
States to recognize differences in local law, tax policy or custom. The terms
and conditions imposed by the Board
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with respect to the vesting, exercise or forfeiture of a Grant may, without
limitation, include performance-based conditions relating to the trading price
of shares of Stock, market share, sales, revenue growth, cost reduction,
earnings per Share and return on equity. As a condition to any subsequent Grant,
the Board shall have the right, at its discretion, to require Optionees to
return to the Company Grants previously awarded under the Plan. Subject to the
terms and conditions of the Plan, any such new Grant shall be upon such terms
and conditions as are specified by the Board at the time the new Grant is made.
3.04 No Liability. No member of the Board or of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Grant or Option Agreement.
3.05 Applicability of Rule 16b-3. Those provisions of the Plan that make
express reference to Rule 16b-3 under the Exchange Act shall apply only to
Reporting Persons and shall be effective only from and after the date the
Company has a class of equity security registered under Section 12 of the
Exchange Act.
ARTICLE IV
NUMBER OF SHARES AVAILABLE FOR GRANT
4.01 Aggregate Limitation. Subject to adjustment as provided in Section
15.01 hereof, the aggregate number of shares of Stock available for issuance
under the Plan pursuant to Options (including Incentive Stock Options) shall be
3,000,000. Shares of Stock issued or to be issued under the Plan shall be
authorized but unissued shares. If any shares covered by a Grant are not
purchased or are forfeited, or if a Grant otherwise terminates without delivery
of any shares of Stock subject thereto, then the number of shares of Stock
counted against the aggregate number of shares available under the Plan with
respect to such Grant shall, to the extent of any such forfeiture or
termination, again be available for making Grants under the Plan.
4.02 Per-Optionee Limitation. The initial Grant of Options to any person
eligible for a Grant under Section 6.01 hereof may not be exercisable for
greater than 360,000 shares of Stock (subject to adjustment as provided in
Section 15.03 hereof). Except for the initial Grant, no person eligible for a
Grant under Section 6.02 hereof may be awarded Options in any calendar year
exercisable for greater than 100,000 shares of Stock (subject to adjustment as
provided in Section 15.03 hereof). If the initial Grant is of Options
exercisable for 100,000 shares of Stock or more, no additional Grants may be
made in the same calendar year to the same Optionee. If the initial Grant is of
Options exercisable for fewer than 100,000 shares of Stock, additional Grants
may be made in the same calendar year to the same Optionee so long as Options to
acquire no more than an aggregate of 100,000 shares of Stock are granted to such
Optionee in such year.
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ARTICLE V
TERM OF PLAN
The Plan shall be effective as of the Effective Date. The Plan has no
termination date; however, no Incentive Stock Option may be granted under the
Plan on or after October 9, 2008.
ARTICLE VI
PERMISSIBLE GRANTEES
6.01 Company and Affiliate Employees. Subject to the provisions of
Article 7, Grants may be made under the Plan to any employee of the Company,
ORBCOMM Global, L.P. or any of their respective affiliates, including any such
employee who is an officer or director of the Company, ORBCOMM Global, L.P. or
any of their respective affiliates, and any Outside Director of the Company,
ORBCOMM Global, L.P. or any of their respective affiliates.
6.02 Successive Grants. An eligible person may receive more than one
Grant, subject to such restrictions as are provided herein.
ARTICLE VII
LIMITATIONS ON GRANTS OF INCENTIVE STOCK OPTIONS
An Option shall constitute an Incentive Stock Option only (a) if the
Optionee of such Option is an employee of the Company or any Subsidiary of the
Company; (b) to the extent specifically provided in the related Option
Agreement; and (c) to the extent that the aggregate Fair Market Value
(determined at the time the Option is granted) of the shares of Stock with
respect to which all Incentive Stock Options held by such Optionee become
exercisable for the first time during any calendar year (under the Plan and all
other plans of the Optionee's employer and its affiliates) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
ARTICLE VIII
OPTION AGREEMENT
Each Grant pursuant to the Plan shall be evidenced by an Option
Agreement, in such form or forms as the Board shall from time to time determine.
Option Agreements evidencing Grants made from time to time or at the same time
need not contain similar provisions but shall be consistent with the terms of
the Plan. Each Option Agreement evidencing a Grant shall specify whether such
Options are intended to be non-qualified stock options or Incentive Stock
Options, and in the absence of such specification such options shall be deemed
non-qualified stock options.
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ARTICLE IX
OPTION PRICE
The Option Price of each Option shall be fixed by the Board and stated in
the Option Agreement evidencing such Option. The Option Price of an Incentive
Stock Option shall be the Fair Market Value of a share of Stock on the Grant
Date; provided, however, that in the event that an Optionee would otherwise be
ineligible to receive an Incentive Stock Option by reason of the provisions of
Sections 422(b)(6) and 424(d) of the Code (relating to ownership of more than
ten percent (10%) of the Company's outstanding shares of Stock), the Option
Price of an Option granted to such Optionee that is intended to be an Incentive
Stock Option shall be not less than one hundred and ten percent (110%) of the
Fair Market Value of a share of Stock on the Grant Date. In no case shall the
Option Price of any Option be less than eighty-five percent (85%) of the Fair
Market Value of a share of Stock on the Grant Date.
ARTICLE X
VESTING, TERM AND EXERCISE OF OPTIONS
10.01 Vesting and Option Period. Subject to Section 10.02 and Section
15.01 hereof, each Option granted under the Plan shall become exercisable at
such times and under such conditions as shall be determined by the Board and
stated in the applicable Option Agreement. For purposes of this Section 10.01,
fractional numbers of shares of Stock subject to an Option shall be rounded down
to the next nearest whole number. The period during which any Option shall be
exercisable shall constitute the "Option Period" with respect to such Option.
10.02 Term. Each Option granted under the Plan shall terminate, and all
rights to exercise options and purchase shares of Stock thereunder shall cease,
upon the expiration of ten years from the Grant Date, or under such
circumstances and on such date prior thereto as is set forth in the Plan or as
may be fixed by the Board and stated in the Option Agreement relating to such
Option (the "Termination Date"); provided, however, that in the event that the
Optionee would otherwise be ineligible to receive an Incentive Stock Option by
reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating
to ownership of more than ten percent (10%) of the outstanding shares of Stock),
an Option granted to such Optionee that is intended to be an Incentive Stock
Option shall not be exercisable after the expiration of five years from its
Grant Date.
10.03 Acceleration. Any limitation on the exercise of an Option contained
in any Option Agreement may be rescinded, modified or waived by the Board, in
its sole discretion, at any time and from time to time after the Grant Date of
such Option, so as to accelerate the vesting for such Option.
10.04 Termination of Employment or Other Relationship for a Reason Other
than Death or Disability. Upon the termination of an Optionee's employment or
other relationship with the Company, ORBCOMM Global, L.P. or any of their
respective affiliates, other than by reason of
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death or "permanent and total disability" (within the meaning of Section
22(e)(3) of the Code), any Option or portion thereof held by such Optionee that
has not vested as of such date in accordance with the provisions of Section
10.01 hereof shall terminate immediately. With respect to any Option or portion
thereof that has vested as of such date in accordance with the provisions of
Section 10.01 hereof but has not been exercised, such Optionee shall have the
right to exercise any such vested Option at any time within the earlier of (a)
the close of business on the day that is three months following the Optionee's
termination of employment or other relationship (or, if such day is a Saturday,
Sunday or holiday, at the close of business on the next preceding day that is
not a Saturday, Sunday or holiday) (or, in the case of an Option that is not an
Incentive Stock Option, such longer period as the Board, in its discretion, may
determine prior to the expiration of such three month period) and (b) the
termination of the Option pursuant to Section 10.02 above. Upon termination of
an Option or portion thereof, the Optionee shall have no further right to
purchase shares of Stock pursuant to such Option or portion thereof. Whether a
leave of absence or leave on military or government service shall constitute a
termination of employment or other relationship for purposes of the Plan shall
be determined by the Board, which determination shall be final, binding and
conclusive. For purposes of the Plan, a termination of employment, service or
other relationship shall not be deemed to occur if the Optionee is immediately
thereafter employed with or an officer of the Company, ORBCOMM Global, L.P. or
any of their respective affiliates, or is engaged as an Outside Director of the
Company, ORBCOMM Global, L.P. or any of their respective affiliates. Whether a
termination of an Optionee's employment or other relationship with the Company,
ORBCOMM Global, L.P. or any of their respective affiliates shall have occurred
shall be determined by the Board, which determination shall be final, binding
and conclusive.
10.05 Rights in the Event of Death. If an Optionee dies while employed by
or providing services to the Company, ORBCOMM Global, L.P. or any of their
respective affiliates, any Option or portion thereof held by such Optionee that
has not vested as of the date of such Optionee's death in accordance with the
provisions of Section 10.01 hereof shall terminate immediately. With respect to
any Option or portion thereof that has vested as of such date in accordance with
the provisions of Section 10.01 hereof but has not been exercised, the executors
or administrators or legatees or distributees of such Optionee's estate shall
have the right to exercise any such Option at any time within the earlier of (a)
one year after the date of such Optionee's death (or such longer period as the
Board, in its discretion, may determine prior to the expiration of such one-year
period) and (b) the termination of the Option pursuant to Section 10.02 above.
Upon termination of an Option or portion thereof, the executors or
administrators or legatees or distributees of such Optionee's estate shall have
no further right to purchase shares of Stock pursuant to such Option or portion
thereof.
10.06 Rights in the Event of Disability. If an Optionee's employment or
other relationship with the Company, ORBCOMM Global, L.P. or any of their
respective affiliates is terminated by reason of the "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, any Option or portion thereof held by such Optionee that has not
vested as of the date of such "permanent and total disability" in accordance
with the provisions of Section 10.01 hereof shall terminate immediately. With
respect to any Option or portion thereof that has vested as of such date in
accordance with the provisions of Section 10.01
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hereof but has not been exercised, such Optionee shall have the right to
exercise any such Option at any time within the earlier of (a) one year after
such termination of employment or service (or, in the case of an Option that is
not an Incentive Stock Option, such longer period as the Board, in its
discretion, may determine prior to the expiration of such one-year period) and
(b) termination of the Option pursuant to Section 10.02 above. Whether a
termination of employment or service by reason of "permanent and total
disability" shall have occurred shall be determined by the Board, which
determination shall be final, binding and conclusive. Upon termination of an
Option or portion thereof, Optionee shall have no further right to purchase
shares of Stock pursuant to such Option or portion thereof.
10.07 Limitations on Exercise of Option. Notwithstanding any other
provision of the Plan, in no event may any Option be exercised, in whole or in
part, prior to the Effective Date, after ten years following the Grant Date for
such Option, or after the occurrence of an event referred to in Section 15.02
hereof that results in termination of the Option.
10.08 Method of Exercise. An Option that is exercisable may be exercised
by the Optionee's delivery to the Company of written notice of exercise on any
business day, at the Company's principal office, addressed to the attention of
the Secretary of the Company. Such notice shall specify the number of shares of
Stock with respect to which the Option is being exercised and shall be
accompanied by payment in full of the Option Price of the shares of Stock for
which the Option is being exercised. Payment of the Option Price for the shares
purchased pursuant to the exercise of an Option shall be made (a) in cash or in
cash equivalents; (b) to the extent permitted by law and at the discretion of
the Company, through the tender to the Company of shares of Stock, which shares,
if acquired from the Company, shall have been held for at least six months and
which shall be valued, for purposes of determining the extent to which the
Option Price has been paid thereby, at their Fair Market Value on the date of
exercise of the Option; or (c) by combination of the methods described in (a)
and (b). The Board may provide, by inclusion of appropriate language in an
Option Agreement, that payment in full of the Option Price need not accompany
the written notice of exercise provided that the notice is accompanied by
delivery of an unconditional and irrevocable undertaking by a licensed broker
acceptable to the Company as the agent for the individual exercising the Option
to deliver promptly to the Company sufficient funds to pay the Option Price and
directs that the certificate or certificates for the shares of Stock for which
the Option is exercised be delivered to a licensed broker acceptable to the
Company as the agent for the individual exercising the Option and, at the time
such certificate or certificates are delivered, the broker tenders to the
Company cash (or cash equivalents acceptable to the Company) equal to the Option
Price for the shares of Stock purchased pursuant to the exercise of the Option
plus the amount (if any) of federal and/or other taxes that the Company may in
its judgment, be required to withhold with respect to the exercise of the
Option. An attempt to exercise any Option granted hereunder other than as set
forth above shall be invalid and of no force and effect.
10.09 Rights as a Stockholder. Unless otherwise stated in the applicable
Option Agreement, an individual holding or exercising an Option shall have none
of the rights of a stockholder (for example, the right to receive cash or
dividend payments or distributions attributable to the subject shares of Stock
or to direct the voting of the subject shares of Stock)
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until the shares of Stock covered thereby are fully paid and issued to such
individual. Except as provided in Article 15 hereof, no adjustment shall be made
for dividends, distributions or other rights for which the record date is prior
to the date of such issuance.
10.10 Delivery of Stock Certificates. Promptly after the exercise of an
Option by an Optionee and the payment in full of the Option Price, such Optionee
shall be entitled to the issuance of a Stock certificate or certificates
evidencing his or her ownership of the shares of Stock subject to the Option.
ARTICLE XI
TRANSFERABILITY OF OPTIONS
11.01 Nontransferability of Options. During the lifetime of an Optionee,
only the Optionee (or, in the event of legal incapacity or incompetence, the
Optionee's guardian or legal representative) may exercise an Option. No Option
shall be assignable or transferable by the Optionee to whom it is granted, other
than by will or the laws of descent and distribution.
11.02 Nontransferability of Shares. An Optionee (or such other individual
who is entitled to exercise an Option) shall not sell, pledge, assign, gift,
transfer, or otherwise dispose of any shares of Stock acquired pursuant to an
Option to any person or entity without first offering such shares to the Company
for purchase on the same terms and conditions as those offered the proposed
transferee. The Company may assign its right of first refusal under this Section
11.02 in whole or in part, to (a) any holder of stock or other securities of the
Company (a "Securityholder"), (b) any of its or ORBCOMM Global, L.P.'s
affiliates or (c) any other person or entity that the Board determines in its
sole discretion has a sufficient relationship with or interest in the Company.
The Company shall give reasonable written notice to the Optionee of any such
assignment of its rights. The restrictions of this Section 11.02 re-apply to any
person to whom Stock that was originally acquired pursuant to an Option is sold,
pledged, assigned, bequeathed, gifted, transferred or otherwise disposed of,
without regard to the number of such subsequent transferees or the manner in
which they acquire the Stock, but the restrictions of this Section 11.02 do not
apply to a transfer of Stock that occurs as a result of the death of the
Optionee or of any subsequent transferee (but shall apply to the executor, the
administrator or personal representative, the estate, and the legatees,
beneficiaries and assigns thereof).
11.03 Company Repurchase Rights.
(a) Upon the termination of an Optionee's employment or other
relationship with the Company, ORBCOMM Global, L.P. or any of their respective
affiliates (whether as an employee or a director of the Company, ORBCOMM Global,
L.P. or any of their respective affiliates, or otherwise), the Company shall
have the right, for a period of up to 180 days following such termination, to
repurchase any or all of the shares of Stock acquired by the Optionee pursuant
to the Plan under an Option (including shares that were previously transferred
pursuant to Section 11.01 or Section 11.02 above, unless otherwise specified in
the Option
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Agreement), at a price equal to the Fair Market Value of such shares of Stock on
the date of termination.
(b) Upon the exercise of an Option following termination of an
Optionee's employment or other relationship with the Company, ORBCOMM Global,
L.P. or any of their respective affiliates (whether as an employee or a director
of the Company, ORBCOMM Global, L.P. or any of their respective affiliates, or
otherwise), the Company shall have the right, for a period of up to 180 days
following such exercise, to repurchase any or all of the shares of Stock
acquired by the Optionee pursuant to such Option exercise, at a price that is
equal to the Fair Market Value of such shares (including shares that were
previously transferred pursuant to Section 11.01 or Section 11.02 above, unless
otherwise specified in the Option Agreement), on the date of exercise (or at the
Fair Market Value on such other date as shall have been specified by the Board
on the Grant Date and set out in the applicable Option Agreement with respect to
the Grant).
(c) On the closing of any repurchase authorized under this Section
11.03, the Optionee shall deliver to the Company a certificate or certificates
representing the Shares to be purchased by the Company, duly endorsed for
transfer, free and clear of any lien or encumbrance, in exchange for payment of
the purchase price (i) by check, (ii) by delivery of a subordinated promissory
note of the Company in the principal amount of the purchase price of the Shares,
bearing interest at a rate equal to the then applicable federal short-term rate
(determined pursuant to Section 1274(d) of the I.R.C.), providing for quarterly
payments of interest and payment of the principal amount in full on the first
anniversary of the date of issuance, and containing provisions as approved by
the Board in its sole discretion providing for the subordination of such notes
to such indebtedness, whether then existing or thereafter created, of the
Company as is specified by the Board, including, without limitation,
indebtedness for money borrowed or similar indebtedness, or (iii) any
combination of the foregoing; provided, however, that no more than fifty percent
(50%) of the purchase price for Shares may be paid by subordinated promissory
note.
(d) In the event that the Company determines that it cannot or will
not exercise its rights to purchase Stock under this Section 11.03 and the
applicable Option Agreement, in whole or in part, the Company may assign its
rights, in whole or in part, to (i) any Securityholder, (ii) of its or ORBCOMM
Global L.P.'s affiliates or (iii) any other person or entity that the Board
determines in its sole discretion has a sufficient relationship with or interest
in the Company. The Company shall give reasonable written notice to the Optionee
of any assignment of its rights.
11.04 Purchase by Company of Stock Acquired Pursuant to Option Exercises.
(a) Subject to the conditions set forth in this Section, an Optionee or his or
her executor, administrator, legatee or distributee that has acquired shares of
Stock pursuant to exercise of an Option shall have the right, so long as such
Optionee is still an employee or Outside Director of the Company, ORBCOMM
Global, L.P. or any of their respective affiliates or such Optionee has suffered
a "permanent and total disability" or has died, to require the Company to
repurchase any or all of such shares of Stock that have been held by the
Optionee for at least six months from the date of exercise of such Option
("Payable Stock"). The Company shall purchase Payable Stock
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at a price that is equal to the Fair Market Value of such shares on March 1 and
September 1 of each year (each such date is referred to as a "Valuation Date").
Within 30 days after each such Valuation Date after any Options have become are
exercisable, the Company shall cause the Fair Market Value of the Stock to be
determined and shall notify each holder of Payable Stock of such Fair Market
Value (the "Company Notice"). Within 30 days after the date of the Company
Notice, each such holder of Payable Stock may elect to have all or any portion
of his or her Payable Shares be purchased by the Company at a price per share
equal to such Fair Market Value by submitting to the Committee an irrevocable
written notice of such election (the "Optionee Notice").
(b) The purchase and sale of such shares shall be completed within
60 days after the Company Notice, at the principal offices of the Company or at
such other place and time as the Company and the Optionee may agree. At the
closing, the Optionee shall deliver to the Company a certificate or certificates
representing the Payable Stock specified in the Optionee Notice to be purchased
by the Company, duly endorsed for transfer, free and clear of any lien or
encumbrance, in exchange for payment of the purchase price (i) by check, (ii) by
delivery of a subordinated promissory note of the Company in the principal
amount of the purchase price of the Payable Stock, bearing interest at a rate
equal to the then applicable federal short-term rate (determined pursuant to
Section 1274(d) of the I.R.C.), providing for quarterly payments of interest and
payment of the principal amount in full on the first anniversary of the date of
issuance, and containing provisions as approved by the Board in its sole
discretion providing for the subordination of such notes to such indebtedness,
whether then existing or thereafter created, of the Company as is specified by
the Board, including, without limitation, indebtedness for money borrowed or
similar indebtedness, or (iii) any combination of the foregoing; provided,
however, that no more than fifty percent (50%) of the purchase price for Payable
Stock may be paid by subordinated promissory note.
(c) Notwithstanding the foregoing, each repurchase by the Company
pursuant to this Section must be specifically authorized by the Board, which may
only authorize such repurchase if (i) such repurchase is permitted under
applicable laws or under the terms of any of (A) the Company's, ORBCOMM Global's
or any of their respective affiliates' then-existing debt instruments or
agreements governing such debt instruments, (B) the then-existing terms of any
class of preferred stock of the Company, ORBCOMM Global or any of their
respective affiliates, or (C) any then-existing stockholders agreement to which
the Company, ORBCOMM Global, L.P. or any of their respective affiliates is a
party; (ii) there has not yet been a public offering (within the meaning of the
Securities Act and the rules and regulations thereunder) of the Stock; (iii) no
amounts are owed by the Company to any Securityholder at the time of such
repurchase; (iv) the Board determines, in its sole discretion, that such
repurchase would not impair the working capital of the Company; and (v) the
Company would be authorized under law to declare and pay cash dividends on the
shares of its capital stock at the time of such repurchase; provided that, any
time when at least a majority of the voting power of the Company's capital stock
is beneficially owned by ORBCOMM Global, L.P., any such repurchase shall require
the prior approval of the designated representatives of the General Partners of
ORBCOMM Global, L.P.
11.05 Publicly Traded Stock. If the Stock is listed on an established
national or regional stock exchange or the Nasdaq National Market, or is
publicly traded in an established securities
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market, the transfer restrictions of Section 11.02 and Section 11.03 shall
terminate as of the first date that the Stock is so listed or publicly traded.
11.06 Legend. To enforce the restrictions imposed upon shares of Stock
under the Plan or as provided in an Option Agreement, the Board may cause a
legend or legends to be placed on any certificate representing shares of Stock
issued pursuant to the Plan that complies with the applicable securities laws
and regulations and makes appropriate reference to the restrictions imposed
under the Plan.
ARTICLE XII
PARACHUTE LIMITATIONS
Notwithstanding any other provision of the Plan or of any other
agreement, contract, or understanding heretofore or hereafter entered into by an
Optionee with the Company or any affiliate of the Company, except an agreement,
contract, or understanding hereafter entered into that expressly modifies or
excludes application of this paragraph (an "Other Agreement"), and
notwithstanding any formal or informal plan or other arrangement for the direct
or indirect provision of compensation to the Optionee (including groups or
classes of participants or beneficiaries of which the Optionee is a member),
whether or not such compensation is deferred, is in cash or is in the form of a
benefit to or for the Optionee (a "Benefit Arrangement"), if the Optionee is a
"disqualified individual," as defined in Section 280G(c) of the Code, any Option
held by that Optionee and any right to receive any payment or other benefit
under the Plan shall not become exercisable or vested (a) to the extent that
such right to exercise, vesting, payment or benefit, taking into account all
other rights, payments or benefits to or for the Optionee under the Plan, all
Other Agreements and all Benefit Arrangements, would cause any payment or
benefit to the Optionee under the Plan to be considered a "parachute payment"
within the meaning of Section 280G(b)(2) of the Code as then in effect (a
"Parachute Payment") and (b) if, as a result of receiving a Parachute Payment,
the aggregate after-tax amounts received by the Optionee from the Company under
the Plan, all Other Agreements and all Benefit Arrangements would be less than
the maximum after-tax amount that could be received by the Optionee without
causing any such payment or benefit to be considered a Parachute Payment. In the
event that the receipt of any such right to exercise, vesting, payment, or
benefit under the Plan, in conjunction with all other rights, payments, or
benefits to or for the Optionee under any Other Agreement or any Benefit
Arrangement would cause the Optionee to be considered to have received a
Parachute Payment under the Plan that would have the effect of decreasing the
after-tax amount received by the Optionee as described in clause (b) of the
preceding sentence, then the Optionee shall have the right, in the Optionee's
sole discretion, to designate those rights, payments or benefits under the Plan,
any Other Agreements and any Benefit Arrangements that should be reduced or
eliminated so as to avoid having the payment or benefit to the Optionee under
the Plan be deemed to be a Parachute Payment.
13
<PAGE> 14
ARTICLE XIII
REQUIREMENTS OF LAW
13.01 General. The Company shall not be required to sell or issue any
shares of Stock in connection with the exercise of any Option if the sale or
issuance of such shares of Stock would constitute a violation by the Optionee,
any other person exercising a right emanating from such Option, or the Company
of any provision of any law or regulation of any governmental authority,
including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its sole discretion,
that the listing, registration or qualification of any shares of Stock subject
to a Option upon any securities exchange or under any governmental regulatory
body is necessary, appropriate or desirable as a condition of, or in connection
with, the issuance or purchase of shares of Stock hereunder, no shares of Stock
may be issued or sold to the Optionee or any other person exercising a right
emanating from such Option unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Company, and any delay caused thereby shall in no way
affect the date of termination of the Option. Specifically, in connection with
the Securities Act, upon the exercise of any Option that may be settled in
shares of Stock, unless a registration statement under the Securities Act is in
effect with respect to the shares of Stock covered by such Option, the Company
shall not be required to sell or issue such shares of Stock unless the Board has
received evidence satisfactory to it that the Optionee or any other person
exercising a right emanating from such Option may acquire such shares of Stock
pursuant to an exemption from registration under the Securities Act. Any
determination in this connection by the Board shall be final, binding and
conclusive. The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Securities Act. The Company shall not
be obligated to take any affirmative action to cause the exercise of an Option
or the issuance of shares of Stock pursuant to the Plan to comply with any law
or regulation of any governmental authority. As to any jurisdiction that
expressly imposes the requirement that an Option shall not be exercisable until
the shares of Stock covered by such Option are registered or are exempt from
registration, the exercise of such Option (under circumstances in which the laws
of such jurisdiction apply) shall be deemed conditioned upon the effectiveness
of such registration or the availability of such an exemption.
13.02 Rule 16b-3. During any time when the Company has a class of equity
security registered under Section 12 of the Exchange Act, it is the intent of
the Company that Grants pursuant to the Plan and the exercise of Options granted
hereunder will qualify for the exemption provided by Rule 16b-3 under the
Exchange Act. To the extent that any provision of the Plan or action by the
Board does not comply with the requirements of Rule 16b-3, it shall be deemed
inoperative to the extent permitted by law and deemed advisable by the Board,
and shall not affect the validity of the Plan. In the event that Rule 16b-3 is
revised or replaced, the Board may exercise its discretion to modify the Plan in
any respect necessary to satisfy the requirements of, or to take advantage of
any features of, the revised exemption or its replacement.
14
<PAGE> 15
ARTICLE XIV
AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Grants have not been
made; provided, however, that the Board shall not, without approval of the
Company's stockholders, amend the Plan such that it does not comply with the
Code or, to the extent applicable, Section 16b-3. Except as permitted under this
Article 14 or Article 15 hereof, no amendment, suspension, or termination of the
Plan shall, without the consent of the Optionee, alter or impair rights or
obligations under any Grant theretofore awarded under the Plan.
ARTICLE XV
EFFECT OF CHANGES IN CAPITALIZATION
15.01 Changes in Shares of Stock. Subject to Section 15.02, in the event
of any merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, spin-off, split-up, share combination or other
change in the corporate structure of the Company affecting the shares of Stock,
(a) such adjustment may be made in the number and class of shares of Stock that
may be delivered under Section 4.01 hereof and the Grant limits under Section
4.02 hereof, and in the number and class of and/or price of shares of Stock
subject to outstanding Grants as may be determined to be appropriate and
equitable by the Board, in its sole discretion, to prevent dilution or
enlargement of existing rights; and (b) the Board, or, if another legal entity
assumes the obligations of the Company hereunder, the board of directors,
compensation committee or similar body of such other legal entity, shall either
(i) make appropriate provision for the protection of outstanding Grants by the
substitution on an equitable basis of appropriate equity interests or awards
similar to the Grants, provided that the substitution neither enlarges nor
diminishes the value and rights under the Grants or (ii) upon written notice to
the Optionees, provide that Grants will be exercised, distributed, canceled or
exchanged for value pursuant to such terms and conditions (including the waiver
of any existing terms or conditions) as shall be specified in the notice. Any
adjustment of an Incentive Stock Option under this Section 15.01 shall be made
in such a manner so as not to constitute a "modification" within the meaning of
Section 424(h)(3) of the Code. The conversion of any convertible securities of
the Company shall not be treated as a change in the corporate structure of the
Company affecting the shares of Stock.
15.02 Reorganization, Sales of Assets or Sale of Shares of Stock. The
Board may, in its discretion, determine that, upon the dissolution or
liquidation of the Company or upon a merger, consolidation, or reorganization of
the Company with one or more other entities in which the Company is not the
surviving entity, or upon a sale of substantially all of the assets of the
Company to another entity, or upon any transaction (including, without
limitation, a merger or reorganization in which the Company is the surviving
entity) that results in any person or entity (or person or entities acting as a
group or otherwise in concert, owning eighty percent (80%) or more of the
combined voting power of all classes of securities of the Company, all Options
outstanding hereunder shall become immediately exercisable for a specified
period not to exceed 15 days
15
<PAGE> 16
immediately prior to the scheduled consummation of the event, except to the
extent provision is made in writing in connection with such transaction for the
continuation of the Plan or the assumption of such Options, theretofore granted,
or for the substitution for such Options of new options covering the stock of a
successor entity, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kinds of shares or units and exercise prices,
in which event the Plan and Option theretofore granted shall continue in the
manner and under the terms so provided. Notwithstanding the foregoing, if any
such transaction is to be accounted for as a pooling, all Options outstanding
hereunder shall become immediately exercisable for a period of 15 days
immediately prior to the scheduled consummation of the event, except to the
extent provision is made in writing in connection with such transaction for the
continuation of the Plan or the assumption of such Options, theretofore granted,
or for the substitution for such Options of new options covering the stock of a
successor entity, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kinds of shares or units and exercise prices,
in which event the Plan and Option theretofore granted shall continue in the
manner and under the terms so provided. Any exercise of an Option during such
specified (or in the case of a "pooling" transaction, 15-day) period shall be
conditioned upon the consummation of the event and shall be effective only
immediately before the consummation of the event. Upon consummation of any such
event, the Plan and all outstanding but unexercised Options shall terminate,
except to the extent provision is made in writing in connection with such
transaction for the continuation of the Plan or the assumption of such Options
theretofore granted, or for the substitution for such Options of new options
covering the shares of a successor entity, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kinds of shares or units and
exercise prices, in which event the Plan and Options theretofore granted shall
continue in the manner and under the terms so provided. The Board shall send
written notice of an event that will result in such a termination to all
individuals who hold Options not later than the time at which the Company gives
notice thereof to its stockholders.
15.03 Adjustments. Adjustments under this Article 15 related to shares of
Stock or securities of the Company shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. No
fractional shares of Stock or other securities shall be issued pursuant to any
such adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share of
Stock.
15.04 No Limitations on Company. The making of Grants pursuant to the
Plan shall not affect or limit in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge, consolidate, dissolve or liquidate, or to
sell or transfer all or any part of its business or assets.
ARTICLE XVI
DISCLAIMER OF RIGHTS
No provision in the Plan, any Grant or any Option Agreement shall be
construed to confer upon any individual the right to remain in the employ or
service of the Company, ORBCOMM Global, L.P. or any of their respective
affiliates, or to interfere in any way with any
16
<PAGE> 17
contractual or other right or authority of the Company, ORBCOMM Global, L.P. or
any of their respective affiliates either to increase or decrease the
compensation or other payments to any individual at any time, or to terminate
any employment or other relationship between any individual and the Company,
ORBCOMM Global, L.P. or any of their respective affiliates. In addition,
notwithstanding anything contained in the Plan to the contrary, unless otherwise
stated in the applicable Option Agreement, no Grant awarded under the Plan shall
be affected by any change of duties or position of the Optionee, so long as such
Optionee continues to be a director, officer or employee of the Company, ORBCOMM
Global, L.P. or any of their respective affiliates. The obligation of the
Company to pay any benefits pursuant to the Plan shall be interpreted as a
contractual obligation to pay only those amounts described herein, in the manner
and under the conditions prescribed herein. The Plan shall in no way be
interpreted to require the Company to transfer any amounts to a third party
trustee or otherwise hold any amounts in trust or escrow for payment to any
participant or beneficiary under the terms of the Plan.
ARTICLE XVII
NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to or approval by the stockholders of the Company shall be construed as
creating any limitations upon the right and authority of the Board to adopt such
other incentive compensation arrangements (which arrangements may be applicable
either generally to a class or classes of individuals or specifically to a
particular individual or particular individuals) as the Board in its sole
discretion determines desirable, including, without limitation, the granting of
stock options otherwise than under the Plan.
ARTICLE XVIII
WITHHOLDING TAXES
The Company, ORBCOMM Global, L.P. or any of their respective affiliates,
as the case may be, shall have the right to deduct from payments of any kind
otherwise due to an Optionee any Federal, state, or local taxes of any kind
required by law to be withheld upon the exercise of an Option. At the time of
such vesting, lapse, or exercise, the Optionee shall pay to the Company ORBCOMM
Global, L.P. or any of their respective affiliates, as the case may be, any
amount that the Company, ORBCOMM Global, L.P. or any of their respective
affiliates may reasonably determine to be necessary to satisfy such withholding
obligation. To the extent permitted by law and at the discretion of the Company,
ORBCOMM Global, L.P. or any of their respective affiliates, the Optionee may
elect to satisfy such obligations, in whole or in part, (a) by causing the
Company, ORBCOMM Global, L.P. or any of their respective affiliates to withhold
shares of Stock otherwise issuable to the Optionee or (b) by delivering to the
Company, ORBCOMM Global, L.P. or any of their respective affiliates shares of
Stock already owned by the Optionee, which shares, if acquired from the Company,
shall have been held for at least six months by such Optionee and which shall be
valued at their Fair Market Value on the date of exercise of the Option and be
equal to such withholding obligations. An Optionee who has made
17
<PAGE> 18
an election pursuant to this Article 18 may satisfy his or her withholding
obligation only with shares of Stock that are not subject to any repurchase,
forfeiture, unfulfilled vesting, or other similar requirements.
ARTICLE XIX
GENERAL PROVISIONS
19.01 Captions. The use of captions in the Plan or any Option Agreement
is for the convenience of reference only and shall not affect the meaning of any
provision of the Plan or such Option Agreement.
19.02 Other Provisions. Each Grant awarded under the Plan may contain
such other terms and conditions not inconsistent with the Plan as may be
determined by the Board, in its sole discretion.
19.03 Number and Gender. With respect to words used in the Plan, the
singular form shall include the plural form, the masculine gender shall include
the feminine gender, etc., as the context requires.
19.04 Severability. If any provision of the Plan or any Option Agreement
shall be determined to be illegal or unenforceable by any court of law in any
jurisdiction, the remaining provisions hereof and thereof shall be severable and
enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.
19.05 Pooling. Notwithstanding anything in the Plan to the contrary, if
any right under or feature of the Plan would cause to be ineligible for pooling
of interest accounting a transaction that would, but for the right or feature
hereunder, be eligible for such accounting treatment, the Board may modify or
adjust the right or feature so that the transaction will be eligible for pooling
of interest accounting. Such modification or adjustment may include payment of
cash or issuance to an Optionee of shares of Stock having a Fair Market Value
equal to the cash value of such right or feature.
19.06 Governing Law. The validity and construction of the Plan and the
instruments evidencing the Grants awarded hereunder shall be governed by the
laws of the State of Delaware (without giving effect to the conflict or choice
of law provisions thereof).
* * *
18
<PAGE> 19
The Plan was duly adopted and approved by the Board of Directors and the
sole stockholder of the Company as of the 9th day of October 1998.
/S/ MARY ELLEN SERAVALLI
------------------------------------------
Mary Ellen Seravalli
Vice President and Secretary
19
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrants
As of December 31, 1998
ORBCOMM Global, L.P.
1. ORBCOMM USA. L.P., a Delaware limited partnership
2. ORBCOMM International Partners, L.P., a Delaware limited partnership
3. ORBCOMM Global Capital Corp., a Delaware corporation
4. ORBCOMM Corporation, a Delaware corporation
5. Dolphin Information Services, Inc., a Delaware corporation
6. Dolphin Software Services ULC, a Nova Scotia unlimited liability company
ORBCOMM Global Capital Corp.
None.
ORBCOMM Corporation
None.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORBCOMM
GLOBAL, L.P. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K FILING.
</LEGEND>
<CIK> 0001021649
<NAME> ORBCOMM GLOBAL, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,799
<SECURITIES> 390
<RECEIVABLES> 248
<ALLOWANCES> 0
<INVENTORY> 6,688
<CURRENT-ASSETS> 11,125
<PP&E> 352,540
<DEPRECIATION> 24,594
<TOTAL-ASSETS> 346,634
<CURRENT-LIABILITIES> 71,245
<BONDS> 170,000
0
0
<COMMON> 0
<OTHER-SE> 104,790
<TOTAL-LIABILITY-AND-EQUITY> 346,634
<SALES> 1,262
<TOTAL-REVENUES> 1,262
<CGS> 1,242
<TOTAL-COSTS> 1,242
<OTHER-EXPENSES> 67,748<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,900<F2>
<INCOME-PRETAX> (69,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,628)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>* Includes 11,048 as depreciation expenses and 4,732 as equity in net
losses of affiliates
<F2>** Net of interest income of 914
</FN>
</TABLE>
