<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
<TABLE>
<S> <C>
Iridium World Communications Ltd. Iridium LLC
(Exact name of Co-Registrant as specified in (Exact name of Co-Registrant as specified in
its charter) the charter)
Bermuda Delaware
(State or other jurisdiction of incorporation) (State or other jurisdiction of organization)
0-22637 0-22637-01
(Commission File Number) (Commission File Number)
52-2025291 52-1984342
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
Clarendon House
2 Church Street 1575 Eye Street, N. W.
Hamilton HMll Washington, D. C. 20005
Bermuda
(Address of principal executive offices) (Address of principal executive offices)
(441)295-5950 (202)326-5600
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
</TABLE>
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 past 90 days.
Yes No X
---- ----
Shares outstanding
Class at July 31, 1997
- ----------------------------- ---------------------------
Common Stock $0.01 12,000,000
par value per share ---------------------------
<PAGE> 2
IRIDIUM WORLD COMMUNICATIONS LTD
--------
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
--------
INDEX TO FORM 10-Q
--------
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
IRIDIUM WORLD COMMUNICATIONS LTD
Condensed Balance Sheets
June 30, 1997 and December 31, 1996 4
Unaudited Condensed Statements of Loss
For the three and six months ended June 30, 1997 5
Unaudited Condensed Statement of Cash Flows
For the six months ended June 30, 1997 6
Notes to Unaudited Condensed Financial Statements 7
IRIDIUM LLC
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 8
Unaudited Condensed Consolidated Statements of Loss
For the three months ended June 30, 1997 and 1996
and six months ended June 30, 1997 and 1996 9
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended June 30, 1997 and 1996
and six months ended June 30, 1997 and 1996 10
Notes to Unaudited Condensed Consolidated Financial Statements 11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
</TABLE>
2
<PAGE> 3
IRIDIUM WORLD COMMUNICATIONS LTD
--------
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
--------
INDEX TO FORM 10-Q
(CONTINUED)
--------
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 19
ITEM 2 Changes in Securities and Use of Proceeds 19
ITEM 3 Defaults upon Senior Securities 19
ITEM 4 Submission of Matters to a Vote of Security Holders 19
ITEM 5 Other Information 19
ITEM 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
3
<PAGE> 4
IRIDIUM WORLD COMMUNICATIONS LTD.
CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1997
1996 (UNAUDITED)
------------ ------------
ASSETS
<S> <C> <C>
Cash...................................................................... $ -- $ --
Investment in Iridium LLC................................................. -- 224,821
------------- -------------
Total assets.................................................. $ -- $ 224,821
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities............................................................... $ -- $ --
Stockholders' equity:
Class B Common stock, non-voting, par value $0.01; 2,500,000 shares
authorized; none issued or outstanding............................ -- --
Class A Common stock, voting, par value $0.01; 50,000,000 shares
authorized; 1,200,000 and 12,000,000 issued and outstanding....... 12 120
Additional paid-in capital................................................ -- 225,480
Subscription receivable................................................... (12) --
Retained earnings (deficit)............................................... -- (779)
------------- -------------
Total stockholders' equity.................................... -- 224,821
------------- -------------
Total liabilities and stockholders' equity.................... $ -- $ 224,821
============= =============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
4
<PAGE> 5
IRIDIUM WORLD COMMUNICATIONS LTD.
UNAUDITED CONDENSED STATEMENTS OF LOSS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------ ----------------
<S> <C> <C>
Equity in loss of Iridium........................ $ 779 $ 779
----------------- ---------------
Net loss......................................... $ 779 $ 779
================= ===============
Net loss per Class A Common share................ $ 0.28 $ 0.56
================= ===============
Weighted average shares used in computing
net loss per Class A Common shares........... 2,769,231 1,392,265
================= ===============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
<PAGE> 6
IRIDIUM WORLD COMMUNICATIONS LTD.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Net loss............................................. $ (779)
Adjustment to reconcile net loss to net
cash used in operating activities:
Equity in loss of Iridium................... 779
-------------
Net cash used in operating activities....... --
-------------
Cash Flows From Investing Activities:
Investment in Iridium LLC............................ (225,600)
-------------
Net cash used in investing activities....... (225,600)
-------------
Cash Flows From Financing Activities:
Net proceeds from equity offering.................... 225,600
Proceeds from Class A Common Stock subscribed........ 12
Retirement of Class A Common Stock................... (12)
-------------
Net cash provided by financing activities.... 225,600
-------------
Increase in cash and cash equivalents.................... --
Cash and Cash Equivalents, beginning of period........... --
-------------
Cash and Cash Equivalents, end of period................. $ --
=============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
6
<PAGE> 7
IRIDIUM WORLD COMMUNICATIONS LTD.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments necessary for a fair presentation
of the financial position of Iridium World Communications Ltd. ("IWCL") as of
June 30, 1997 and its results of operations for the three and six month periods
then ended, and its cash flows for the six month period ended June, 30, 1997.
These condensed financial statements are unaudited and do not include all
related footnote disclosures. These financial statements should be read in
conjunction with the audited financial statement and footnotes thereto included
in the registration statement on Form S-1 (333-23419, 23419-01), dated June 9,
1997.
Since its inception on December 12, 1996 through June 30, 1997, IWCL has
not entered into any operating transactions or incurred any expenses. The
results of operations for the three and six months ended June 30, 1997 are not
necessarily indicative of the results of operations expected in the future.
During March 1997, IWCL registered with the Securities and Exchange
Commission 13,800,000 shares of its Class A Common Stock for sale in an initial
public offering (the "Offering"), and on June 13, 1997 IWCL consummated the
Offering and issued 12,000,000 shares. Pursuant to the 1997 Subscription
Agreement between IWCL and Iridium LLC ("Iridium"), approximately $225 million
in net proceeds from the Offering were invested in Iridium Class 1 Membership
Interests, at which time the outstanding shares of Class A Common Stock held by
Iridium were retired, and IWCL became a member of Iridium.
2. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("Statement 128"). Statement 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share"
("APB 15") and its related interpretations, and promulgates new accounting
standards for the computation and manner of presentation of earnings (loss) per
share data. IWCL is required to adopt the provisions of Statement 128 for the
year ending December 31, 1997. Earlier application is not permitted; however,
upon adoption of Statement 128 IWCL will be required to restate previously
reported annual and interim earnings (loss) per share data in accordance with
the provisions of Statement 128. IWCL does not believe that the adoption of
Statement 128 will have a material impact on the computation or manner of
presentation of its earnings (loss) per share data as presented under APB 15.
3. SUBSEQUENT EVENT
On July 16,1997, Iridium and Iridium Capital Corporation, a wholly owned
subsidiary of Iridium, completed an offering (the "High Yield Offering") of (i)
300,000 units, each consisting of $1,000 principal amount of 13% Senior Notes
due 2005, Series A, and one IWCL Warrant, representing the right to purchase
5.2 shares of Class A Common Stock of IWCL and (ii) $500 million aggregate
principal amount of 14% Senior Notes due 2005, Series B. IWCL is not an obligor
of the Series A or Series B Notes. The IWCL Warrants represent, in aggregate,
the right to purchase 1,560,000 shares of Class A Common Stock of IWCL.
Approximately $17,113,000 of the proceeds of the High Yield Offering was
allocated to the purchase price of the IWCL Warrants. The exercise price of
each IWCL Warrant is $20.90 per share. The IWCL Warrants are exercisable at
anytime on or after one year from the date of original issuance and expire on
July 15, 2005. Concurrent with the issuance of the IWCL Warrants in the High
Yield Offering, Iridium issued to IWCL 1,560,000 LLC Interest Warrants, each
exerciseable for one Class 1 Interest at an exercise price of $20.90 per LLC
Interest Warrant. The LLC Interest Warrants are designed to be exercised upon
the exercise of the IWCL Warrants.
7
<PAGE> 8
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT MEMBER INTEREST DATA)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1997
ASSETS 1996 (UNAUDITED)
------------ -------------
<S> <C> <C>
Current assets :
Cash and cash equivalents............................................... $ 1,889 $ 106,419
Due from affiliates..................................................... 3,476 10,269
Prepaid expenses and other current assets............................... 7,154 9,321
------------ -----------
Total current assets................................................ 12,519 126,009
Property and equipment - net................................................ 2,065 3,959
System under construction................................................... 2,376,884 2,708,325
Other assets................................................................ 42,613 96,252
------------ ----------
Total assets........................................................ $ 2,434,081 $ 2,934,545
============ ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities :
Accounts payable and accrued expenses................................... $ 17,937 $ 38,748
Accounts payable to member.............................................. 100,563 189,000
------------ -----------
Total current liabilities........................................... 118,500 227,748
Guaranteed bank facility.................................................... 505,000 660,000
Long term debt due to Members............................................... 230,904 253,337
Other liabilities........................................................... 7,648 6,327
------------ -----------
Total liabilities................................................... 862,052 1,147,412
------------ -----------
Commitments and contingencies
Members' equity :
Class 2 Interests, authorized 50,000 interests for Series M;
authorized an aggregate of 300,000 interests for Series A,
Series B and Series C:
Series M, convertible, no interest issued and outstanding........... -- --
Series A, redeemable, convertible, 46,977 and 37,194
interests issued and outstanding; liquidation value of $37,194..... 46,977 37,194
Series B, redeemable, 1 interest issued and outstanding............. -- --
Series C, redeemable, 75 interests issued and outstanding........... -- --
Class 1 Interests, authorized 225,000,000 interests, 120,836,025 and
135,836,025 interests issued and outstanding.......................... 1,659,625 1,968,366
Deficit accumulated during the development stage........................ (133,840) (217,694)
Adjustment for minimum pension liability................................ (733) (733)
------------ -----------
Total Members' equity............................................... 1,572,029 1,787,133
------------ -----------
Total liabilities and Members' equity............................... $ 2,434,081 $ 2,934,545
============ ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
8
<PAGE> 9
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS EXCEPT MEMBER INTEREST DATA)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, JUNE 14, 1991
------------------------------ ----------------------------- (INCEPTION) THROUGH
1996 1997 1996 1997 JUNE 30, 1997
-------------- ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Operating expenses
Sales, general and administrative........... $ 10,321 $ 48,414 $ 18,731 $ 84,468 $ 222,600
Other income
Interest income............................. 481 488 1,715 614 12,877
------------ ------------ ------------ ------------ ------------
Loss before provision for income taxes.......... 9,840 47,926 17,016 83,854 209,723
Provision for income taxes...................... - - 487 - 7,971
------------ ------------ ------------ ------------ ------------
Net loss........................................ $ 9,840 $ 47,926 $ 17,503 $ 83,854 $ 217,694
============ ============ ============ ============ ============
Preferred dividend requirement.................. 839 1,316 839 3,607
------------ ------------ ------------ ------------
Net loss applicable to Class 1 Interests........ $ 10,679 $ 49,242 $ 18,342 $ 87,461
============ ============ ============ ============
Net loss per Class 1 Interest................... $ 0.09 $ 0.40 $ 0.15 $ 0.71
============ ============ ============ ============
Weighted average interests used in computing
net loss per Class 1 Interest............... 119,962,650 124,627,234 118,729,176 123,625,227
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
9
<PAGE> 10
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED JUNE 30, JUNE 14, 1991
--------------------------- (INCEPTION) THROUGH
1996 1997 JUNE 30, 1997
----------- ----------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................................ $ (17,503) $ (83,854) $ (217,694)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization ........................................ 287 603 2,908
Expense recognized for warrants issued in
connection with debt guarantee ................................... -- 35,266 60,985
Changes in assets and liabilities:
(Increase) decrease in prepaids and other current assets ......... 483 (2,167) (9,321)
Decrease in due from affiliates .................................. -- (6,793) (10,269)
Increase in other assets ......................................... (9,282) (16,643) (33,016)
Increase in accounts payable and accrued expenses ................ 4,294 20,811 38,748
(Decrease) increase in other liabilities ......................... 6,418 (1,321) 5,594
----------- ----------- -----------
Net cash used in operating activities ........................ (15,303) (54,098) (162,065)
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment .................................... (603) (2,422) (6,792)
Additions to system under construction ................................. (376,000) (224,566) (2,472,760)
----------- ----------- -----------
Net cash used in investing activities ......................... (376,603) (226,988) (2,479,552)
----------- ----------- -----------
Cash Flows From Financing Activities:
Net proceeds from issuance of Class 1 and 2 interests .................. 175,167 263,691 1,912,813
Gross proceeds from issuance of senior subordinated
notes and warrants ................................................... 201,720 -- 238,453
Borrowings under bank line of credit ................................... -- 230,000 815,478
Payments under bank line of credit ..................................... -- (75,000) (155,478)
Deferred financing costs ............................................... (5,466) (33,075) (63,230)
----------- ----------- -----------
Net cash provided by financing activities ...................... 371,421 385,616 2,748,036
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ........................... (20,485) 104,530 106,419
Cash and Cash Equivalents, beginning of period ............................. 51,332 1,889 --
----------- ----------- -----------
Cash and Cash Equivalents, end of period.................................... $ 30,847 $ 106,419 $ 106,419
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
10
<PAGE> 11
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Iridium LLC ("Iridium") is devoting its present efforts to developing and
commercializing a global wireless telephony system - the IRIDIUM(R)
communications system (the "IRIDIUM System") - that will enable subscribers to
send and receive telephone calls virtually anywhere in the world - all with one
phone, one phone number and one customer bill.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of only
normal recurring accruals, necessary for a fair presentation of the financial
position of Iridium as of June 30, 1997, and the results of their operations
for the three and six month periods ended June 30, 1997 and 1996, and the
period from June 14, 1991 (inception) through June 30, 1997, and their cash
flows for the six month period ended June 30, 1997 and 1996, and the period
from June 14, 1991 (inception) through June 30, 1997. These condensed
consolidated financial statements are unaudited, and do not include all related
footnote disclosures. The results of operations for the three and six months
ended June 30, 1997 are not necessarily indicative of the results of operations
expected in the future, although the Company will continue to be a development
stage limited liability company and anticipates a net loss for the year. These
financial statements should be read in conjunction with Iridium's audited
consolidated financial statements and footnotes thereto included in the
registration statement on Form S-1 (333-23419, 23419-01), dated June 9, 1997.
3. MEMBERS' EQUITY
On April 16, 1997, the Limited Liability Company Agreement of Iridium was
amended to increase the authorized number of Class 1 Interests from 3,000,000
to 225,000,000. On May 9, 1997, Iridium effected a 75 for 1 subdivision of its
Class 1 Membership Interests whereby each existing Class 1 Interest was
subdivided into 75 Class 1 Interests. All interest and per interest data
appearing in the unaudited condensed consolidated financial statements and
notes thereto have been retroactively adjusted for the subdivision.
On May 9, 1997, Iridium entered into a definitive agreement with South
Pacific Iridium Holdings Limited ("SPI"), an affiliate of P.T. Bakrie
Communications Corporation ("Bakrie"), pursuant to which SPI agreed to acquire
from Iridium 7,500,000 Class 1 Interests at $13.33 per interest. The
transaction closed on May 30, 1997 with 40% of the total purchase price paid on
that date, 10% payable on November 15, 1997 and 50% on May 15, 1998. The
outstanding amount due will increase to approximately $70 million in the event
SPI elects in full its right to defer a portion of the purchase price. In
connection with its investment in Iridium, SPI has been allocated the South
Pacific gateway service territory.
On June 13, 1997, Iridium World Communications Ltd. ("IWCL"), a
wholly-owned subsidiary of Iridium as of that date, consummated an initial
public offering (the "Offering") of 12,000,000 shares of its Class A Common
Stock which resulted in proceeds of approximately $225 million to IWCL
(expenses of the offering were paid by Iridium). Pursuant to the 1997
Subscription Agreement between Iridium and IWCL, such proceeds were used to
purchase
11
<PAGE> 12
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12,000,000 Class 1 Interests in Iridium. Upon consummation of the Offering, all
of the outstanding shares of IWCL held by Iridium were retired, and IWCL became
a member of Iridium.
Iridium declared approximately $1,316,000 and $839,000 in-kind dividends
to holders of Series A Class 2 Membership Interests during the three month
periods ended June 30, 1997 and 1996, respectively, and $3,607,000 and $839,000
for the six month periods ended June 30, 1997 and 1996, respectively.
4. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 1997 and 1996, $32,032,000 and
$4,905,000, respectively, of interest expense was incurred and capitalized to
the system under construction. Interest paid was $7,931,000 during the six
months ended June 30, 1997, and no amounts were paid for interest during the
six months ended June 30, 1996.
There were no income taxes paid during the six months ended June 30, 1997,
and the amount paid for income taxes was $892,000 during the six months ended
June 30, 1996.
5. TRANSACTION WITH MEMBER
TERRESTRIAL NETWORK DEVELOPMENT CONTRACT
As a result of technological developments, changes in the desired product
mix and features of the IRIDIUM services, the addition of enhanced system
capabilities, and scheduling adjustments, Iridium entered into an amendment to
the Terrestrial Network Development Contract ("TNDC") with Motorola, Inc.
("Motorola"), effective July 15, 1997. Aggregate payments under the TNDC, as so
amended, are expected to be approximately $270 million.
GUARANTEED BANK FACILITY
In accordance with the Agreement Regarding the Guarantee between Iridium
and Motorola, pursuant to which Motorola guaranteed Iridium's obligations under
the Guaranteed Bank Facility, an additional 40,912 warrants to purchase
3,068,400 Class 1 Interests were earned by Motorola during the six months ended
June 30,1997. Iridium recognized $35,266,000 as expense during the six months
ended June 30, 1997 to reflect the fair market value of the warrants earned by
Motorola.
On July 21, 1997, Iridium permanently reduced the commitment of the bank
lenders in the Guaranteed Bank Facility from $750 million to $655 million. As a
result of the reduction, the maximum number of warrants Motorola may earn as
compensation for their guarantee of that facility prior to commercial
activation (assumed to be in September 1998) is 140,862 warrants to purchase
approximately 10,565,000 Class 1 Interests.
6. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("Statement 128"). Statement 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share"
("APB 15") and its related interpretations, and promulgates
12
<PAGE> 13
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
new accounting standards for the computation and manner of presentation of
Iridium's loss per Class 1 Interest data. Iridium is required to adopt the
provisions of Statement 128 for the year ending December 31, 1997. Earlier
application is not permitted; however, upon adoption of Statement 128, Iridium
will be required to restate previously reported annual and interim loss per
Class 1 Interest data in accordance with the provisions of Statement 128.
Iridium does not believe that the adoption of Statement 128 will have a
material impact on the computation or manner of presentation of its loss per
Class 1 Interest data as currently or previously presented under APB 15.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement 130
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. Iridium is required to adopt the
provisions of Statement 130 for the year ending December 31, 1998. Earlier
application is permitted; however, upon adoption of Statement 130, Iridium will
be required to reclassify previously reported annual and interim financial
statements. The disclosure of comprehensive income in accordance with the
provisions of Statement 130 will impact the manner of presentation of its
financial statements as currently and previously reported.
7. SUBSEQUENT EVENTS
On July 16, 1997, Iridium and Iridium Capital Corporation, a wholly owned
subsidiary of Iridium, completed an offering (the "High Yield Offering") of (i)
300,000 units, each consisting of $1,000 principal amount of 13% Senior Notes
due 2005, Series A, and one IWCL Warrant representing the right to purchase 5.2
shares of Class A Common Stock of IWCL, and (ii) $500 million aggregate
principal amount of 14% Senior Notes due 2005, Series B. The aggregate net
proceeds received were approximately $745 million. Interest on the Series A
Notes and Series B Notes is payable in cash semi-annually on January 15th and
July 15th of each year, commencing on January 15, 1998. The notes are
redeemable at the option of Iridium, in whole or in part, at any time on or
after July 15, 2002. The Series A and Series B Notes mature on July 15, 2005.
The IWCL Warrants represent, in aggregate, the right to purchase 1,560,000
shares of Class A Common Stock of IWCL. The exercise price of each IWCL Warrant
is $20.90 per share, exercisable at any time on or after one year from the date
of original issuance, and expires on July 15, 2005. Concurrent with the
issuance of the IWCL Warrants in the High Yield Offering, Iridium issued to
IWCL 1,560,000 LLC Interest Warrants, each exerciseable for one Class 1
Interest at an exercise price of $20.90 per LLC Interest Warrant. The LLC
Interest Warrants are designed to be exercised upon the exercise of the IWCL
Warrants.
Iridium has received a commitment letter from Chase Securities Inc., The
Chase Manhattan Bank, Barclays Bank PLC and BZW, the investment banking
division of Barclays Bank PLC, for a Secured Bank Facility in a principal
amount up to $750 million, to be secured by substantially all of Iridium's
assets and by the Reserve Capital Call, defined as the contractual commitment
by 17 of Iridium's investors to purchase up to 18,206,550 Class 1 Interests at
$13.33 per interest. Borrowings under the Secured Bank Facility would mature on
December 31, 1998, subject to Iridium's right to extend such maturity until
June 30, 1999 if it can demonstrate by October 31, 1998 that it has sufficient
available or committed financing for its projected capital and operating
expenses under its business plan through such extended maturity. The
availability of the Secured Bank Facility is subject to significant conditions,
including the execution of satisfactory definitive documentation, technical
conditions relating to the IRIDIUM System, conditions relating to regulatory
approvals and conditions relating to other financing sources.
13
<PAGE> 14
ITEM 2.
IRIDIUM WORLD COMMUNICATIONS LTD.
AND
IRIDIUM LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IWCL is a member of Iridium and has no other business. IWCL's sole assets
are its Class 1 Interests in Iridium and its LLC Interest Warrants, and IWCL's
results of operations reflect its proportionate share of the results of
operations of Iridium on an equity accounting basis.
Iridium is currently devoting its entire efforts to establishing and
commercializing the IRIDIUM communications system (the "Iridium System"). As
such, Iridium's current principal activities relate to managing the design,
construction and development of the system and preparing for its day-to-day
operations. See IWCL's and Iridium's financial statements and notes thereto
included elsewhere in this quarterly report.
FORWARD LOOKING INFORMATION
Iridium is a development stage enterprise. Accordingly, many statements in
this report are forward looking. Examples of such forward looking statements
include, but are not limited to, the statements concerning Iridium's
operations, funding needs, financial sources, schedule for commencement of
commercial operations, the estimate of the last year in which Iridium will have
negative cash flow and a net increase in year-end borrowings, and future
regulatory approvals, as well as information concerning expected
characteristics of competing systems and expected actions of third parties such
as equipment suppliers, gateway operators, service providers and roaming
partners. These forward looking statements are based on a number of assumptions
and are inherently predictive and speculative. One or more of the assumptions
underlying such forward looking statements is likely to be incorrect.
Therefore, actual results may be materially different from those expressed or
implied by such statements.
Factors which may cause IWCL's or Iridium's results to differ materially
from those expressed or implied by such forward looking statements include, but
are not limited to, (i) Iridium's absence of current revenues, highly leveraged
capital structure and significant additional funding needs, (ii) delays and
cost overruns related to the construction and deployment of the IRIDIUM System,
(iii) technological risks related to the development and implementation of the
various components of the IRIDIUM System, (iv) customer acceptance of Iridium's
services, (v) satellite launch, operations and maintenance risks, (vi) risks
associated with the need to obtain operating licenses in the numerous countries
where Iridium assumes it will provide its services, (vii) competition from
satellite and terrestrial communications services and (viii) Iridium's
dependence on Motorola, Inc. ("Motorola") and its other members for the
construction and operation of the IRIDIUM System and the distribution and
marketing of Iridium's services. These factors, and other factors that may
materially affect Iridium's operations, are described in greater detail in the
Securities and Exchange Commission filings of IWCL and Iridium, including
Exhibit 99.1 to this report.
LIQUIDITY AND CAPITAL RESOURCES
Funding Requirements
Iridium will require substantial amounts of continued outside financing to
acquire and develop its assets and to commence operations. With respect to the
IRIDIUM System, Iridium and Motorola have entered into (i) the Space System
Contract for the design, development, production and delivery in orbit of the
space segment, (ii) the Terrestrial Network Development Contract to design the
gateway hardware and software, and (iii) the Operations and Maintenance
14
<PAGE> 15
Contract to provide day-to-day management of the space segment after deployment
and to monitor, upgrade and replace hardware and software of the space segment
as necessary to maintain performance specifications. Substantially all of the
initial capital raised by Iridium is being used and will continue to be used to
make payments to Motorola under the Space System Contract and, to a lesser
extent, the Terrestrial Network Development Contract. The Space System Contract
provides for a fixed price of $3.45 billion (subject to certain adjustments),
scheduled to be paid by Iridium to Motorola over approximately a five-year
period for completion of milestones under the contract. Payments under the
Operations and Maintenance Contract will be payable quarterly and are expected
to aggregate approximately $2.88 billion over such contract's initial five-year
term (assuming commencement of commercial operations on September 23, 1998 and
no excusable delays), in addition to the cost of certain spare satellites at
the completion of the contract. The payments increase each year, ranging from
quarterly payments of $129.4 million in 1998 to $157.4 million in 2003 to
$171.4 million in 2005. If Iridium exercises its option to extend the
Operations and Maintenance Contract for an additional two years, the payments
due for that two-year extension are expected to aggregate approximately $1.33
billion (assuming commencement of commercial operations on September 23, 1998
and no excusable delays). The Terrestrial Network Development Contract provides
for payments aggregating approximately $270 million through 1999. As a result
of technological developments, changes in the product mix of the IRIDIUM
Service, and scheduling adjustments, including the implementation of ICRS
(Iridium Cellular Roaming Service) into Iridium's service offerings, there have
been, and Iridium anticipates there will be, amendments and interpretations of
the Space System Contact, the Terrestrial Network Development Contract and the
Operations and Maintenance Contract and other agreements and letters with
Motorola which may increase the total costs of these contracts. Iridium's
estimate of the cost of anticipated amendments is reflected in Iridium's
estimates of its funding requirements.
Through June 30, 1997, Iridium has incurred expenditures totaling $2.54
billion to Motorola under the Space System Contract in respect of completed
milestones and expenditures totaling $96 million under the Terrestrial Network
Development Contract. Based on current estimates and the current planned
schedule, Iridium's expected future cash requirements by year under the
contracts through December 31, 1999 are approximately as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Space System Contract...................... $ 477 $ 589 --
Terrestrial Network Development Contract... 68 47 $ 91
Operations and Maintenance Contract........ -- 140 538
</TABLE>
Iridium will also require funds for working capital, business software
development, interest on anticipated borrowings, financing costs and operating
expenses until some time after the commencement of commercial operations.
Iridium's interest expense will increase significantly as a result of its
financing plan. During commercialization, Iridium will be required to make
payments to Motorola under the Operations and Maintenance Contract. After
December 31, 1999 (the last year in which Iridium projects negative cash flow
and a net increase in year-end outstanding borrowings), Iridium's obligations
relating to the Operations and Maintenance Contract and funds needed for
working capital, capital expenditures and debt service are anticipated to be
funded through operations. Iridium anticipates cash funding requirements of
approximately $4.365 billion through September 1998, the month Iridium expects
to commence commercial operations, and $5.1 billion (net of assumed revenues
following commencement of commercial operations) through year-end 1999, the
last year in which Iridium projects negative cash flow and a net increase in
year-end borrowing.
The foregoing information reflects Iridium's current estimate of its
funding requirements through year-end 1999. Actual amounts may be expected to
vary from such estimates for a variety of reasons, including unforeseen
construction, integration or regulatory delays or launch failures.
15
<PAGE> 16
Sources of Funding
As of June 30, 1997, Iridium had equity investments of $1.982 billion,
including approximately $224 million in net proceeds from the IWCL initial
public offering and $60 million due from South Pacific Iridium Holdings Limited
pursuant to the terms of a definitive purchase agreement. At June 30, 1997,
debt equaled approximately $900 million, including a $750 million Guaranteed
Bank Facility, under which $660 million was outstanding as of June 30, 1997. On
July 21, 1997, Iridium permanently reduced the bank commitments under the
Guaranteed Bank Facility to $655 million. Borrowings under the Guaranteed Bank
Facility are guaranteed by Motorola (the "Motorola Guarantee").
On July 16, 1997, Iridium and Iridium Capital Corporation, a wholly owned
subsidiary of Iridium, completed an offering (the "High Yield Offering") of (i)
300,000 units, each unit consisting of $1,000 principal amount of 13% Senior
Notes due 2005, Series A, and one IWCL Warrant, representing the right to
purchase 5.2 shares of Class A Common Stock of IWCL and (ii) $500 million
aggregate principal amount of 14% Senior Notes due 2005, Series B, for
aggregate net proceeds of approximately $745 million. The Series A and Series B
Notes mature on July 15, 2005.
Pursuant to the Memorandum of Understanding, dated July 11, 1997, between
Iridium and Motorola ("Motorola MOU"), Motorola has conditionally agreed to
guarantee up to $350 million of additional indebtedness (including principal
and interest) under the Guaranteed Bank Facility or another credit facility on
identical terms (the "Motorola Additional Guarantee"), provided that borrowings
under such additional indebtedness are made on or prior to February 28, 1999.
Borrowings under the Guaranteed Bank Facility mature in August 1998. Pursuant
to the Motorola MOU, Motorola has agreed to extend the Motorola Guarantee
(including the Motorola Additional Guarantee, if committed) until after July
15, 2005, if the Guaranteed Bank Facility is so extended. Iridium believes it
would be able to amend the Guaranteed Bank Facility to increase its amount and
to extend its maturity, if it so requests. There can be no assurance, however,
that the bank lenders will agree to increase the amount of the Guaranteed Bank
Facility or to extend the term of the Guaranteed Bank Facility, if so requested
by Iridium, or that any such other identical credit facility would be
available.
Iridium has received a commitment letter from Chase Securities, Inc., The
Chase Manhattan Bank, Barclays Bank PLC and BZW, the investment banking
division of Barclays Bank PLC, for a bank facility (the "Secured Bank
Facility") in a principal amount up to $750 million, to be secured by
substantially all of Iridium's assets and by the Reserve Capital Call (as
defined). The availability of the Secured Bank Facility is subject to
significant conditions, including execution of satisfactory definitive
documentation, technical conditions relating to the IRIDIUM System, conditions
relating to regulatory approvals and conditions relating to other financing
sources. Borrowings under the Secured Bank Facility would mature on December
31, 1998, subject to Iridium's right to extend such maturity until June 30,
1999 if it can demonstrate by October 31, 1998 that is has sufficient available
or committed financing for its projected capital and operating expenses under
its business plan through such extended maturity. After giving effect to the
$745 million received from the Notes on July 16, 1997, and assuming
approximately $650 million of borrowings under the Guaranteed Bank Facility
(extended through Iridium's commencement of commercial operations as discussed
above) and full utilization of the Secured Bank Facility, Iridium expects to
have sufficient cash to meet its anticipated funding requirements through
September 1998, the month Iridium expects to commence commercial operations.
Iridium is seeking other senior secured bank financing in order to meet its
expected funding requirements through at least year-end 1999, the last year in
which Iridium projects negative cash flow and a net increase in year-end
borrowings.
Additional financing may also need to be obtained through the issuance of
equity or debt securities in the public or private markets. The availability
and terms of any such financing are uncertain and are dependent, in part, on
market conditions existing at the time of any proposed financing. Iridium's
estimated funding requirements will increase, perhaps substantially, in the
event of unexpected cost increases or schedule delays. Additional equity
financing, if pursued, may be raised either privately from strategic or
financial investors, or through additional public
16
<PAGE> 17
offerings. Pursuant to the Motorola MOU, Iridium agreed that, to the extent the
net proceeds to Iridium of senior note offerings prior to December 31, 1997
including the Series A and Series B Notes) exceed $650 million, it will apply
such excess to a prepayment of the Guaranteed Bank Facility and to a permanent
reduction of the commitments of the lenders thereunder (provided that such
commitments need not be reduced to an amount less than $275 million). On July
21, 1997 such commitments were reduced to $655 million as a result of the High
Yield Offering discussed above.
In connection with the Secured Bank Facility, the bank lenders will
require a security interest in substantially all of Iridium's assets and the
Reserve Capital Call, defined as the contractual commitment by 17 of Iridium's
investors to purchase up to 18,206,550 Class 1 Interests at $13.33 per
interest. The bank lenders also will require that the membership interests in
Iridium, or any company to which all or substantially all of Iridium's assets
are transferred, be pledged as security under the Secured Bank Facility. In
connection with granting such security interest, Iridium expects to enter into
a transaction whereby Iridium expects to establish a new wholly-owned
subsidiary and transfer all or substantially all of its assets and liabilities
to that subsidiary with Iridium remaining as a holding company for the new
entity. Iridium would then pledge all of the membership interests in the new
entity to the bank lenders in connection with the Secured Bank Facility. The
new entity is expected to be a member-managed limited liability company with
Iridium acting as the sole member and would assume Iridium's obligations with
respect to currently outstanding indebtedness of Iridium.
As a result of Iridium's outstanding debt and the expected incurrence of
significant additional indebtedness required to meet its capital requirements,
Iridium will have substantial indebtedness. The debt instruments governing
indebtedness contain restrictions on, among other things, the incurrence of
indebtedness. Iridium's ability to meet all of its debt service obligations
when due will require it to generate significant cash flow from operations or,
if necessary, make additional borrowings to refinance its outstanding
indebtedness. No assurance can be made that Iridium will be able to generate
sufficient cash flow to meet its debt service obligations or will be able to
refinance indebtedness.
OPERATIONS
Iridium is a development stage company and, as such, will not generate any
revenues from operations until the IRIDIUM System is constructed and deployed,
and commercial operations commence, which is currently anticipated to be in
September 1998. To date, Iridium's only source of income has been interest
income on the cash and investment balances from the proceeds of equity
commitments, which amounted to approximately $12.9 million from July 29, 1993
(the "Initial Capital Contribution Date") to June 30, 1997. During the same
period, Iridium recorded a net loss of $203 million. In addition, during the
years ended December 31, 1991 and 1992, and the period from January 1, 1993 to
the Initial Capital Contribution Date, aggregate costs of $14.8 million were
incurred by Motorola. Such costs were paid by Iridium to Motorola pursuant to a
reimbursement agreement.
As a development stage company, Iridium has incurred losses since its
inception and will continue to do so for the forseeable future. Iridium's
ability to become profitable and generate positive cash flow is dependent on
the successful commencement of the operation of the IRIDIUM System, wide
subscriber acceptance and numerous other factors.
Capitalization of Costs
All payments by Iridium under the Space System Contract are being
capitalized. These capitalized costs are then depreciated over the five-year
estimated life of the satellites. Depreciation expense is realized on a
satellite-by-satellite basis, commencing with the acceptance of title for each
such satellite. Depreciation related to the ground control stations commences
with the placement in service of each such station. Capitalized amounts under
the
17
<PAGE> 18
Space System Contract and the Terrestrial Network Development Contract
aggregated $2.64 billion through June 30, 1997. In addition, costs incurred in
connection with the issuance by Iridium of Class 1 Interests are reflected as a
reduction of additional paid-in capital and debt issuance costs are deferred.
Payment of these costs and charges has resulted in significant negative
operating cash flow. Certain interest expenses have and will also be
capitalized.
A portion of the payments made under the Operations and Maintenance
Contract will be capitalized and depreciated. Any payments under the Operations
and Maintenance Contract not capitalized will be expensed in the year paid.
Operating Expenses
For the period from the Initial Capital Contribution Date through June 30,
1997, marketing, general and administrative expenses were approximately $208
million. During the period prior to the Initial Capital Contribution Date,
total accumulated expenditures of approximately $14.8 million were incurred,
primarily to reimburse Motorola for expenses associated with operating Iridium
during the period from its incorporation in 1991 through the Initial Capital
Contribution Date. Iridium expects a substantial increase in future operating
expenditures relating to sales, marketing and other costs associated with
commercialization.
Interest Expense
Iridium expects to finance a significant portion of its capital
requirements through borrowings. As a result of these borrowings, Iridium will
have significant interest costs. Interest costs are being capitalized while the
system is under construction and will be depreciated thereafter. This has
resulted in all interest costs being capitalized during 1995, 1996, and the
three and six month periods ended June 30,1997, and will likely have similar
results for the remainder of 1997, with a meaningful portion of interest cost
expensed in 1998 and all interest cost expensed beginning in 1999. Some portion
of interest expense will not be paid in cash, including the interest expense
related to Iridium's 14 1/2 % Senior Subordinated Notes through March 1, 2001.
Such non-cash interest will be accrued and such accrual will increase
outstanding indebtedness on Iridium's balance sheet.
Income Taxes
Iridium reports its income as a partnership for United States federal
income tax purposes and accordingly, is not expected to be directly subject to
U. S. federal income tax. Iridium may, however, be subject to tax in some
state, local or foreign jurisdictions on portions of its income.
18
<PAGE> 19
PART II
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 9, 1997, Iridium and IWCL's registration statement (Registration
No. 333-23419 and 333-23419-01) with respect to the initial public offering
(the "IWCL IPO") of 12,000,000 IWCL Class A Common Shares (the "Shares") was
declared effective by the Securities and Exchange Commission. Merrill Lynch
International, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
Goldman Sachs International acted as the International Representatives, and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, DLJ, and Goldman, Sachs &
Co. acted as the U.S. Representatives in connection with the IWCL IPO. Pursuant
to the IWCL IPO, 12,000,000 Shares were offered for sale at an offering price
of $20.00 per share, for an aggregate offering price of $240,000,000. All
12,000,000 shares sold were sold in the IWCL IPO, which was consummated on June
13, 1997.
In connection with the IWCL IPO, the underwriting discount was an
aggregate of $14,400,000, or $1.20 per share, and the net offering proceeds to
IWCL from the IWCL IPO were $225,600,000. IWCL and Iridium reasonably estimated
that approximately $2,000,000 in other expenses were incurred in connection
with the IWCL IPO. Those expenses were borne entirely by Iridium. None of the
expenses (including the underwriting discount) was paid to any director,
officer, ten-percent owner or other affiliated party of Iridium or IWCL.
IWCL used the net proceeds of the offering to purchase 12,000,000 Class 1
Interests of Iridium pursuant to a 1997 Subscription Agreement between IWCL and
Iridium. IWCL owns approximately 8.5% of Iridium's outstanding Class 1
Interests.
Iridium is using and will continue to use the net proceeds from the sale
of its Class 1 Interests to IWCL primarily for milestone payments due to
Motorola under the Space System Contract and the Terrestrial Network
Development Contract and to a lesser extent for other general corporate
purposes. Motorola owns 18.8% of the Class 1 Interests of Iridium.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11.1 Computation of Loss Per Class A Common Share
11.2 Computation of Loss per Class 1 Interest
99.1 Certain of the Factors Which May Affect Forward
Looking Statements
</TABLE>
(b) Reports on Form 8-K
On July 18, 1997, the registrants filed a report describing
an anomaly with respect to one of the IRIDIUM satellites.
19
<PAGE> 20
IRIDIUM WORLD COMMUNICATIONS LTD.
---------
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
---------
SIGNATURES
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on each of their behalf
by the undersigned thereunto duly authorized:
/s/ Edward F. Staiano /s/ Roy T. Grant
- ----------------------------------- ------------------------------------
Dr. Edward F. Staiano Roy T. Grant
Chief Executive Officer, Iridium Chief Financial Officer, Iridium
World Communications Ltd. World Communications Ltd.
/s/ Edward F. Staiano /s/ Roy T. Grant
- ----------------------------------- ------------------------------------
Dr. Edward F. Staiano Roy T. Grant
Chief Executive Officer, Iridium LLC Chief Financial Officer, Iridium LLC
Date: August 11, 1997
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ---------------------- ----
<S> <C> <C>
11.1 Computation of Loss Per Class A Common Share 22
11.2 Computation of Loss per Class 1 Interest 23
27 Financial Data Schedule 24
99.1 Certain of the Factors Which May Affect Forward
Looking Statements 25
</TABLE>
21
<PAGE> 1
EXHIBIT 11.1
IRIDIUM WORLD COMMUNICATIONS LTD.
COMPUTATION OF LOSS PER CLASS A COMMON SHARE
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------ ----------------
<S> <C> <C>
Net loss applicable to Class A Common shares........ $ 779 $ 779
------------ ------------
Average number of shares outstanding................ 2,769,231 1,392,265
------------ ------------
Net Loss per Class A Common Share................... $ 0.28 $ 0.56
============ ============
</TABLE>
22
<PAGE> 1
EXHIBIT 11.2
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
COMPUTATION OF LOSS PER CLASS 1 INTEREST
(IN THOUSANDS EXCEPT MEMBER INTEREST DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1996 1997 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET LOSS APPLICABLE TO CLASS 1 INTERESTS:
Net loss................................................. $ 9,840 $ 47,926 $ 17,503 $ 83,854
Preferred dividend requirement........................... 839 1,316 839 3,607
-------------- -------------- -------------- --------------
Net loss applicable to class 1 interests................. $ 10,679 $ 49,242 $ 18,342 $ 87,461
============== ============== ============== ==============
AVERAGE NUMBER OF CLASS 1 INTERESTS:
Average number of Class 1 Interests outstanding.......... 119,962,650 124,627,234 118,729,176 123,625,227
Fully diluted adjustments (2):
Subscribed but unissued Class 1 Interests........... 873,375 1,532,967 1,536,024 770,716
Assumed exercise of options and warrants............ 4,484,259 11,266,689 2,843,367 10,425,446
Assumed conversion of Series A Class 2 Interest..... 427,859 911,951 226,359 869,544
-------------- -------------- -------------- --------------
Average number of Class 1 Interests assumed to be
outstanding, assuming full dilution................. 125,748,143 138,338,841 123,334,926 135,690,933
============== ============== ============== ==============
NET LOSS PER CLASS 1 INTEREST:
Primary (1).............................................. $ 0.09 $ 0.40 $ 0.15 $ 0.71
Fully diluted (2)........................................ $ 0.08 $ 0.35 $ 0.14 $ 0.62
</TABLE>
(1) The assumed exercise of options and warrants in periods of net loss are
anti-dilutive and are not included in the computation and presentation
of primary loss per Class 1 Interest.
(2) The assumed exercise of options, warrants, and conversion of Series A
Class 2 Interests are anti-dilutive but are included in the calculation
of fully diluted loss per Class 1 Interest in accordance with Regulation
S-K, Item 601 (a) (11).
23
<PAGE> 1
EXHIBIT 99.1
CERTAIN FACTORS WHICH MAY AFFECT
FORWARD LOOKING STATEMENTS
The following risk factors should be carefully considered by prospective
investors in IWCL or Iridium.
DEVELOPMENT STAGE COMPANY; ABSENCE OF REVENUES
Iridium is a development stage enterprise with no operating history. There
is no operating or financial data about the IRIDIUM System on which to base an
evaluation of the IRIDIUM System's performance and an investment in IWCL or
Iridium. Iridium currently has no source of revenues other than nominal
interest income. No assurances can be given that the IRIDIUM System will become
commercially operational, or that Iridium will have revenues from operations or
become profitable.
SIGNIFICANT ADDITIONAL FUNDING NEEDS
Iridium anticipates total funding requirements of approximately $4.365
billion through September 1998, the month Iridium expects to commence
commercial operations, and $5.1 billion (net of assumed revenues following
commercial activation) through year-end 1999, the last year in which Iridium
projects negative cash flow and a net increase in year-end borrowings. Based on
funds raised or committed to date, Iridium expects to have sufficient cash to
meet its anticipated funding requirements through September 1998, the month
Iridium expects to commence commercial operations. Iridium is seeking other
senior bank financing in order to meet its expected funding requirements
through at least year-end 1999. Iridium's estimated funding requirements do not
reflect any contingency amounts and therefore those requirements may increase,
perhaps substantially, in the event of unexpected cost increases or schedule
delays. There can be no assurance that Iridium will secure the financing it
needs to meet its anticipated funding requirements.
RISK OF HIGHLY LEVERAGED CAPITAL STRUCTURE
Iridium is a development stage company with a highly leveraged capital
structure and expects to incur substantial additional indebtedness, including
secured indebtedness. The amount of debt needed to finance the IRIDIUM System
could be increased by one or more factors outside the control of Iridium.
Iridium currently has no significant income-producing assets from which to
service its indebtedness.
POTENTIAL FOR DELAY AND COST OVERRUNS
Iridium's business plan assumes the IRIDIUM System will commence
commercial operations in September 1998. Motorola's construction schedule for
the satellites in the IRIDIUM System requires an unprecedented rate of
satellite assembly for commercial telecommunications systems. A significant
delay in the delivery of the satellites needed for the space segment would
materially and adversely affect Iridium's operations. A significant delay in
the date the IRIDIUM System becomes fully operational would harm the
competitive position of Iridium by eroding the timing advantages Iridium
currently anticipates, would delay the generation of revenue by Iridium and
might significantly affect Iridium's ability to pay interest on, and the
principal of, its indebtedness.
The operation of the IRIDIUM System is dependent on the successful
construction and operation of gateways. Iridium closely monitors the progress
of each gateway and currently expects that 11 gateways will be in operation
with voice functionality at the commencement of commercial operations. However,
there can be no assurance that one or more gateways will not fail to be
completed by the commencement of commercial operations, which could have a
material adverse effect upon Iridium.
Prior to commencement of commercial operations, Iridium must develop and,
in conjunction with each of the gateway owners, integrate and test software
related to the operation of the IRIDIUM System, including the business support
systems. A significant delay in the development, deployment or implementation
of such software systems would have a material adverse effect on Iridium.
25
<PAGE> 2
Significant delay in the development, manufacture and sale of phones and
pagers would have a material adverse effect on Iridium. Planned commercial
operation of the IRIDIUM System assumes that commercial quantities of the
portable, hand-held phones, Terrestrial Radio Cassettes and belt-worn pagers
will be ordered approximately six months in advance of expected delivery and
then produced for distribution shortly in advance of the commencement of
commercial operations. There can be no assurance that any such products will be
developed, manufactured and sold on a timely basis.
TECHNOLOGY IMPLEMENTATION RISKS
To build the IRIDIUM System, Motorola and its subcontractors must
integrate a number of sophisticated technologies. The integration of this array
of diverse technologies is a complex task which has not previously been
attempted and is further complicated by the fact that a significant portion of
the hardware components associated with the IRIDIUM System will be in space.
CONSEQUENCES OF SATELLITE SERVICE LIMITATIONS ON CUSTOMER ACCEPTANCE
Iridium's ability to generate sufficient operating revenues will depend
upon customer acceptance of and satisfaction with IRIDIUM Services, which in
turn will depend upon a variety of factors, including the price and technical
capabilities of the IRIDIUM Services and equipment, and the extent,
availability and price of alternative telecommunications services.
Based upon current testing and simulations, IRIDIUM subscribers using
IRIDIUM Satellite Services via portable, hand-held phones should expect some
degradation in service quality and availability to occur in environments where
obstructions, such as trees, buildings and other natural and man-made
obstacles, are positioned between a satellite and the user. The severity of
this degradation will increase as the obstacles become larger and more densely
spaced. In addition, only extremely limited satellite voice service, or no
satellite voice service, is expected to be available in densely packed urban
environments or inside buildings with steel construction and metal coated glass
common in many urban high rise buildings. Also, because the structure of
automobiles will tend to obstruct the satellite signal, use of a hand-held
Iridium phone in a moving automobile will make the effect of environmental
obstructions temporary but more pronounced. The actual limitations will vary,
sometimes significantly, as actual situations and conditions change and as the
satellites move across the sky. The IRIDIUM satellite paging service will also
be unable to provide service in certain environments where terrestrial paging
generally would. While Iridium believes that the addition of ICRS and the
availability of multi-mode phones will lessen the effect of these obstacles by
providing access to local cellular service (if available and if the local
cellular provider has an agreement in place with Iridium) in environments in
which the IRIDIUM Satellite Service is unavailable or degraded, there can be no
assurance that the service limitations will not result in significantly lower
sales to professional and other travelers than Iridium anticipates.
RISKS RELATED TO ICRS
Subscribers to Iridium's ICRS service will not experience the
satellite-related service limitations when their multi-mode phone is accessing
local wireless service, for example, in major urban areas. While the
availability of ICRS may lessen somewhat the impact of the satellite-related
service limitations, ICRS will only be available in an area if (i) that area
has an existing wireless system, (ii) the system uses a protocol supported by
Iridium and (iii) that system has a roaming agreement with Iridium.
In order for Iridium to offer interprotocol ICRS, Motorola entered into a
contract with a third-party supplier to develop, manufacture and deliver the
IIU that will permit protocol translation. However, there can be no assurance
that the required IIU will be delivered on a timely basis.
26
<PAGE> 3
SATELLITE LAUNCH RISKS
In order for the IRIDIUM System to be fully operational under its current
specifications and timetable, Iridium anticipates the need to launch
successfully at least 66 low earth orbit satellites in the 12 to 15 month
period from the first launch on May 5, 1997. Moreover, to maintain the system,
additional satellites are expected to be launched each year during the term of
the Operations and Maintenance Contract. No other commercial satellite
communications system has required this number of launches to become fully
deployed and operational. There can be no assurance that Iridium's satellites
will be successfully deployed in a timely manner or that launch failures,
whether or not deploying IRIDIUM satellites, will not occur and materially and
adversely affect Iridium.
The terms of the Space System Contract provide that Motorola will bear the
responsibility of launching the satellites that comprise the space segment.
Nevertheless, Iridium retains the risk of cost overruns and delays associated
with excusable delays, including delays in launch provider schedules due to
prior delays of launches of non-IRIDIUM satellites, and the risk of economic
damage due to any delay or reduced performance beyond the limited remedies
provided by the Space System Contract.
LIMITED LIFE OF SATELLITES; COST OF MAINTAINING THE SPACE SEGMENT; RISK OF
SATELLITE FAILURE OR DAMAGE
A significant portion of Iridium's tangible assets will be represented by
the satellites in the space segment. Iridium's business plan currently assumes
that the satellites will have a useful life of five years. There can be no
assurance that any satellite will actually achieve such a useful life.
Maintaining the space segment is a complex undertaking which has not
previously been attempted on a commercial basis. The cost of maintaining the
space segment and the risk of loss of satellites are significant. Iridium has
entered into an Operations and Maintenance Contract with Motorola which
provides for the operation and maintenance of the space segment for its first
five years of operation. Iridium has the option to extend the Operations and
Maintenance Contract for an additional two years. Under the Operations and
Maintenance Contract, Iridium will bear the risk of damage to satellites by the
acts of third parties (including but not limited to the degradation or complete
loss of any satellite due to contact with space debris of any size or
character). Satellites operating in the low earth orbit region, such as the
IRIDIUM satellites, face a higher risk of damage from space debris than
satellites operating in geostationary orbit.
Premature failure or interruption of one or more satellites, including
temporary losses, that for whatever reason are not promptly corrected or
replaced, could, among other things, cause gaps in service availability,
significantly degrade service quality, increase costs in the event Iridium is
liable, and result in loss of revenue for the period that service is
compromised and, as a result, could materially and adversely affect Iridium.
RISKS ASSOCIATED WITH LICENSING AND SPECTRUM ALLOCATION
The operation of the IRIDIUM System is and will continue to be subject to
United States and international regulation. This regulation is pervasive and
largely outside Iridium's direct control. Iridium, Motorola, and the various
gateway owners have made substantial progress in taking the steps needed to
implement the IRIDIUM System, but a significant number of additional regulatory
approvals remain to be obtained, in particular with respect to (1) the domestic
allocation in each country of spectrum for MSS and Aeronautical Mobile
Satellite (Route) Service ("AMS(R)S") use, (2) in each country in which a
gateway or system control terminal will be located, the authorizations to
construct and operate those facilities, including necessary gateway link
spectrum assignments, (3) in each country in which IRIDIUM subscriber equipment
will be operated, the authority to market and operate that equipment with the
IRIDIUM System, user link spectrum assignments, and authorization to offer
IRIDIUM communications services, and (4) international coordination of the
IRIDIUM System under the auspices of the ITU or domestic coordination in each
country where IRIDIUM Services are offered with other entities using or
proposing to use the spectrum required for the IRIDIUM System or adjacent
spectrum, to ensure the avoidance of harmful interference.
27
<PAGE> 4
COMPETITIVE RISKS
Certain sectors of the telecommunications industry are highly competitive
in the United States and in other countries. While no single wireless
communications system serves the global personal communications market today,
Iridium anticipates that more than one system will serve this market in some
fashion in the future. Iridium also expects to face competition from regional
geostationary satellite-based systems. Certain services are already available
to provide roaming services among a number of countries, including those that
use incompatible cellular standards. These services will compete directly with
Iridium's ICRS service and with Iridium's satellite-based phone services for
traveling professionals who travel between or among territories with
incompatible cellular standards. Moreover, it is expected that GSM-based
service will continue to expand its reach (including further into North
America), permitting broader roaming capability by subscribers to such systems
without the need for any interprotocol equipment and with a single phone.
Iridium will also compete for travel customers with businesses that provide
short-term rentals of terrestrial wireless phones capable of operating in
specific countries or regions.
RELIANCE ON MOTOROLA, GATEWAY OWNERS AND OTHER THIRD PARTIES
Construction and Operation of the IRIDIUM System
Iridium does not independently have and does not intend to acquire, except
by contracting with other parties, the ability to design, develop or produce
the components of the IRIDIUM System or to launch the constellation of
satellites or to operate and maintain the system once it is fully deployed.
Motorola has agreed to provide these services to Iridium under the Space System
Contract, the Operations and Maintenance Contract and the Terrestrial Network
Development Contract. Thus, Iridium currently relies on Motorola to perform
these critical tasks.
Motorola is also supplying gateway equipment and associated services and
Iridium believes that currently Motorola and Kyocera are the only companies
that are planning to develop and sell subscriber equipment. If for any reason
Motorola or any of its important subcontractors fail to perform as required
under the agreements, the ability of Iridium to implement the IRIDIUM System on
time and within estimated costs and, once implemented, to maintain and operate
the system, could be materially and adversely affected.
Iridium has obtained commitments from its investors who are gateway
operators that they will use their reasonable best efforts to perform certain
critical functions including: obtaining the necessary licenses, if any, from
the jurisdictions in which they operate; constructing and operating the
gateways; connecting the IRIDIUM System to PSTNs; marketing IRIDIUM Services;
selecting, or acting as, service providers; and managing relations with IRIDIUM
System subscribers either directly or through service providers. Iridium is
dependent on the activities of its gateway operators for its success. Some
gateway operators are behind schedule in the steps necessary to establish and
implement their gateways. Other gateway operators have indicated that they may
not receive regulatory approvals for some of the countries in their territories
at the anticipated commencement of commercial operations in September 1998.
There can be no assurance that Motorola will be able to meet its gateway
supply commitments or that gateway operators will perform their obligations
under gateway authorization agreements or gateway equipment purchase
agreements.
Distribution and Marketing of IRIDIUM Services
The sales of IRIDIUM Services and of IRIDIUM subscriber equipment to the
ultimate consumer will be made by service providers which will be, or will be
selected by, Iridium's gateway operators. Iridium's business plan assumes
substantial sales of IRIDIUM subscriber equipment by service providers prior to
the commencement of commercial services. Iridium's success will depend upon the
ability of such service providers to generate on a timely basis demand for
IRIDIUM Services and subscriber equipment, and there can be no assurance that
such demand can be generated on a timely basis.
28
<PAGE> 5
A number of gateway operators have entered into non-binding memoranda of
understanding with entities that have indicated an interest in becoming IRIDIUM
service providers in their service territories but have not yet executed
definitive agreements to any significant extent. The willingness of companies
to become service providers will be dependent upon a variety of factors
including pricing of services and compensation to service providers, local
regulations and the perceived competitiveness of the IRIDIUM System.
RISKS ASSOCIATED WITH PRINCIPAL SUPPLY CONTRACTS
Space System Contract
Iridium and Motorola have entered into the Space System Contract which
provides for the payment by Iridium to Motorola of $3.45 billion (subject to
certain adjustments) for the design, development, production and delivery in
orbit of the space segment. As of June 30, 1997, Iridium had paid $2.54 billion
of this amount, and all but $150 million of this price is required to be paid
by Iridium before the space segment is determined to be fully operational.
Furthermore, Motorola's aggregate liability under the Space System Contract and
related contracts with Iridium in the event the system is not operational is
limited and in no event is Motorola required under the contract to refund
amounts previously paid by Iridium to Motorola. In addition, subject to certain
exceptions, Iridium bears the risk, including additional costs, if any,
resulting from excusable delays under the Space System Contract, as well as
certain of the risks of loss for satellites once placed in orbit. There can be
no assurance that events constituting "excusable delays" will not arise in the
future, or, if any event constituting an "excusable delay" does arise, that it
will be resolved on terms that are not materially adverse to Iridium.
The Space System Contract provides that, to the extent Motorola has any
liability to Iridium under the contract for any costs, damages, claims or
losses whatsoever arising out of or related to such contract, or any such
liability under the Operations and Maintenance Contract, the Terrestrial
Network Development Contract or any other contract executed between Iridium and
Motorola in connection with the IRIDIUM System, or any provisions of any of the
foregoing, whether pursued as a breach of contract or as a tort or other cause
of action and whether accruing before or after completion of all the work
required under the contracts, such liability shall be limited to $100 million
in the aggregate.
Operations and Maintenance Contract
Iridium has also entered into the Operations and Maintenance Contract with
Motorola which obligates Motorola for a period of five years after completion
of the final milestone under the Space System Contract to operate the IRIDIUM
space segment and to exert its best efforts to monitor, upgrade and replace the
hardware and software of the IRIDIUM space segment as necessary to maintain
specified performance levels. Iridium has the right to extend the term of this
contract for an additional two years. This contract provides for specified
increasing quarterly payments by Iridium to Motorola that are expected to
aggregate approximately $2.88 billion, subject to certain adjustments. If
Iridium exercises its option to extend the Operations and Maintenance Contract
for an additional two years, the payments due will be based upon specified
quarterly payments ranging up from $157 million in 2003. Such payments are
expected to aggregate approximately $1.33 billion, subject to certain
adjustments.
The Operations and Maintenance Contract contains provisions relating to
indemnification, excusable delays, insurance, permits and licenses, waivers of
rights, events of default and other matters similar to those contained in the
Space System Contract. Motorola's liability under the Operations and
Maintenance Contract is limited. In the event that the Space System Contract is
terminated for whatever reason, the Operations and Maintenance Contract will
also terminate.
29
<PAGE> 6
Terrestrial Network Development Contract
Iridium has also entered into the Terrestrial Network Development Contract
with Motorola, pursuant to which Motorola is obligated to design and develop
the gateway hardware and software, and license Iridium to use and permit others
to use intellectual property developed under the contract to procure the
development and manufacture of gateways from sources other than Motorola.
Motorola will be paid a total of approximately $270 million under the contract
in increments tied to the completion of milestones, including those relating to
acceptance tests of the completed gateway design. Motorola's liability under
the Terrestrial Network Development Contract is limited and the contract
contains provisions relating to excusable delays, waivers of rights, events of
default and other matters similar to those contained in the Space System
Contract and the Operations and Maintenance Contract.
CONFLICTS OF INTEREST WITH MOTOROLA
Motorola has and will have various conflicts of interest with Iridium.
Motorola is the creator and developer of the concept of the IRIDIUM System, the
principal supplier to Iridium, a founding investor of Iridium, a gateway owner,
Iridium's largest Class 1 Interest holder, a holder of warrants to acquire
Class 1 Interests and a warrant to acquire Series M Class 2 Interests, the
guarantor of Iridium's borrowings under its Guaranteed Bank Facility. Although
Motorola does not by itself control the Iridium Board and is not permitted to
participate in decisions or other actions by Iridium with respect to the Space
System Contract, Operations and Maintenance Contract and the Terrestrial
Network Development Contract, Motorola could in certain situations exercise
significant influence over Iridium.
Iridium was a wholly-owned subsidiary of Motorola at the time the Space
System Contract and Operations and Maintenance Contract were negotiated and
therefore the negotiations between Iridium and Motorola were not conducted on
an arm's-length basis. Iridium's payment obligations under these agreements are
expected to comprise most of its expenses, and the proceeds of the Offering
will be used primarily to make milestone payments to Motorola under the Space
System Contract and the Terrestrial Network Development Contract.
CONFLICTS OF INTEREST WITH GATEWAY OWNERS
The Iridium Board consists of representatives of certain of the world's
leading telecommunications companies. Almost all of the members of the Iridium
Board have been appointed by investors in Iridium who also are gateway owners
and service providers. Because Iridium will be a supplier to the gateways and
the service providers, the interests of Iridium are expected to conflict in
certain respects with the interests of the gateway owners and the service
providers. For example, this conflict of interest will be relevant in setting
the wholesale prices that Iridium will charge for airtime and other IRIDIUM
Services.
RISK ASSOCIATED WITH INTERNATIONAL OPERATIONS AND DEVELOPING MARKETS
Since Iridium expects to provide telecommunications services in almost
every country, it is subject to certain multinational operational risks, such
as changes in domestic and foreign government regulations and
telecommunications standards, licensing requirements, tariffs or taxes and
other trade barriers, price, wage and exchange controls, political, social and
economic instability, inflation, and interest rate and currency fluctuations.
The risks enumerated above are often greater in developing countries or
regions. In addition, although Iridium anticipates that gateway operators and
service providers will make all payments in United States dollars, the
potential lack of available United States currency in developing markets may
prevent gateway operators and service providers in such markets from being able
to do so. Because Iridium expects to receive most payments in United States
dollars it does not intend to hedge against exchange rate fluctuations. Under
current United States law, Iridium, as a U.S. company, is prohibited from doing
business in Cuba, Iran, Iraq, Libya and North Korea. These restrictions may
limit, or eliminate entirely, the provision of gateway services or IRIDIUM
Services in these countries. Motorola and other United States companies may
also be prohibited from selling equipment in these countries.
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Iridium
LLC's financial statements for the quarter ended June 30, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
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