<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
PROSPECTUS Registration Nos. 333-23419
333-23419-01
12,000,000 SHARES
IRIDIUM WORLD COMMUNICATIONS LTD.
CLASS A COMMON STOCK
---------------------
Of the 12,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), of Iridium World Communications Ltd., a Bermuda
company (the "Company"), being offered hereby, 9,600,000 shares are being
offered in the United States and Canada by the U.S. Underwriters (the "U.S.
Offering") and 2,400,000 shares are being offered in a concurrent offering
outside the United States and Canada by the International Managers (the
"International Offering" and, together with the U.S. Offering, the "Offerings").
The public offering price and the underwriting discount per share are identical
for both Offerings. Of the 12,000,000 shares being offered in the Offerings, up
to 1,200,000 shares are being reserved for sale to eligible employees of the
Company and Iridium and persons having business relationships with Iridium. See
"Underwriting." The Company will use the proceeds of the Offerings to purchase
12,000,000 Class 1 Membership Interests (the "Class 1 Interests") in Iridium
LLC, a Delaware (U.S.A.) limited liability company ("Iridium"). Upon
consummation of the Offerings and application of the net proceeds therefrom to
purchase Class 1 Interests in Iridium, the Company will be admitted as a member
of Iridium. Pursuant to the rules promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), Iridium is a co-registrant on the
registration statement of which this Prospectus forms a part.
Prior to the Offerings, there has been no public market for the Class A
Common Stock. See "Underwriting" for a discussion of factors considered in
determining the initial public offering price. The Class A Common Stock has been
approved for quotation on the Nasdaq National Market System ("NNMS") under the
symbol "IRIDF," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNT(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $20.00 $1.20 $18.80
- --------------------------------------------------------------------------------------------------------
Total(3)................................. $240,000,000 $14,400,000 $225,600,000
========================================================================================================
</TABLE>
(1) The Company and Iridium have agreed to indemnify the several Underwriters
against certain liabilities under the Securities Act. See "Underwriting."
(2) Expenses of the Offerings are estimated to be $2,000,000 and are payable by
Iridium. See "Underwriting."
(3) The Company has granted the U.S. Underwriters and the International Managers
options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 1,440,000 and 360,000 shares of Class A Common
Stock, respectively, on the same terms as set forth above, to cover
over-allotments, if any. The Company will use the proceeds from the sale of
any shares of Class A Common Stock in respect of such over-allotment options
to purchase an equivalent number of Class 1 Interests. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $276,000,000, $16,560,000 and
$259,440,000, respectively. See "Underwriting."
---------------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them and
subject to the approval of certain legal matters by counsel for the Underwriters
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made in New
York, New York on or about June 13, 1997.
---------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
---------------------
The date of this Prospectus is June 9, 1997.
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[INSIDE FRONT COVER]
Pictures of the current non-working models of the multi-mode, hand-held phone
and alphanumeric belt-worn pager expected to be produced by Motorola, Inc. and
Kyocera Corporation for use with the IRIDIUM System. For a description of
these devices See "Business--the IRIDIUM System--Subscriber Equipment."
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF CLASS A COMMON STOCK
TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
---------------------
FORWARD LOOKING INFORMATION
Iridium is a development stage enterprise. Accordingly, all statements in
this Prospectus that are not clearly historical in nature are forward looking.
Examples of such forward looking statements include the statements concerning
Iridium's operations, prospects, markets, size of addressable markets for mobile
satellite services, technical capabilities, funding needs, financing sources,
pricing, launch schedule, commercial operations schedule, 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 inherently predictive
and speculative and no assurance can be given that any of such statements will
prove to be correct. Actual results and developments may be materially different
from those expressed or implied by such statements. See "Risk Factors" for a
discussion of various factors which, among others, could result in any of such
forward looking statements proving to be inaccurate.
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[INSIDE FRONT COVER FOLDOUT]
Pictured is a map of the world illustrating proposed gateway locations and
various locations where components of the IRIDIUM System are located or are
being assembled. See "Business--The IRIDIUM System" for a description of the
IRIDIUM satellite gateways and subscriber equipment.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by reference
to the detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. See the Glossary included as
Annex A hereto for the definitions of certain terms used in this Prospectus. On
February 26, 1997, the Company effected a 100 for 1 stock split (the "Stock
Split") of the Company's Class A Common Stock. 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 (the "Class 1 Interest
Subdivision"). Unless otherwise indicated all information contained in this
Prospectus reflects the Stock Split and the Class 1 Interest Subdivision and
assumes that the over-allotment options granted to the Underwriters are not
exercised. In this Prospectus, reference to "dollars" and "$" are United States
dollars.
THE COMPANY AND IRIDIUM
Iridium LLC ("Iridium") is developing and commercializing a global mobile
wireless communications 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. The IRIDIUM communications system (the "IRIDIUM
System") will combine the convenience of terrestrial wireless systems with the
global reach of Iridium's satellite system. The IRIDIUM System encompasses four
components: the "space segment," which will include the low earth orbit
satellite constellation and the related control facilities; the ground stations
or "gateways," which will link the satellites to terrestrial communications
systems; the IRIDIUM subscriber equipment, which will provide mobile access to
the satellite system and terrestrial wireless systems; and the terrestrial
wireless interprotocol roaming infrastructure, which will facilitate roaming
among the IRIDIUM satellite system and multiple terrestrial wireless systems
that use different wireless protocols. Launch of the first five IRIDIUM
satellites occurred on May 5, 1997, and Iridium expects to commence commercial
operations in September 1998. The satellite constellation is being designed,
assembled and delivered in orbit by Motorola, Inc. ("Motorola"), a leading
international provider of wireless communications systems, phones and pagers,
semiconductors and other electronic equipment. Motorola is also the principal
investor in Iridium, having provided direct investments and guarantees totaling
over $1.26 billion, and a conditional commitment to guarantee up to an
additional $350 million of borrowings. Iridium's other strategic investors
include leading wireless communications service providers from around the world,
as well as experienced satellite manufacturers and experienced launch providers.
Iridium World Communications Ltd., a Bermuda company (the "Company"), is
the issuer of the Class A Common Stock offered hereby. Upon consummation of the
Offerings and application of the net proceeds therefrom to purchase Class 1
Membership Interests in Iridium ("Class 1 Interests"), the Company will be
admitted as a member of Iridium and will own approximately 8.5% of the
outstanding Class 1 Interests (approximately 9.6%, if the Underwriters'
over-allotment options are exercised in full). See "Dilution." The shares of
Class A Common Stock are equity securities of the Company and do not represent
interests in Iridium.
IRIDIUM SERVICES AND MARKET
Global mobile satellite service ("MSS") systems such as the IRIDIUM System
are designed to address two broad trends in the communications market: (i) the
worldwide growth in the demand for portable wireless communications -- according
to industry sources, the worldwide wireless communications market had
approximately 135 million subscribers at year-end 1996 and is estimated to grow
to over 400 million subscribers by year-end 2000; and (ii) the growing demand
for communications services to and from areas where landline or terrestrial
wireless service is not available or accessible. The IRIDIUM System architecture
and IRIDIUM voice, data, facsimile and paging services ("IRIDIUM Services") are
primarily designed to serve customers who place the greatest value on global
mobile communications services.
Iridium believes there is a significant market comprised of individuals and
businesses who need global communications capability and are willing to pay for
the convenience of a hand-held wireless phone or belt-worn pager. The
availability of terrestrial wireless communications service is often constrained
by the limited
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geographic coverage of terrestrial systems, the incompatibility of differing
wireless protocols or the absence of roaming agreements among wireless
operators. The combination of IRIDIUM Cellular Roaming Service ("ICRS"), IRIDIUM
Satellite Services and IRIDIUM paging will extend wireless access globally and
allow customers of Iridium to be reached by phone or pager, and to place phone
calls from or to, virtually anywhere in the world with one phone and one phone
number. ICRS is expected to enable customers to roam on an international basis
among terrestrial wireless networks, including those using different protocols,
that have roaming agreements with Iridium. IRIDIUM Satellite Services will
extend voice services to the regions of the world not served by terrestrial
systems. Iridium intends to offer global paging both in combination with IRIDIUM
voice services and as a stand-alone service. Iridium believes that the signaling
capabilities of the IRIDIUM System will enable Iridium to track the location of
a voice customer effectively and with minimal customer cooperation, thereby
allowing Iridium to direct pages and calls as customers travel globally. Iridium
also expects to offer, commencing in 1999, a broad range of in-flight passenger
communications services with participating airlines, including global incoming
and outgoing voice, data and facsimile services. In addition, Iridium expects to
market IRIDIUM Services to governmental, industrial and rural users of wireless
communications systems. Iridium believes it will be the only wireless
communications system in operation prior to 2000 that will be able to offer this
array of global communications services. See "Risk Factors -- Consequences of
Satellite Service Limitations on Customer Acceptance" and "-- Consequences of
IRIDIUM Phone and Pager Characteristics on Customer Acceptance."
To estimate potential demand for its services, Iridium has engaged in
extensive market analysis, including primary market research which involved
screening over 200,000 persons and interviewing more than 23,300 individuals
from 42 countries and 3,000 corporations with remote operations. Based on this
market analysis, Iridium has identified five target markets for IRIDIUM
Services: traveling professionals; corporate/industrial; government; rural; and
aeronautical. Iridium expects the traveling professional and
corporate/industrial markets will provide most of the demand for IRIDIUM
Services. Iridium believes that individuals in these markets are more likely to
need and have the ability to afford hand-held, global mobile communications
capability than, for example, individuals who live in remote areas outside
existing distribution channels for wireless communications services.
Iridium estimates that the addressable traveling professional market, which
it defines as all employed adults living in urban areas who own a wireless phone
and travel at least four times per year beyond the coverage of their current
wireless phone, will include approximately 42 million individuals by 2002. The
global corporate/industrial addressable market, which consists of companies with
more than 1,000 employees in industries with operations that are likely to need
mobile satellite services, is estimated by Iridium to include over 8,800
companies by 2002. Iridium believes that its unique service package is well
tailored to meet the demands of, and will give Iridium an advantage over
competing MSS systems in, these target markets. For a more detailed description
of Iridium's target markets see "Business -- The IRIDIUM Market," and for a
discussion of the forward looking nature of Iridium's estimates, and various of
the factors which could cause actual addressable markets to differ materially
from these estimates, see "Risk Factors -- Risk of Error in Forward Looking
Statements."
THE IRIDIUM SYSTEM
The satellite constellation of the IRIDIUM System, which will consist of 66
operational satellites arranged in six polar orbital planes, is being assembled
and delivered in orbit by Motorola pursuant to a fixed price contract, subject
to certain adjustments. Motorola also will operate and maintain the satellite
constellation for five years (extendible to seven years at Iridium's option)
under a fixed price contract, subject to certain adjustments. Iridium believes
the IRIDIUM System will have greater signal strength than other proposed MSS
systems, thereby allowing it to better serve hand-held phones and providing a
higher degree of in-building penetration for paging services. The IRIDIUM System
utilizes adaptations of proven technologies, including GSM cellular call
processing technology, intersatellite links, FDMA/TDMA radio transmission
technology, a 2,400 bps vocoder and business support software. The IRIDIUM
satellites will feature cross-link antennas allowing telephone calls and
signaling information to be passed globally from satellite to satellite. These
intersatellite links, which enable the satellites to function as switches in the
sky, will allow the
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IRIDIUM System to (i) select the optimal space-to-ground path of each call,
thereby enhancing system reliability and capacity while reducing the costs
associated with the use of terrestrial phone systems, (ii) communicate with
subscribers in all regions of the world (including mid-ocean and remote areas)
regardless of their proximity to a gateway, (iii) provide full global coverage
with a relatively small number of gateways, thereby lowering total ground
segment build-out and operating costs and (iv) provide enhanced ability to track
the location of a voice customer, allowing Iridium to direct calls and pages as
customers travel globally. In addition, the communications, station keeping and
control systems of the IRIDIUM satellites can be upgraded, maintained and
reconfigured in orbit through the remote loading of software. Iridium believes
that its primary technological challenge in implementing the IRIDIUM System is
the integration of these proven technologies into a single system.
Iridium expects to provide virtually global service initially through 11
gateways, although it will be able to provide full global service with fewer
gateways. Each of these 11 gateways will be owned, operated and financed by one
or more investors in Iridium or their affiliates.
IRIDIUM subscriber equipment will support voice, data and paging services.
Iridium expects that portable, hand-held IRIDIUM phones will be manufactured by
at least two experienced suppliers, Motorola and Kyocera Corporation
("Kyocera"), both of which have hand-held IRIDIUM phones under development. The
phones are expected to be available in satellite-only and "multi-mode" models.
The multi-mode phone being developed by Motorola uses changeable terrestrial
radio cassettes ("TRCs") which can be inserted into the phone. TRCs will be
developed for most major terrestrial wireless protocols so that with a single
multi-mode phone and the appropriate TRCs, a subscriber will be able to access
the IRIDIUM System and most terrestrial wireless systems. Kyocera's multi-mode
phone is expected to be configured as a satellite phone casing into which
terrestrial wireless phones using different protocols can be inserted. The
IRIDIUM belt-worn pager, to be manufactured by Motorola, will have the
capability to receive alphanumeric messages virtually anywhere in the world.
ICRS will support roaming among the two principal types of terrestrial
wireless protocols -- IS-41 (AMPS, NAMPS and CDMA) and GSM (GSM900, DCS1900 and
DCS1800). Roaming between these protocols requires cross protocol translation
which will be accomplished for ICRS through the IRIDIUM Interoperability Unit
("IIU"), being developed under the direction of Motorola. The IIU will permit
system management information, including customer authentication and location,
to be relayed between systems that use different technologies.
PRICING STRATEGY, DISTRIBUTION AND MARKETING
Iridium intends to implement a pricing strategy for its voice services
similar to the prevailing pricing structure for terrestrial wireless calls.
Prices for terrestrial wireless calls generally reflect two components -- a
charge based on the landline "dial-up" rate for a comparable call (primarily the
long distance charges) and a mobility premium for the convenience of wireless
service (including any roaming charges). Pricing for both IRIDIUM Satellite
Services and ICRS is expected to be based on this structure.
For international IRIDIUM Satellite Services calls, which Iridium expects
will constitute the majority of calls over the IRIDIUM satellite system, the
"dial-up" rate component will be designed to approximate the rates for
comparable landline point-to-point international long distance calls. Iridium
has analyzed and will continue to analyze published international direct dial
rates around the world as well as published international calling card rates of
many of the largest international telecommunications carriers in establishing
the "dial-up" rate component. Iridium intends to set the global mobility premium
with reference to the premium charged by other wireless services, including
cross-protocol international terrestrial wireless roaming services and competing
MSS systems.
Iridium will set the wholesale prices for its services to allow for a
suggested retail price that will approximate the "dial-up" plus mobility premium
price. Iridium's wholesale price will be designed to compensate Iridium, as the
network provider, and the originating and terminating gateways, as well as to
cover the PSTN tail charges. The home gateway will mark up the wholesale price
and the service provider will establish the final retail price. Iridium expects
that for international wireless calls, Iridium's suggested retail
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prices will be competitive with other global MSS systems. In addition, from a
regulatory approval perspective in markets where the monopoly telecommunications
provider and the licensing authority are the same entity, a pricing strategy
that takes into account the "dial-up" alternatives allows Iridium to respond to
concerns that Iridium will capture the local monopoly provider's long-distance
revenues by undercutting terrestrial "dial-up" rates.
For ICRS pricing, the "dial up" rate component is primarily the long
distance charge, if any, which will be passed through to the customer. The
mobility premium will be set to compensate the parties involved, primarily the
serving network for its airtime charges, the visited gateway for customer
authentication and Iridium for protocol translation services. The retail price
will include the markup of the home gateway and service provider. Iridium
believes that its ICRS suggested retail prices will be comparable to prices
charged by other cross-protocol roaming services.
In addition to airtime charges, IRIDIUM subscribers will pay a monthly
subscription fee in the same manner that terrestrial wireless customers pay
monthly charges. Iridium will permit service providers that are wireless network
operators to offer IRIDIUM Services as additional features to their existing
wireless services, permitting their customers to remain customers of the
wireless network and to roam onto the IRIDIUM System. These customers will pay a
feature charge to Iridium for the roaming privilege that will be significantly
below the IRIDIUM monthly subscription fee, but they will pay an additional
roaming premium for calls made over the IRIDIUM System.
Initially, Iridium paging subscribers will pay a fixed monthly subscription
fee for unlimited paging. Iridium expects to implement per page pricing after
commencement of commercial operations, with the cost per page based, in part, on
the size of the geographic area covered by the page. The monthly paging
subscription fees will be reduced for persons who are also subscribers to
IRIDIUM voice services.
Iridium's distribution strategy reflects its role as a wholesaler of
IRIDIUM Services and is primarily designed to leverage off established retail
distribution channels by using existing distributors of wireless services as
IRIDIUM service providers and marketing IRIDIUM Services to their customers.
Iridium will implement the distribution of IRIDIUM Services through its gateway
operators, all of which have agreed to become or to engage IRIDIUM service
providers within their exclusive gateway territories. IRIDIUM service providers
will generally have primary responsibility for marketing IRIDIUM Services within
their territories in accordance with marketing policies and programs established
by Iridium. They will also be responsible for customer service, billing and
collection. Iridium anticipates its gateway operators will generally seek to
utilize more than one method of distribution in their markets. Iridium expects
that its service providers also will include affinity partners (e.g., airlines,
hotels and car rental companies).
Iridium's marketing strategy is to position IRIDIUM as the premier brand in
global wireless communications services. Iridium believes that its principal
target markets -- traveling professional and corporate/industrial -- can be
accessed through established marketing channels, which will permit more
effective marketing compared to MSS systems targeting individuals in remote
areas where marketing opportunities and distribution channels are limited.
Iridium is coordinating with its gateway partners to determine the optimum
allocation of marketing expenditures based on the market analysis that Iridium
has conducted. Iridium plans to engage in direct marketing to certain markets,
such as the utility, oil and gas, mining and maritime industries. Iridium
believes that a coordinated and comprehensive global marketing strategy,
supported by its market research, will promote a consistent message and permit
Iridium to establish a global brand identity.
IRIDIUM'S INVESTOR GROUP
The IRIDIUM investor team includes enterprises from around the world with
skills and experience in developing, manufacturing, licensing and distributing
satellite and telecommunications products and services. Iridium's strategic
investors have collectively invested, or committed to invest, approximately
$3.34 billion in Iridium, including equity, debt, guarantees, conditional
commitments to provide guarantees and a reserve capital call. These investments
represent more than 77% of Iridium's projected total funding needs through the
end of September 1998, the month Iridium expects to commence commercial
operations, and approximately 67% of Iridium's projected total funding needs
through December 31, 1999, the last year in which Iridium
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projects negative cash flow and a net increase in year-end borrowings. By
partnering with strategic investors, Iridium benefits from the development,
manufacturing and launch expertise of leading worldwide satellite development
and launch organizations and from the wireless telecommunications distribution
and regulatory expertise of leading telecommunications companies. The Iridium
investor team includes leading telecommunications companies in North America
(Motorola, Sprint and BCE Mobile Communications Inc.), Europe (STET and o.tel.o
communications GmbH) and Asia (DDI in Japan, UCOM in Thailand and Korea Mobile
Telecommunications). Iridium expects that these investors will use their
wireless communications sales and services organizations to market IRIDIUM
Services and equipment in their territories, which include their existing base
of approximately 14 million wireless subscribers. In addition, because of the
prominence of many of these investors, Iridium believes that their efforts to
obtain necessary regulatory approvals have been, and will continue to be, of
great importance. The investor team also includes organizations with significant
satellite communications development, manufacturing and launch expertise
including Raytheon, Lockheed Martin, Nuova Telespazio, Khrunichev and China
Aerospace. Iridium expects subscriber equipment for use with the IRIDIUM System
will be manufactured and sold by Motorola and Kyocera, two of the world's
leading manufacturers of wireless phones.
On May 30, 1997, South Pacific Iridium Holdings Limited ("SPI"), an
indirect, wholly owned subsidiary of P.T. Bakrie Communications Corporation,
purchased 7,500,000 Class 1 Interests at $13.33 per Class 1 Interest. Pursuant
to the terms of its purchase agreement with Iridium, SPI exercised its right to
defer payment of 60% of the total purchase price payable and is required to pay
10% of the total purchase price on or before November 15, 1997 and the remaining
50% on or before May 15, 1998. The total purchase price of such Class 1
Interests will increase to approximately $110 million in the event SPI elects in
full its right to defer payment. All information in this Prospectus with respect
to Class 1 Interests gives effect to the issuance of 7,500,000 Class 1 Interests
to SPI. In connection with its investment in Iridium, SPI was allocated the
South Pacific gateway service territory.
PROGRESS TO DATE
Iridium, Motorola and the various gateway owners have made substantial
progress in the development and implementation of the IRIDIUM System and related
activities and expect to commence global commercial service on schedule in
September 1998. Satellite hardware development is substantially complete. By
early May 1997, eight satellites had been produced, seven additional satellites
had been assembled and were in testing and additional satellites were being
produced at a rate of approximately five per month. The first five IRIDIUM
satellites were launched on May 5, 1997. The initial satellite launch had been
scheduled to occur in January 1997, but was postponed until May 1997 following
the failure of a Delta II launch vehicle, the same type of launch vehicle
McDonnell Douglas is using for Iridium satellite launches. Motorola has informed
Iridium that it is in the process of reworking the original launch schedule with
its launch service providers and currently believes that the new planned launch
schedule should permit Iridium to meet its planned September 1998 commencement
of commercial operations for the IRIDIUM System and that there will be no price
adjustment under the Space System Contract, the Operations and Maintenance
Contract or the Terrestrial Network Development Contract as a result of the
initial launch delay. See "Risk Factors -- Potential for Delay and Cost
Overruns -- Deployment of Satellites" and "-- Satellite Launch Risks -- Number
of Launches; Compressed Launch Schedule."
Motorola has completed construction of most of the terrestrial facilities
necessary to command the in-space movements of the IRIDIUM System's satellites,
including the Master Control Facility and the associated tracking, telemetry and
command ("TT&C") facilities. The construction of the Iridium North America
(Tempe, Arizona) and Nippon Iridium Corporation (Nagano, Japan) gateway
facilities is substantially complete and the telecommunications equipment is
being installed at both locations. Equipment procurement has commenced for seven
other gateways pursuant to gateway equipment purchase agreements with Motorola.
Motorola has produced a functional, unminiaturized prototype of the IRIDIUM
phone, and Motorola has produced a functional prototype of the IRIDIUM belt-worn
pager. Iridium has also made substantial progress in the development of its
IRIDIUM business support systems, which will be used for the
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provision of its billing and customer support functions. See "Risk Factors" for
a description of the risks that could impair the ability of Iridium to commence
commercial operations on schedule in September 1998.
Iridium has made significant progress to date in securing the worldwide
regulatory approvals necessary to build and operate the IRIDIUM System. At the
1992 World Administrative Radiocommunications Conference ("WARC-92"), the
International Telecommunications Union (the "ITU") allocated 16.5 MHz of
spectrum in the 1610-1626.5 MHz band to MSS systems. The U.S. Federal
Communications Commission (the "FCC") conditionally assigned the IRIDIUM System
exclusive use of 5.15 MHz of the 16.5 MHz for use in the United States. The
space segment of the IRIDIUM System has been licensed in the United States.
Iridium believes that coordination through the ITU has been completed
successfully between the IRIDIUM System and all existing or planned systems that
have been identified under the ITU's coordination process. No other action is
required from any other country to license the space segment. Three final and
four experimental licenses to build and operate gateways have been received,
including a final license with respect to the Iridium North America gateway in
Tempe, Arizona. Each country in which Iridium intends to operate must authorize
use of IRIDIUM subscriber equipment, including allocation of subscriber link
frequencies. The FCC has issued a license covering IRIDIUM Satellite Services in
the United States and six additional countries have granted conditional licenses
for IRIDIUM Satellite Services in their respective countries. Iridium's gateway
owners are dedicating substantial effort to obtaining licensing for IRIDIUM
Satellite Services in the countries in their service territories with particular
focus on obtaining licenses by the commencement of commercial operations in
those countries which are expected to account for most of the demand for and
usage of IRIDIUM Services. See "Risk Factors -- Risks Associated with Licensing
and Spectrum Allocation -- Significant Regulatory Approvals Required for
Operation of the IRIDIUM System," "-- Significant Remaining Regulatory
Approvals" and "Regulation of Iridium" for a discussion of the conditions to
these licenses and the additional regulatory approvals outside the United States
that remain to be obtained.
THE COMPANY
The Company is organized to act as a member of Iridium and to have no other
business. The Company will use the net proceeds from the Offerings to acquire
Class 1 Interests. Upon consummation of the Offerings and application of the
proceeds therefrom to purchase Class 1 Interests, the Company will own
approximately 8.5% of the outstanding Class 1 Interests (approximately 9.6% if
the Underwriters' over-allotment options are exercised in full). See "Dilution"
and "Governance of the Company and Relationship with Iridium."
BUSINESS STRATEGY
Iridium's strategy is to launch and operate the premier global mobile
wireless network. The key components of this strategy are set forth below:
Provide a unique service package to traveling professionals enabling them
to be reached and make calls virtually anywhere in the world. IRIDIUM Satellite
Services will complement terrestrial wireless services and provide the traveling
professional with communications capability in areas where terrestrial wireless
service is unavailable, inconvenient, of poor quality or unreliable. Iridium
intends to offer ICRS and global paging as complements to IRIDIUM Satellite
Services and as stand-alone services. Iridium believes that it will be the only
wireless communications system in operation prior to 2000 that will be able to
offer virtually global mobile voice and paging services, including:
- Global coverage. An IRIDIUM subscriber will generally have worldwide
wireless coverage wherever IRIDIUM Services are authorized, including
mid-ocean and remote areas. The availability of the IRIDIUM Satellite
Service will not be limited by the customer's proximity to a gateway.
Iridium believes this feature will make its Satellite Services
particularly well suited for aeronautical and shipping communications and
for service in land areas where LEO MSS systems using "bent pipe"
technology are not expected to have the more extensive gateway
infrastructure needed by such systems to provide global coverage.
8
<PAGE> 10
- Convenient roaming onto terrestrial wireless networks. Iridium will offer
subscribers a combination of IRIDIUM Satellite Services and ICRS. With
the addition of ICRS, customers will be able to overcome (i) the
incompatibility of differing wireless protocols and (ii) the service
limitations of satellite-only voice services in buildings and urban
canyons. Iridium expects to be able to deliver all of its voice services
with one phone, one phone number and one customer bill.
- Global paging with belt-worn pagers. The IRIDIUM belt-worn pager will
have the capability of receiving alphanumeric messages of up to 63
characters and numeric messages of up to 20 digits virtually anywhere in
the world. With Iridium's global paging, users of IRIDIUM Satellite
Services or ICRS will generally be able to update their location on the
IRIDIUM System by briefly turning on their phone, thereby allowing the
IRIDIUM System to send a targeted page. Iridium believes that it will be
the first company, and the only company prior to 2000, which will offer
global paging to a belt-worn pager.
- Greater signal strength. The IRIDIUM System is designed to provide
greater signal strength than proposed competing MSS systems. Iridium
believes this greater signal strength will allow it to better serve
hand-held phones, and provide a higher degree of in-building signal
penetration for pagers, than competing MSS systems.
Be the first to market with a global wireless communications system.
Iridium plans to capitalize on the substantial design, development, fabrication
and testing efforts and financial investment to date of its strategic investors
to bring IRIDIUM Services to market at the earliest practicable date, which is
currently expected to be September 1998. Iridium believes that it will be the
only wireless communications system in operation prior to 2000 that will be able
to offer global mobile voice and paging services in each country in which
IRIDIUM Services are authorized.
Adapt proven technologies through an industrial team led by Motorola. The
IRIDIUM System adapts proven technology, including GSM cellular call processing
technology, intersatellite links, FDMA/TDMA radio transmission technology, a
2,400 bps vocoder and business support software. Iridium believes that the
primary technological challenge is the integration of these proven technologies
into a single system. Motorola, the principal investor in Iridium, is a leading
international provider of wireless communications systems, cellular phones,
pagers, semiconductors and other electronic equipment. The industrial team
assembled by Motorola to build and deliver in orbit the IRIDIUM System consists
of major companies experienced in aerospace and telecommunications, including
Nuova Telespazio, Lockheed Martin, Raytheon, McDonnell Douglas, Khrunichev and
China Aerospace.
Capitalize on the strengths of its strategic investors. A number of
Iridium's strategic investors provide telecommunications services in various
parts of the world and have significant operating, regulatory and marketing
experience in their service territories. Iridium expects that its investors with
existing wireless communications sales and service organizations will use these
organizations to market and distribute IRIDIUM Services and equipment to
potential subscribers. Because of the prominence of many of these investors,
Iridium believes that their efforts to obtain the necessary regulatory approvals
have been, and will continue to be, of great importance.
Utilize existing wireless distribution channels. Iridium's strategy is to
target primarily traveling professionals, who are generally wireless phone
users. Iridium's strategy is to provide customers with an enhancement to their
existing terrestrial wireless service through existing marketing and
distribution channels rather than to focus on individuals who have no or limited
landline or wireless communications experience and live in areas where no
marketing and distribution channels currently exist.
9
<PAGE> 11
SOURCES AND USES OF FUNDS BY IRIDIUM
The following table describes the estimated sources and uses of funds by
Iridium from its inception through the end of September 1998 (the month Iridium
expects to commence commercial operations). Significant additional funds will be
needed to cover Iridium's cash needs prior to its generation of positive cash
flow from operations. The projection of total sources and total uses of funds is
forward looking and could vary, perhaps substantially, from actual results, due
to events outside Iridium's control, including unexpected costs and unforeseen
delays. See "Risk Factors -- Risk of Error in Forward Looking Statements."
PRE-OPERATIONAL PERIOD(1)
(IN MILLIONS)
<TABLE>
<CAPTION>
SOURCES OF FUNDS
- ------------------------------------
<S> <C>
Class 1 Interests(2)................ $1,728
Series A Class 2 Interests(3)....... 31
14 1/2% Senior Subordinated Notes
due 2006(4)....................... 238
Guaranteed Bank Facility(5)......... 750
------
Total.......................... 2,747
Net Proceeds to Iridium from the
Offerings(6)...................... 223
------
Total after Offerings.......... 2,970
Reserve Capital Call(7)............. 243
Conditional Motorola Guarantee
Commitment(8)..................... 350
Additional funding
requirements(9)................... 798
------
Total Pre-operational
Sources...................... $4,361
======
</TABLE>
<TABLE>
<CAPTION>
USES OF FUNDS
- ------------------------------------
<S> <C>
Space System Contract(10)........... $3,450
Terrestrial Network Development
Contract(11)...................... 179
Business support systems and other
expenditures(12).................. 184
Net interest and financing
costs(13)......................... 220
Net expenses and working
capital(13)(14)................... 328
------
Total Pre-operational net
uses......................... $4,361
======
</TABLE>
- ---------------
(1) Assumes that the IRIDIUM System will commence commercial operations in
September 1998. Iridium anticipates total cash needs of $5.0 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 borrowings. Many factors,
including Iridium's ability to generate significant revenues, could affect
this estimate. See "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(2) Includes the investment of $100 million by South Pacific Iridium Holdings
Limited ("SPI"), an indirect, wholly owned subsidiary of P.T. Bakrie
Communications Corporation. On May 30, 1997, SPI purchased 7,500,000 Class
1 Interests at $13.33 per Class 1 Interest. Pursuant to the terms of its
purchase agreement with Iridium, SPI exercised its right to defer payment
of 60% of the total purchase price and is required to pay 10% of the total
purchase price on or before November 15, 1997 and the remaining 50% on or
before May 15, 1998. The aggregate purchase price of such Class 1 Interests
will increase to approximately $110 million in the event SPI elects in full
its right to defer payment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) The Series A Class 2 Interests pay a 14 1/2% dividend which, at the option
of Iridium, may be paid in-kind until 2001 and paid in cash thereafter. If
all dividends permitted to be paid in-kind are paid in-kind, at the time
when the Series A Class 2 Interests convert to a cash dividend, there will
be 62,668 Series A Class 2 Interests outstanding convertible into 1,159,985
Class 1 Interests, subject to anti-dilution adjustments.
10
<PAGE> 12
(4) These Notes were issued with warrants to purchase 4,997,292 Class 1
Interests at a price of $.01 per Interest.
(5) As of March 31, 1997, Iridium had drawn $665 million under a $750 million
borrowing facility with a syndicate of banks (the "Guaranteed Bank
Facility"). Borrowings under the Guaranteed Bank Facility are guaranteed by
Motorola. The Guaranteed Bank Facility matures in August 1998. Iridium
expects that it will be able to extend this facility through December 31,
2000. Motorola has conditionally committed to extend its guarantee to that
date if the Guaranteed Bank Facility is so extended. In connection with its
guarantee of the Guaranteed Bank Facility Motorola received a security
interest in substantially all of Iridium's assets. Motorola's compensation
for the $750 million guarantee is in the form of warrants to acquire
additional Class 1 Interests at $.00013 per Class 1 Interest. The maximum
number of warrants to be issued as compensation for the $750 million
guarantee prior to the commencement of commercial operations would be
warrants to purchase 11,250,000 Class 1 Interests (subject to anti-dilution
adjustments). If the Guaranteed Bank Facility is extended beyond the
commencement of commercial operations, the yearly warrant compensation
proposed by Motorola would be warrants to purchase 900,000 Class 1
Interests at $.00013 per Class 1 Interest for each $100 million of
guarantee commitments, beginning at the commencement of commercial
operations (subject to anti-dilution adjustments). The Class 1 Interests
acquired upon exercise of such warrants must be held for five years from
the date of issuance of such Interests. See "Dilution."
(6) Reflects the application by the Company of the net proceeds of the
Offerings to the purchase from Iridium of 12,000,000 Class 1 Interests at a
price per Class 1 Interest equal to the net price per share of Class A
Common Stock payable to the Company in the Offerings. Expenses of the
Offerings, estimated to be $2,000,000, will be borne by Iridium. See "Use
of Proceeds."
(7) Seventeen of Iridium's investors have made varying reserve capital call
commitments to purchase an aggregate of 18,206,550 Class 1 Interests at
$13.33 per Class 1 Interest for an aggregate purchase price of
approximately $243 million (the "Reserve Capital Call"). Iridium is
required to exercise the Reserve Capital Call under certain conditions,
including in the event of a prospective funding shortfall. See "Description
of Iridium LLC Limited Liability Company Agreement -- Capital
Contributions; Reserve Capital Call."
(8) Motorola has made a conditional commitment to guarantee up to an additional
$350 million of borrowings under the Guaranteed Bank Facility, for which
Motorola would be compensated with additional warrants to purchase Class 1
Interests at $.00013 per Class 1 Interest. The maximum number of warrants
to be issued as compensation for the additional $350 million guarantee, if
implemented, would be warrants to purchase 3,750,000 Class 1 Interests
(subject to anti-dilution adjustments) prior to commencement of commercial
operations. See "Dilution." If such additional borrowing under the
Guaranteed Bank Facility is extended beyond its August 1998 maturity date,
Motorola has proposed additional warrant compensation beginning at
commencement of commercial operations as described in note (5) above.
(9) Iridium currently expects to satisfy its additional funding requirements
through the incurrence of debt. Iridium is seeking to obtain a senior bank
facility in an amount of up to approximately $1.7 billion. In addition to
or in lieu of such bank facility, additional financing may need to be
obtained through the issuance of equity or debt securities in the public or
private markets. Iridium expects that in connection with any issuance of
debt securities in the public or private market, equity compensation in the
form of warrants to purchase shares of Class A Common Stock likely will be
required. Iridium also expects that other methods of debt financings are
likely to require guarantees or other forms of credit support and that
compensation, including equity (which may be in the form of warrants)
likely will be required for such guarantees. There are currently no
agreements with Motorola or Iridium's other investors or vendors to provide
such credit support. It is possible that some portion of Iridium's
additional funding requirements may be met through the issuance of
additional equity. Although Iridium believes that it will be able to meet
its additional funding requirements, there can be no assurance that such
financing will be available on favorable terms, on a timely basis, or at
all. Among other things, the availability of
11
<PAGE> 13
any financing is subject to market conditions at the time of any proposed
financing. See "Risk Factors -- Significant Additional Funding Needs" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(10) As of March 31, 1997, Iridium had incurred $2,284 million of this amount.
See "Risk Factors -- Potential for Delay and Cost Overruns," "-- Risks
Associated with Principal Supply Contracts" and "-- Satellite Launch
Risks -- Impact of Excusable Delays."
(11) As of March 31, 1997, Iridium had incurred $64 million of this amount. See
"Risk Factors -- Risks Associated with Principal Supply Contracts."
(12) As of March 31, 1997, Iridium had incurred $28 million of this amount. See
"Risk Factors -- Risks Associated with Principal Supply Contracts."
(13) Based on assumed interest rates and borrowing levels. Actual interest and
financing costs will depend upon applicable interest rates and the amount
and timing of actual borrowings.
(14) Comprised of operating expenses of $587 million and net of interest income
of $13 million and working capital of $246 million.
12
<PAGE> 14
THE OFFERINGS
Class A Common Stock offered by the
Company:
U.S. Offering..................... 9,600,000 shares
International Offering............ 2,400,000 shares
Total.......................... 12,000,000 shares
Class A Common Stock of the Company
to be outstanding immediately after
the Offerings..................... 12,000,000 shares(1)
Iridium Class 1 Interests to be
outstanding immediately after the
Offerings......................... 141,219,150 Interests(1)(2)
Iridium Class 1 Interests to be
owned by the Company immediately
following the Offerings........... 12,000,000 Interests(1)
Use of Proceeds..................... The net proceeds of the Offerings,
including the net proceeds from any
exercise of the Underwriters' over-
allotment options, will be used by the
Company to purchase Class 1 Interests
in Iridium pursuant to the terms of the
1997 Subscription Agreement described
under "Governance of the Company and
Relationship with Iridium -- 1997
Subscription Agreement." Iridium will
use the proceeds from such sale of the
Class 1 Interests primarily to make
milestone payments under the Space
System Contract and the Terrestrial
Network Development Contract and to a
lesser extent for other general
corporate purposes related to the
commercialization of the IRIDIUM
System. See "Use of Proceeds."
Voting Rights....................... All voting rights with respect to the
affairs of the Company, except as
otherwise required by law, are vested
in the holders of the Class A Common
Stock. See "Governance of the Company
and Relationship with Iridium" and
"Description of Capital Stock."
Nasdaq NMS Symbol................... IRIDF
- ---------------
(1) Assumes the Underwriters' over-allotment options are not exercised. If the
over-allotment options are exercised in full, there will be 13,800,000
shares of Class A Common Stock and 143,019,150 Class 1 Interests outstanding
immediately following the Offerings of which the Company will own 13,800,000
Interests. Does not reflect the issuance of shares of the Company's
non-voting Class B Common Stock, par value $.01 per share (the "Class B
Common Stock"), to be issued in connection with the Company's Global
Ownership Program or the application of the proceeds therefrom to acquire
Class 1 Interests. Upon satisfaction of certain conditions, the shares of
Class B Common Stock may be exchanged for shares of Class A Common Stock.
There are no shares of Class B Common Stock outstanding. See "Governance of
the Company and Relationship with Iridium -- Global Ownership Program" and
"Description of Capital Stock."
(2) This amount does not give effect to the issuance of any Class 1 Interests
pursuant to options, warrants or convertible interests or pursuant to the
Reserve Capital Call. See "Dilution."
RISK FACTORS
See "Risk Factors" beginning on page 14 for a discussion of certain factors
that should be considered by prospective purchasers of the Class A Common Stock
offered hereby, including that Iridium is a development stage company, has not
generated any revenue from operations to date and does not expect to generate
any revenue from operations until after the IRIDIUM System commences commercial
operations (anticipated to be September 1998).
13
<PAGE> 15
RISK FACTORS
An investment in the Class A Common Stock offered hereby is speculative in
nature and involves a high degree of risk. Because the sole asset of the Company
will be its Class 1 Interests, prospective investors should carefully consider
the following risk factors related to both the Company and Iridium, in addition
to the other information contained elsewhere in this Prospectus, in evaluating
whether to make an investment in the Company prior to purchasing shares in the
Offerings.
DEVELOPMENT STAGE COMPANY; ABSENCE OF REVENUES
Iridium is a development stage enterprise with no operating history.
Prospective investors have no operating and financial data about the IRIDIUM
System on which to base an evaluation of the IRIDIUM System's performance and an
investment in the Class A Common Stock. Through March 31, 1997, Iridium had
realized cumulative net losses of approximately $170 million and expects to
realize significant net losses at least until some time after the IRIDIUM System
commences commercial operations, which is currently anticipated to be September
1998. Through March 31, 1997, Iridium had made payments totaling $2,284 million
to Motorola under the Space System Contract and payments totaling $64 million
under the Terrestrial Network Development Contract, in respect of completed
milestones. The completion and maintenance of the IRIDIUM System and
implementation of commercial service will require significant additional
expenditures of funds. Iridium currently has no source of revenues other than
nominal interest income. No assurances can be given that, or when, the IRIDIUM
System will become commercially operational, or that, or when, Iridium will have
revenues from operations or positive cash flow or become profitable.
SIGNIFICANT ADDITIONAL FUNDING NEEDS
Iridium anticipates total funding requirements of approximately $4.361
billion through September 1998, the month Iridium expects to commence commercial
services, and $5.0 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. As of March 31,
1997, Iridium had equity investments of $1.659 billion with an additional $243
million available in the form of a Reserve Capital Call. Debt investments
equaled $990 million, including the $750 million credit facility with a
syndicate of banks which are guaranteed by Motorola (the "Guaranteed Bank
Facility") under which $665 million had been drawn as of March 31, 1997. In
addition, Motorola has conditionally agreed to guarantee up to an additional
$350 million of borrowings under the Guaranteed Bank Facility, bringing the
total commitments thereunder to $1.1 billion. Borrowings under the Guaranteed
Bank Facility mature in August 1998. Iridium believes it will be able to amend
the Guaranteed Bank Facility to permit these additional borrowings and to extend
its maturity. There can be no assurance that Iridium will satisfy the terms of
Motorola's conditional commitment to guarantee additional borrowings or that the
bank lenders will agree to increase the size or extend the term of the
Guaranteed Bank Facility.
Iridium expects to have sufficient cash after consummation of the Offerings
to meet its anticipated funding requirements through December 1997, assuming
exercise and full funding of the Reserve Capital Call and $1.1 billion of
borrowings under the Guaranteed Bank Facility. The remaining funds needed to
meet Iridium's projected funding requirements are expected to be raised through
additional financings. Iridium is seeking to obtain a senior bank facility in an
amount of up to approximately $1.7 billion. However, there can be no assurance
that Iridium will obtain such a financing or will be able to do so on terms and
conditions acceptable to Iridium and its members or, if such bank financing is
unavailable, that Iridium will be able to obtain financing from an alternative
source. In addition to or in lieu of the senior bank facility Iridium is seeking
to obtain, additional financing may need to be obtained through the issuance of
equity or debt securities in the public or private markets. The availability of
such financing is uncertain and is dependent, in part, on market conditions
existing at the time of any proposed financing. Iridium expects that, in
connection with any issuance of debt securities in the public or private market,
equity compensation in the form of warrants to purchase shares of Class A Common
Stock will likely be required. Iridium also expects that other methods of debt
financings are likely to require guarantees or other forms of credit support and
that compensation, including equity (which may be in the form of warrants),
likely will be required for such
14
<PAGE> 16
guarantees. There are currently no agreements with Motorola or Iridium's other
investors or vendors to provide such guarantees and there can be no assurance
that any of Iridium's investors, vendors or others will provide such guarantees
or credit support. Iridium's estimated funding requirements do not reflect any
contingency amounts and therefore those requirements will increase, perhaps
substantially, in the event of unexpected cost increases or schedule delays.
The $243 million Reserve Capital Call is an unsecured obligation of certain
of the members of Iridium and there can be no assurance that all of the
obligated members will meet their Reserve Capital Call obligations or that they
will do so in a timely fashion.
RISK OF HIGHLY LEVERAGED CAPITAL STRUCTURE; RISK OF DEFAULT ON EXISTING
COMMITMENTS
Iridium is a development stage company with a highly leveraged capital
structure and expects to incur substantial additional indebtedness. Iridium
currently has no significant income-producing assets from which to service its
indebtedness. In connection with providing its guarantee of borrowings under the
Guaranteed Bank Facility, Motorola was granted a security interest in
substantially all of Iridium's assets and Iridium agreed not to take specified
actions without Motorola's approval. In connection therewith, Motorola also was
granted the right to appoint an additional director on the Iridium Board of
Directors (the "Iridium Board") and is being compensated in the form of warrants
to purchase Class 1 Interests. See "-- Dilution Risk" and "Dilution." If
Motorola is required to make a payment under its guarantee of the Guaranteed
Bank Facility as a result of certain events of default by Iridium, Motorola, in
most instances, will have the right to elect a majority of the Iridium Board and
each committee thereof other than the Related Party Contracts Committee.
Iridium's current and future debt service requirements could negatively
affect the value of the Class 1 Interests as a result of the following: (i)
Iridium's limited ability to obtain additional financing for future working
capital needs or for other purposes; (ii) a substantial portion of Iridium's
cash flow from operations will be dedicated to the payment of principal and
interest on its indebtedness, thereby reducing funds available for operations;
(iii) Iridium's greater exposure to adverse economic conditions than competing
companies that are not as highly leveraged; and (iv) the compensation required
to obtain guarantees or other credit support from Iridium members. These factors
could adversely affect Iridium's finances and dilute the interests of members,
including the Company, in Iridium. In addition, the discretion of Iridium's
management with respect to certain business matters will be limited by covenants
that will be contained in future debt instruments. There can be no assurance
that such restrictions will not materially and adversely affect Iridium's
ability to finance its future operations or capital needs or to operate its
business and engage in other corporate activities. Moreover, a failure to comply
with the terms of any agreements with respect to outstanding or additional
financing could result in an event of default under such agreements, which could
result in the acceleration of the related debt and acceleration of debt under
future debt agreements that may contain cross-acceleration or cross-default
provisions.
RISK OF ERROR IN FORWARD LOOKING STATEMENTS
Iridium is a development stage company. Accordingly, all statements in this
Prospectus that are not clearly historical in nature are forward looking.
Examples of such forward looking statements include the statements concerning
Iridium's operations, prospects, markets, size of addressable markets for mobile
satellite services, technical capabilities, funding needs, financing sources,
pricing, launch schedule, commercial operations schedule 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 inherently predictive and speculative and no
assurance can be given that any of such statements will prove to be correct.
Actual results and developments may be materially different from those expressed
or implied by such statements. Prospective investors should carefully review the
other risk factors set forth in this section of the Prospectus for a discussion
of various of the factors which could result in any of such forward looking
statements proving to be inaccurate.
15
<PAGE> 17
In addition, the information in this Prospectus under "Prospectus
Summary -- Sources and Uses of Funds by Iridium" (other than historical
information) and the statements therein and elsewhere that 1999 is the last year
in which Iridium expects negative cash flow and a net increase in year-end
borrowings and as to projected additional capital needs after the commencement
of commercial operations, are forward looking statements which may turn out to
be inaccurate for the reasons described in the preceding paragraph and are also
based upon a number of assumptions. One or more of these assumptions is likely
to be incorrect. The projected financial information assumes, among other
things, that (i) the IRIDIUM System will become commercially operational in
September 1998; (ii) the IRIDIUM System will meet all systems specifications set
forth in the Space System Contract and the Terrestrial Network Development
Contract and will have service characteristics at least as favorable as those
expected by Iridium and described in this Prospectus; (iii) there will be no
increased costs resulting from excusable delays under the Space System Contract,
the Operations and Maintenance Contract or the Terrestrial Network Development
Contract; (iv) Motorola and Kyocera will develop, manufacture and sell in
sufficient numbers portable, hand-held phones that are capable of operating in
multi-mode format and Motorola will develop alphanumeric pagers for use with the
IRIDIUM System on a timely basis in accordance with the model descriptions set
forth in this Prospectus and at the estimated prices set forth in this
Prospectus and Iridium will not incur any significant expenditures as a result
of any need to place any orders for or sell any IRIDIUM subscriber equipment;
(v) a sufficient number of gateways will be constructed and delivered not later
than September 1998 and will be fully operational at such time; (vi) the
satellite navigation and communications software and the business support
systems software will be developed and integrated into Iridium's operations on a
timely basis; (vii) Iridium will contract with a sufficient number of service
providers and roaming partners to ensure effective marketing of the IRIDIUM
Services; (viii) the IRIDIUM System will not require the placing into orbit of
replacement satellites as a result of events that require Iridium to bear the
costs of replacement under the Operations and Maintenance Contract; (ix) there
will be no material change in legislation or regulations or the administration
thereof that will have an unexpected effect on the business of Iridium; (x)
there will be no material adverse changes in any of Iridium's existing material
contracts; (xi) Iridium, its customers and other companies doing business with
Iridium will obtain timely requisite regulatory approvals to provide services in
sufficient countries to enable Iridium to carry out its business strategy; and
(xii) the capacity of the IRIDIUM System, as affected by, among other things,
spectrum allocation, vocoder selection and IRIDIUM Services usage patterns, will
be sufficient to meet Iridium's business plan.
With regard to the statements concerning the expected size of the
addressable market for Iridium's target markets, set forth in the "Prospectus
Summary" and under "Business -- The IRIDIUM Market," and in addition to the
information set forth above, prospective investors are cautioned that such
statements are based exclusively upon market analysis conducted by Iridium.
Market analysis, including use of market research, by its nature does not lend
itself to mathematical certainty, since it is based upon respondents' assertions
rather than actual purchase decisions. Iridium's market analysis is based upon a
number of assumptions and it is likely that some of these assumptions will not
prove correct and unanticipated events may occur which could affect actual
markets realized. Moreover, the risks associated with market analysis are
heightened in cases such as this, where the analysis deals with a product and
service that does not yet exist and that is not directly comparable to any
product or service with which the respondents could be familiar. Consequently,
actual markets should be expected to vary from the market analysis included
herein and such variations may be material.
Iridium does not intend to publish updates or revisions of the projected
financial information or addressable market estimates included in this
Prospectus to reflect events or circumstances after the date hereof or to
reflect subsequent market analysis.
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
16
<PAGE> 18
operations. Although the Space System Contract is a fixed-price contract
(subject to certain adjustments) with a firm schedule for construction and
delivery, there can be no assurance that delays will not occur. In addition,
certain events causing failures or delays in performance may constitute
excusable delays under the Space System Contract. In the event of an excusable
delay, the schedule may be equitably extended and the price will be adjusted for
any additional costs incurred by Motorola. Motorola has the burden to prove an
event of excusable delay has occurred. Moreover, the liability of Motorola under
the contract is limited. See "Principal Contracts for the Development of the
IRIDIUM System."
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 attain
profitability. See "Business -- Competition."
Deployment of Satellites
The launch of the first five IRIDIUM satellites occurred on May 5, 1997 on
a McDonnell Douglas Delta II launch vehicle. This launch had been scheduled for
January 1997 but was delayed on four successive days and then postponed until
May 1997 following a launch failure involving the McDonnell Douglas Delta II
launch vehicle (which is the type of launch vehicle that McDonnell Douglas is
using for the IRIDIUM satellites). The first one-day delay was as a result of a
software problem at Motorola's satellite communications control facility, the
second one-day delay was as a result of a microwave link failure at the
Vandenburg Air Force base, the third one-day delay was as a result of a manual
water valve not being opened for cooling of the launch pad and the fourth
one-day delay was as a result of a problem with the insulation on the side of
the Delta II launch vehicle. The milestone date for the first launch under the
Space System contract was January 29, 1997. Motorola has informed Iridium that
it is in the process of reworking the original launch schedule with its launch
service providers and currently believes its new planned launch schedule should
permit Iridium to meet its planned September 1998 commencement of commercial
operations. There can be no assurance, however, that succeeding launches will
proceed on the new schedule or that the space segment will be operational on
schedule. The reworked launch schedule will require that there are no additional
significant launch delays and that all three launch providers -- McDonnell
Douglas, Khrunichev and China Great Wall -- are able to provide launch services
as currently planned. The new launch schedule will be more compressed than the
original schedule and several intermediate milestones of the Space System
Contract, in addition to the first launch, are expected to occur after their
contract milestone dates before Motorola is able to return to the original
contract schedule. This compression of the launch schedule will add risk to the
launch schedule and put additional pressure on the in-orbit testing phase,
including reduced flexibility in responding to any problems identified in
in-orbit testing, since some portions of the in-orbit testing cannot commence
until a minimum number of satellites are in their assigned orbital position. The
launch delay and the compression of the launch schedule also could place
pressure on the achievement of milestones under the Terrestrial Network
Development Contract. See "Principal Contracts for the Development of the
IRIDIUM System."
Following the January 1997 launch failure involving the McDonnell Douglas
Delta II launch vehicle, Motorola advised Iridium of its position that the U.S.
government's temporary postponement of Delta II launches pending completion of a
failure review analysis constituted an "excusable delay" under the Space System
Contract, the Operations and Maintenance Contract and the Terrestrial Network
Development Contract. Motorola then began the process of reworking the original
launch schedule and notified Iridium it would not claim either a cost adjustment
under the Space System Contract, the Operations and Maintenance Contract or the
Terrestrial Network Development Contract or a schedule extension of the final
Space System Contract milestone as a result of the January 1997 Delta II launch
failure. Iridium and Motorola intend to amend the Space System Contract to
reflect the new launch schedule. There can be no assurance that events
constituting an "excusable delay" will not arise in the future, or, if any such
event of "excusable delay" does arise, that it will be resolved on terms that
are not materially adverse to Iridium.
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Construction and Operation of Gateways
The operation of the IRIDIUM System is dependent on the successful
construction and operation of gateways and the timely availability of necessary
regulatory licenses and approvals. Pursuant to the Gateway Authorization
Agreements, the gateway operators are obligated to use their reasonable best
efforts to meet certain operational capability dates. 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.
Iridium expects paging functionality to be available at a portion of the
gateways by September 1998 with the remainder activated by October 1998.
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. In particular, two gateways are behind
schedule with equipment procurement for their gateways. While Iridium believes
that it is probable that these two gateways will be operational by the planned
September 1998 commencement of commercial operations, in order for them to do so
they will need to move forward promptly, including making certain overdue
payments under their gateway equipment purchase agreements with Motorola. See
"-- Reliance on Motorola, Gateway Owners and Other Third Parties."
Development and Implementation of Software
As discussed under "-- Technology and Technology Implementation Risks;
Inability to Fully Test Prior to Space Deployment -- Integration of
Technologies" and "-- Development and Integration of Software," prior to
commencement of commercial service, 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.
Development, Manufacture and Distribution of Subscriber Equipment
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, TRCs 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. Because there is no current market for IRIDIUM
Services and subscriber equipment, the financial incentive for manufacturers to
produce significant quantities of subscriber equipment in advance is limited.
While Iridium generally does not expect to act as a distributor of subscriber
equipment or derive any income from the sale of subscriber equipment, it is
contemplating a pre-commercial operation order of phones to facilitate the
initial availability of such equipment. There can be no assurance that Iridium
will place a pre-commercial operation order of phones. If Iridium places such a
pre-commercial operation order, Iridium will bear the risk that it will be
unable to resell the phones that it commits to purchase or that it will be
unable to do so at prices that will allow it to recoup its payments to the
manufacturer(s). Moreover, there is a risk that demand for IRIDIUM Services will
not materialize in a timely manner unless Iridium, its gateway operators or
service providers subsidize the cost of hand-held phones. Neither Iridium nor,
to Iridium's knowledge, its gateway owners and service providers currently plan
to provide any such subsidies. The costs associated with any pre-commercial
operation order of phones and the cost of any such subsidization could be
significant. Iridium's current projected funding needs do not reflect any costs
associated therewith.
TECHNOLOGY AND TECHNOLOGY IMPLEMENTATION RISKS; INABILITY TO FULLY TEST PRIOR TO
SPACE DEPLOYMENT
Integration of Technologies
Motorola's timely completion of its obligations under the Space System
Contract is necessary for Iridium to commence commercial operations on its
expected schedule in September 1998. However, the timely completion of such
obligations is not, in itself, sufficient for Iridium to achieve its expected
commercial operation schedule. To build the IRIDIUM System, Motorola and its
subcontractors must integrate a number
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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. Despite the
extensive testing of the components of the IRIDIUM System on the ground, the
nature and complexity of the system is such that final confirmation of the
ability of the system to function in the intended manner, including the ability
of the IRIDIUM System to handle the anticipated number of calls each day, cannot
be confirmed until a substantial portion of the system is deployed in space.
Errors involving hardware or software components in space may result in service
limitations and corresponding reductions in revenue.
Development and Integration of Software
Implementation and operation of the IRIDIUM System, including the business
support systems necessary for such tasks as customer billing and subscriber
authentication, are also significantly dependent on software which has been, is
being or will have to be developed, integrated and tested and which would have
to be reprogrammed if errors require changes. Iridium believes that the
development of the software for the IRIDIUM System, including the space segment,
is one of the largest and most complex software creation and integration tasks
ever undertaken in a commercial satellite communications program. No assurance
can be given that the software necessary to Iridium's business that is being
developed or that will have to be developed will be completed when required,
including integration and testing, or that such software will function as
required.
Prior to commencement of commercial service, the gateway operators must
license additional business support software, develop interface programs between
various software programs and implement software and support systems with
service providers and roaming partners. There can be no assurance that the
gateway operators will acquire or implement the business support systems
necessary for the IRIDIUM Services or that the system supplier will provide such
systems or related services on a timely basis. Failure of a gateway operator to
acquire and implement an adequate business support system could have a material
adverse effect on Iridium.
Development and Production of Subscriber Equipment
The IRIDIUM subscriber equipment is also an essential component critical to
the successful commercial operation of the IRIDIUM System. An inability to
successfully develop and manufacture subscriber equipment in sufficient numbers
could delay commencement of commercial operations or limit the capacity of the
system and the quality of services offered. Such limitations could affect
subscriber acceptance of IRIDIUM Services and as a result could materially and
adversely affect Iridium. Motorola has produced a functional unminiaturized
prototype of the hand-held phone and a functional prototype of the belt-worn
pager. However, there can be no assurance that Motorola, Kyocera or any other
manufacturer will be able to develop on a timely basis, or at all, portable,
hand-held phones or belt-worn pagers that meet Iridium's expectations and which
can be mass produced at economical prices. See "-- Potential for Delay and Cost
Overruns -- Development, Manufacture and Distribution of Subscriber Equipment"
and "-- Reliance on Motorola, Gateway Owners and Other Third Parties."
CONSEQUENCES OF SATELLITE SERVICE LIMITATIONS ON CUSTOMER ACCEPTANCE
Iridium's ability to operate profitably 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.
There is no service available today which approximates the hand-held,
satellite-based service Iridium expects to provide. The IRIDIUM satellite system
is not intended to provide communications services that compete with terrestrial
wireless and paging services where they are available because of the advantages
such wireless and paging systems generally have in terms of cost, voice quality,
signal strength and ability to penetrate various environments (such as
buildings). Based upon current testing and simulations, IRIDIUM
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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 (including, in particular,
in most hotels and professional 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 (i) Iridium's expectation will be correct as to subscribers'
willingness to accept service limitations, higher prices and heavier hand-held
phones and larger pagers than those to which such subscribers may otherwise be
accustomed in order to have the ability to make and receive calls on a worldwide
basis with a single phone or to receive pages on a satellite pager or (ii) that
the service limitations will not result in significantly lower sales to
professional and other travelers than Iridium anticipates. Although the Iridium
paging service will also be satellite-based, Motorola believes that because of
the IRIDIUM System's expected signal strength for paging, Iridium pages will be
generally received in most environments other than in the innermost sections of
large buildings, in densely packed urban canyons or in other situations where
there are significant obstructions between the satellite and the pager. However,
the in building penetration of an Iridium pager is expected to be below that
generally experienced by terrestrial pagers with mature terrestrial paging
systems.
The IRIDIUM System has not been designed to provide high-speed data and
facsimile transmission capability. As a result, Iridium expects that the appeal
of Iridium facsimile and data services will be limited.
CONSEQUENCES OF IRIDIUM PHONE AND PAGER CHARACTERISTICS ON CUSTOMER ACCEPTANCE
Iridium believes that its success is dependent on the development of
satellite phones which are portable and hand-held and pagers which may be worn
on a belt. Moreover, Iridium's business plan assumes that there will be
multi-mode versions of the phone capable of operation with most of the major
terrestrial wireless system standards so that a subscriber can use the same
phone for terrestrial wireless service, including ICRS, and for IRIDIUM
Satellite Service. The phone and pager for the IRIDIUM System are still under
development. Motorola has informed Iridium that the portable, hand-held phone
that Motorola is developing is expected to be larger and heavier than today's
pocket-sized terrestrial wireless phones and is expected to have a significantly
longer and thicker antenna than hand-held terrestrial wireless telephones.
Iridium expects that the Kyocera phone will be relatively the same size and
weight as the Motorola phone. The pager Motorola is developing is slightly
larger than today's standard alphanumeric belt-worn pagers.
Subscribers will generally purchase equipment from service providers.
Iridium does not currently intend to manufacture or distribute IRIDIUM
subscriber equipment or derive any significant income from the sale of IRIDIUM
subscriber equipment. See "-- Potential for Delay and Cost
Overruns -- Development, Manufacture and Distribution of Subscriber Equipment."
Based on information received from Motorola, Iridium expects that Motorola's
version of the multi-mode portable, hand-held phones will have an initial retail
price of approximately $3,000, including at least one TRC, with each extra TRC
having an initial retail price in the range of $500 to $1,000. Motorola's
version of the alphanumeric pager is expected to have an initial retail price of
approximately $500. These projected prices substantially exceed today's prices
for terrestrial wireless phones and pagers and may also exceed prices for
subscriber equipment of competing satellite-based systems. The cost of IRIDIUM
hand-held phones may limit demand for IRIDIUM Services, particularly among
individual purchasers. Motorola has made no commitment to sell subscriber
equipment at these estimated prices. Kyocera has not yet advised Iridium as to
the expected pricing of its hand-held phone.
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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 addition,
many wireless systems as currently configured, including systems covering large
portions of South America, use a form of wireless technology that does not
permit sufficient anti-fraud security or certain international dialing and,
therefore, it is unlikely that Iridium will provide ICRS coverage in areas that
are principally served by this type of technology. To fully implement ICRS,
Iridium also may need to obtain tariff approvals and other regulatory
authorizations from countries where the service will be offered, none of which
has been obtained. Portions of the ICRS service allowing roaming between IS-41
systems will not be implemented before 1999 and ICRS service in Japan is
expected to be delayed until 1999 as well.
In order for Iridium to offer interprotocol ICRS, Motorola must contract
with a third-party supplier to develop, manufacture and deliver the IIU that
will permit protocol translation. While Motorola has identified a third-party
supplier to manufacture and deliver the IIU, contract negotiations are in
preliminary stages and there can be no assurance that Motorola will enter a
contract with such third party or that the required IIU will be delivered on a
timely basis.
The integration of ICRS into Iridium's business management system requires
substantial software development and integration. There can be no assurance that
Iridium will be able to incorporate ICRS into its business support system on a
timely basis. Iridium's business plan currently calls for roaming agreements
covering networks in 57 countries by the commencement of commercial service in
September 1998, with roaming agreements covering networks in approximately 150
countries in place by 2002. To date, Iridium has not entered into any roaming
agreements with terrestrial wireless service providers. Certain terrestrial
wireless service providers are offering or have announced their intention to
offer interprotocol roaming services that will compete with ICRS, and Iridium
may not be able to enter into roaming agreements with such service providers. An
inability to execute roaming agreements which provide ICRS customers terrestrial
wireless coverage in significant markets could have a material adverse effect on
Iridium. Neither Motorola nor Iridium may have sufficient intellectual property
rights to prevent other parties from developing, selling or using equipment and
systems for providing interprotocol roaming services.
SATELLITE LAUNCH RISKS
Number of Launches; Compressed Launch Schedule
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 approximately 12 to 15
months. 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. Motorola has
subcontracted with McDonnell Douglas, Khrunichev and China Great Wall for launch
services. These launch service providers have from time to time experienced
launch failures. 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 risk of a material and adverse effect associated with an Iridium
launch failure is exacerbated by the fact that each launch vehicle will contain
multiple satellites.
The launch of the first five IRIDIUM satellites occurred on May 5, 1997 on
a McDonnell Douglas Delta II launch vehicle. This launch had been scheduled for
January 1997 but was delayed on four successive days and then postponed until
May 1997 as a result of the United States government's decision to temporarily
postpone launches of the McDonnell Douglas Delta II launch vehicle (which is the
type of launch vehicle that McDonnell Douglas is using for IRIDIUM satellites)
following a launch failure involving the McDonnell Douglas Delta II launch
vehicle. The first one-day delay was as a result of a software problem at
Motorola's
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satellite communications control facility, the second one-day delay was as a
result of a microwave link failure at the Vandenburg Air Force base, the third
one-day delay was as a result of a manual water valve not being opened for
cooling of the launch pad and the fourth one-day delay was as a result of a
problem with the insulation on the side of the Delta II launch vehicle. Motorola
has informed Iridium that it is in the process of reworking the original launch
schedule with its launch service providers and that it currently believes its
new launch schedule should permit Iridium to meet its planned September 1998
commencement of commercial operations. The new launch schedule will be more
compressed than the original schedule and several intermediate milestones of the
Space System Contract, in addition to the first launch, are expected to occur
after their contract milestone dates before Motorola is able to return to the
original contract schedule. This compression of the launch schedule will add
risk to the launch schedule and put additional pressure on the in-orbit testing
phase, including reduced flexibility in responding to any problems identified in
in-orbit testing, since some portions of the in-orbit testing cannot commence
until a minimum number of satellites are in their assigned orbital position. The
launch delay and the compression of the launch schedule also could place
pressure on the achievement of milestones under the Terrestrial Network
Development Contract. Delays in the new launch schedule could delay the
commencement of commercial operations, the availability of subscriber equipment
and the ability of gateways to function on a timely basis as well as impair
Iridium's ability to obtain additional funding.
China Great Wall is expected to provide launch services for Iridium using
the Long March 2C vehicle which has not been launched since October 1993. China
Great Wall experienced failures in December 1992 and January 1993 with its Long
March 2E launch vehicle, and in February 1996 with its 3B launch vehicle.
Khrunichev is expected to provide launch services for Iridium using the Proton
launch vehicle. In November 1996, there was a failure with Khrunichev's Proton
launch vehicle in connection with the Mars 96 mission that the failure analysis
determined was attributable to faulty guidance and control commands from the
Mars 96 spacecraft. In addition, Khrunichev experienced launch failures in
February 1996 and May 1993.
Impact of Excusable Delays
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. Following the January 1997 launch failure
involving the McDonnell Douglas Delta II launch vehicle, Motorola advised
Iridium of its position that the United States government's temporary
postponement of Delta II launches pending completion of a failure review
analysis constituted an "excusable delay" under the Space System Contract, the
Operations and Maintenance Contract and the Terrestrial Network Development
Contract. Motorola then began the process of reworking the original launch
schedule and notified Iridium that it would not claim either a cost adjustment
under the Space System Contract, the Operations and Maintenance Contract or the
Terrestrial Network Development Contract or a schedule extension of the final
Space System Contract milestone as a result of the January 1997 Delta II launch
failure. The reworked launch schedule will require that there are no additional
significant launch delays and that all three launch providers -- McDonnell
Douglas, Khrunichev and China Great Wall -- are able to provide launch services
as currently planned. Iridium and Motorola intend to amend the Space System
Contract to reflect the new launch schedule. There can be no assurance that
events constituting "excusable delays" will not arise in the future, or, if any
event of "excusable delay" does arise, that it will be resolved on terms that
are not materially adverse to Iridium. See "-- Potential for Delay and Cost
Overruns -- Deployment of Satellites" and "Principal Contracts for the
Development of the IRIDIUM System."
Risks Related to Non-U.S. Launches
China Great Wall and Khrunichev are located in China and Russia,
respectively. Changes in laws, treaties, trade agreements, governmental policies
or political leadership in the United States, China, Russia or Kazakhstan, where
Khrunichev's launch facilities are located, could affect the political or
economic
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relationship between these countries and, as a result, could affect the cost,
availability, timing or overall advisability of utilizing these launch services
providers. In addition, the use of these launch services providers requires
various approvals from the government of the United States under the United
States Arms Export Control Act and the Export Administration Act. See
"Regulation of Iridium." There can be no assurance that the remaining required
approvals will be obtained. Failure to receive any of the required approvals
could result in an excusable delay under the Space System Contract, the
Terrestrial Network Development Contract and the Operations and Maintenance
Contract. Motorola has informed Iridium that in view of the suspension for over
three months in Delta II launches following the January 1997 Delta II launch
failure, its ability to meet its revised launch schedule and to meet the
schedule specified in the Space System Contract for delivery of the space
segment is dependent upon each of McDonnell Douglas, Khrunichev and China Great
Wall being able to provide launch services on a timely basis.
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. The
actual useful life of any satellite will depend upon a variety of factors
including the quality of construction of the satellite, the quality and
durability of its components and whether the satellite sustains casualty damage
in space. Due to their low and rapid orbit of the Earth, IRIDIUM satellites will
place significant stress on the satellite batteries which will be discharged and
recharged 12 to 14 times a day, as contrasted with approximately 20 times a year
for geostationary satellites.
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 at an aggregate cost to Iridium of approximately $2.88 billion,
assuming the space segment is delivered in September 1998 and assuming no
excusable delay occurs. Iridium has the option to extend the Operations and
Maintenance Contract for an additional two years for additional aggregate
payments aggregating $1.33 billion (based on the same assumption) and assuming
no excusable delay occurs. 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). See "Principal
Contracts for the Development of the IRIDIUM System -- Operations and
Maintenance Contract." 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. As with any satellite system, the
IRIDIUM satellites face risk of damage from meteor and solar storms, which are
recurring phenomena. The potential for damage from meteor and solar storms is
difficult to quantify. Iridium has obtained insurance to cover certain of these
risks, but there can be no assurance that such insurance will provide adequate
mitigation in the event of a loss. Iridium also bears the risk of damage to
person or property resulting from the survival of any portion of a satellite
following planned or unplanned reentry. Motorola believes that the likelihood of
such damage is extremely remote and Iridium expects to insure against such risk.
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.
Upon the expiration of the Operations and Maintenance Contract, Iridium,
unless it enters into another similar contract with Motorola or a third party,
will bear all risks of satellite damage or failure. In addition, if the contract
is not renewed, Iridium is obligated to pay Motorola $46 million for each spare
satellite then located in a low earth, non-operational storage orbit and, unless
Iridium has given Motorola one year's notice of its intention not to renew the
contract, $31 million for each spare satellite not yet launched and a fraction
of that amount for each partially completed spare satellite. The Space System
Contract provides that title and
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risk of loss or damage to each individual satellite will pass to Iridium upon
the arrival of each satellite at its designated orbital location in the
satellite constellation.
RISKS ASSOCIATED WITH LICENSING AND SPECTRUM ALLOCATION
Significant Regulatory Approvals Required for Operation of the IRIDIUM System
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. The successful implementation of the
IRIDIUM System requires (1) the international allocation by a World
Radiocommunications Conference ("WRC") under the International Telecommunication
Union (the "ITU") of the spectrum required for IRIDIUM subscriber, gateway and
intersatellite links, (2) the domestic allocation in each country of spectrum
for MSS and Aeronautical Mobile Satellite (Route) Service ("AMS(R)S") use, (3) a
license from the Federal Communications Commission (the "FCC") for the
construction, launch and operation of the IRIDIUM satellites, using frequencies
assigned to it for subscriber, gateway and intersatellite links, (4) authority
to construct and operate the North American gateway in the United States and
system control facilities to be located in the United States and Canada,
including spectrum assignments for the gateway links, and for the use of the
IRIDIUM subscriber equipment, including spectrum assignments for the user links,
(5) in each other country in which a gateway or system control terminal will be
located, an authorization to construct and operate those facilities, including
necessary gateway link spectrum assignments, (6) in each country in which
IRIDIUM subscriber equipment will be operated, authority to market and operate
that equipment with the IRIDIUM System, user link spectrum assignments, and
authorization to offer IRIDIUM communications services, (7) 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 and (8)
consultation with the International Telecommunications Satellite Organization
("Intelsat") and the International Maritime Satellite Organization ("Inmarsat")
to ensure technical compatibility and avoid significant economic harm to the
extent required by those organizations. See "Regulation of Iridium."
Significant Remaining Regulatory Approvals
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 the approvals mentioned in (2), (5), (6) and (7)
above. See "Regulation of Iridium."
Aeronautical Certification. With respect to (2) above, Motorola submitted
in December 1996 a request to the FCC to authorize the IRIDIUM System to provide
AMS(R)S in its authorized band as part of its in-flight passenger communications
service. Several parties filed comments with and have petitioned the FCC to deny
Motorola's application. Among other arguments, petitioners claim that the
AMS(R)S proposal is inconsistent with ITU and FCC rules and allocations. In
addition to FCC approval, approval is needed from the FAA, which must certify
that the IRIDIUM avionics equipment meets minimum performance standards, and it
may be necessary for IRIDIUM to satisfy other international certification
requirements. There can be no assurance that the FCC application will be
granted, or that the avionics certification requirements will be satisfied in a
timely fashion or at all.
Gateway Licensing. With respect to (5) above, Iridium currently expects to
have 11 operating gateways at the commencement of commercial operations.
However, because the IRIDIUM System utilizes intersatellite links, Iridium can
provide service worldwide with a smaller number of gateways or even a single
gateway. Unlike "bent pipe" systems, it is not necessary for a subscriber and a
gateway to be within the footprint of a single satellite for a call to be
completed over the IRIDIUM System. Nevertheless, it is important for Iridium to
have a sufficient number of gateways available at the commencement of commercial
operations in order to reduce the landline charges from the gateway to the call
termination point and to ensure sufficient capacity of the IRIDIUM System.
Iridium believes that with a majority of the expected 11 gateways operational it
will be
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able to provide a sufficient level and quantity of service and there is no
specific gateway, or specific combination of gateways that is critical to
providing IRIDIUM Satellite Services. If a gateway is not operational at the
commencement of commercial operations, the calls it would process would have to
be processed by an operational gateway, preferably one located in an adjacent
territory so that the costs of relaying the calls terrestrially can be
minimized. There can be no assurance that Iridium will have the necessary number
of gateways in service and licensed at the commencement of commercial operations
or that a gateway that is not operational or licensed at the commencement of
commercial operations will be able to make appropriate arrangements with an
operational and licensed gateway to provide service to its territory.
Each gateway must be licensed by the jurisdiction in which it is located.
Three final and four experimental licenses to build and operate gateways have
been received. The final licenses have been granted for the gateways in the
United States (Tempe), Thailand (Bangkok) and Taiwan (Taipei) and permit the
gateways to engage in commercial operations. The experimental licenses have been
granted for the gateways in Korea (Seoul), Brazil (Rio De Janeiro), Russia
(Moscow) and Italy (Fucino) and permit the gateways to test their links between
the IRIDIUM satellites and terrestrial services. Two of the remaining four
unlicensed gateways -- the gateways in Japan (Nagano) and India (Bombay) -- are
under construction in the expectation that they will be licensed. Iridium
expects that the gateway in Japan will be completed in August 1997 and that the
gateway in India will be completed in March 1998. The gateways to be located in
China (Beijing) and Saudi Arabia (Jeddah) have not received licenses or
commenced construction. The licenses that have been received by the gateways are
subject to conditions that relate to the completion of construction and the
provision of technical information to regulatory authorities. Iridium expects
that the licenses its gateways are seeking will have similar conditions. There
can be no assurance that the additional licenses necessary for Iridium to obtain
the service capability assumed in its business plan will be obtained on a timely
basis or at all. In addition, while Iridium believes the conditions specified in
the gateway licenses that have been received can be satisfied, there can be no
assurance that such conditions will be satisfied or that conditions to licenses
received in the future will be satisfied. See "Regulation of
Iridium -- Licensing Status."
Numerous Remaining Individual Country Authorizations. With respect to (2)
and (6) above, only seven countries have granted conditional licenses for the
use of IRIDIUM Satellite Services in their country. These countries are the
United States, Venezuela, New Zealand, Taiwan, Thailand, Afghanistan and
Micronesia. Iridium will require similar approvals in each country in which it
intends to offer service. In order for Iridium's business plan to be successful,
approvals in a substantial number of countries will need to be obtained prior to
September 1998, the month commercial operations are expected to commence.
Iridium is seeking licenses throughout the world. However, Iridium is placing
emphasis on obtaining approvals by September 1998 from the 70 to 90 countries
where Iridium expects substantially all of the demand for, and usage of, IRIDIUM
Services is likely to be generated. While Iridium believes that all required
licenses will be obtained in a substantial majority of these countries by
September 1998, there can be no assurance that the required authorizations will
be granted at all or in a timely manner, or without burdensome conditions.
Failure to obtain licenses in a timely fashion could have a material adverse
effect on Iridium.
Approval of the offering of IRIDIUM Services by many countries will be
contingent upon Iridium providing such countries with the ability to legally
monitor calls made to or from such countries. Iridium believes that it will be
able to address the concerns of many of these countries by the date commercial
service is expected to begin and of other countries after the commencement of
commercial operations, but there can be no assurance that it will be able to do
so. In addition, other governmental or political concerns may arise, including
spectrum license fees or auctions, that may impair the ability of Iridium to
obtain licenses or offer IRIDIUM Services on a timely basis.
Interference from Other Satellite Systems. In addition, the IRIDIUM System
MSS downlinks to the IRIDIUM subscriber equipment operate on a secondary basis.
Under the rules of the ITU and the FCC, these downlinks may not cause harmful
interference to any primary spectrum user operating in the same frequency band
and must accept any interference caused to them by a primary spectrum user
operating in the same frequency band. In light of the secondary nature of
IRIDIUM's MSS downlinks, there can be no assurance that issues concerning
intersystem interference from CDMA MSS Systems will be resolved in a way that
will protect Iridium subscriber units from harmful interference. Any failure to
implement an acceptable limit on
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out-of-band CDMA emissions could significantly reduce the total capacity of the
IRIDIUM System. Furthermore, the MSS downlinks of the IRIDIUM System may need to
accept interference from Inmarsat terminals, including Inmarsat aeronautical and
land mobile terminals, when they are in the vicinity of an IRIDIUM terminal.
GLONASS and Radioastronomy Coordination. With respect to (7) above, the
IRIDIUM System, including IRIDIUM subscriber equipment, must be coordinated with
all other domestic and foreign users of the 1.6 GHz band. Currently, the Russian
aeronautical navigation system, GLONASS, operates in a frequency band that
overlaps the 1610-1626.5 MHz band. MSS systems are required to coordinate their
operations with the previously registered operations of GLONASS. IRIDIUM
believes that a bilateral coordination agreement between Russia and the United
States is in the final stages of negotiation, under which Russia would agree to
move the GLONASS system's operations to frequencies below 1610 MHz by January 1,
1999, and to frequencies below approximately 1605 MHz by the year 2005. The FCC
has conditioned the Iridium blanket subscriber license upon compliance with a
level of protection from interference to the GLONASS system. Iridium believes
that it can meet the protection requested for GLONASS when GLONASS shifts down
in frequency to below approximately 1605 MHz by the year 2005. During the
interim period between 1999 and when GLONASS shifts to below approximately 1605
MHz, while there can be no assurance as to what level of protection will be
required to protect GLONASS, Iridium believes it will be able to satisfy any
reasonable level of protection required.
In addition, it will be necessary for other administrations to coordinate
with the Russian Federation concerning the level of protection that will be
afforded to GLONASS in countries outside the United States and Russia. In
Russia, additional restrictions are expected to be imposed which may limit the
amount of spectrum available to Iridium in Russia. There can be no assurance
that sufficient spectrum will be available to meet subscriber demand in Russia
or any other country that requires a higher level of protection for GLONASS than
the United States. Moreover, there can be no assurance that the CDMA based
global MSS systems will be able to meet the levels of protection required for
GLONASS, either in the United States, Russia, or elsewhere. Such an eventuality
might lead the FCC and other countries' regulatory authorities to consider
requests to reassign the CDMA systems to higher frequencies within the
1610-1626.5 MHz allocation to protect GLONASS. This development might, in turn,
reduce the amount of spectrum available to Iridium.
Under the FCC's rules, the IRIDIUM System also must protect U.S.
radioastronomy sites during periods when they are observing in the 1610.6-1613.8
MHz band. To date, Motorola has entered into memoranda of understanding and
letter agreements establishing principles for coordinating spectrum use (or, in
one case, determining that coordination is not required) with entities
representing all of the 15 U.S. radioastronomy sites. There can be no assurance
that final coordination agreements with these sites will be concluded in a
timely manner or, if FCC intervention is required, that the FCC will impose a
coordination solution that is acceptable to Iridium. Nor can there be any
assurance that the technical assumptions underlying the memoranda of
understanding will not differ from the manner in which the IRIDIUM System
performs once it is operational.
Some other countries will also require that the IRIDIUM System be
coordinated with radioastronomy sites that observe in the 1.6 GHz band, and
Iridium will not be permitted to cause harmful interference to any such site.
Iridium and Motorola have commenced coordination discussions with numerous
non-U.S. radioastronomy sites. While Iridium believes that it will be able to
demonstrate that Iridium's operations will not materially and adversely affect
the ability of radioastronomers to observe in the 1.6 GHz band, there can be no
assurance that these coordinations will be concluded successfully or in a timely
manner.
COMPETITIVE RISKS; FACTORS AFFECTING IRIDIUM'S COMPETITIVE POSITION
Certain sectors of the telecommunications industry are highly competitive
in the United States and in other countries. The uncertainties and risks created
by this competition are intensified by the continuous technological advances
that characterize the industry, regulatory developments which affect competition
and alliances between industry participants. While no single wireless
communications system serves the global
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personal communications market today, Iridium anticipates that more than one
system will serve this market in some fashion in the future. Iridium believes
that its most likely direct competition will come from the planned I-CO Global
Communications (Holdings) Limited ("ICO") telecommunications service and one or
both of the other FCC-licensed MSS applicants -- Loral/Qualcomm Partnership,
L.P. (on behalf of Globalstar) and TRW, Inc. (on behalf of Odyssey). Iridium
also expects to face competition from regional geostationary satellite-based
systems, including Asia Pacific Mobile Telecommunications Satellite ("APMT"),
Afro-Asian Satellite ("ASC") and PT Asia Cellular Satellite ("ACeS") and from
the existing Inmarsat geostationary global satellite system. See
"Business -- Competition."
Competition from Interprotocol Roaming Service Providers, GSM Roaming
Services, Regional MSS Systems and Wireless Phone Rentals
Certain services are already available to provide roaming services among a
number of countries, including those that use incompatible cellular standards.
For example, GlobalRoam and Cellcard provide roaming between some North American
AMPS networks and some European and other GSM networks. The availability of such
international near-global roaming services is likely to increase. These services
will compete directly with Iridium's ICRS service and with Iridium's
satellite-based phone services for travelling professionals who travel between
or among territories with incompatible cellular standards. One other proposed
MSS system, ICO, and one regional geostationary satellite, ACeS, have indicated
that they may also offer some form of dual-mode satellite/cellular service,
which may include interprotocol roaming capabilities. 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. There is a risk that one or more regional mobile satellite services could
enter into agreements to provide intersystem roaming which could be global or
nearly global in scope. 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. These businesses often
have rental locations at airports, hotels and other locations and will also
deliver phones.
Risk of Delayed Market Entry
The success of the IRIDIUM System will depend in part on the ability of
Iridium to develop and operate the system in a timely fashion. Because some of
the regional satellite-based systems contemplate relatively simple ground
systems and are expected to deploy no more than two satellites, they may succeed
in deploying their systems before Iridium. A significant delay in the
commencement of service by Iridium could result in one or more competing global
MSS systems reaching the market before Iridium. If competing regional or global
systems are deployed and marketed before Iridium's system, Iridium's ability to
compete may be materially and adversely affected. See "-- Potential for Delay
and Cost Overruns."
Technical Capabilities and Financial Resources of Competitors
The technological qualities of Iridium's system will be critical to its
ability to compete. Iridium's system and each of its competitors'
satellite-based systems have different planned technical capabilities. The
actual technical capabilities of satellite-based communications systems will not
be known until such systems are in service. There can be no assurance that the
technological qualities of competing satellite-based systems will not exceed
those of the IRIDIUM System, making those systems more attractive to potential
subscribers. For example, Iridium believes that it will have a link margin
(signal strength) advantage over proposed competing MSS systems, but such
systems may be able to develop and implement technologies, such as "path
diversity" (serving a phone with multiple satellites simultaneously), that may
reduce or eliminate Iridium's expected advantage. Also, it is possible that the
IRIDIUM System may not be able to achieve the technological expectations of
Iridium.
Some of Iridium's potential competitors may have financial and other
resources greater than those of Iridium. There can be no assurance that one or
more of these competitors will not be better capitalized than Iridium.
Terrestrial wireless service providers have found it advantageous to subsidize
wireless phone purchases in order to stimulate demand for their services or to
respond to competitive pressures. Such
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subsidization requires financial resources. There can be no assurance that
Iridium will have the financial resources required to pursue subsidization in
the event subscriber equipment subsidization becomes an advantageous strategy in
the MSS market.
Competition for Subscribers and Service Providers; Pricing
The IRIDIUM System is not intended to provide communications services that
compete with landline and terrestrial wireless services, but instead is designed
to complement such services. IRIDIUM Satellite Services will be priced
significantly higher than most terrestrial phone and paging services, and
IRIDIUM customers are not expected to discontinue their use of terrestrial
wireless services. Iridium's business plan assumes that Iridium will be able to
charge a global mobility premium, over the cost of a hypothetical
terrestrial-based call, for its Satellite Services. If the market will not
support such a premium, Iridium's ability to compete may be materially adversely
affected. Also, the IRIDIUM System will lack the operational capacity to provide
local service to large numbers of subscribers in concentrated areas and the
IRIDIUM System will not afford the same voice quality, signal strength and
degree of building penetration in areas that are served by mature terrestrial
wireless voice or paging systems. The extension of land-based telecommunications
systems to areas that are currently not serviced by landline or terrestrial
wireless phone or paging systems could reduce demand that might otherwise exist
in such areas for IRIDIUM Services.
In addition to competing for subscribers to its service, Iridium also
expects to compete with various other communications services for local service
providers. A failure to effectively compete with these services could materially
and adversely affect the availability to Iridium of the more desirable service
providers or the revenue sharing arrangements among Iridium, gateway operators,
service providers and roaming partners. Furthermore, ICO could have an advantage
in obtaining spectrum allocations and local operating approvals in a number of
countries because it is affiliated with Inmarsat, and investors in ICO and
Inmarsat include many state-owned telecommunications companies and the
regulatory authorities in their countries. See "Regulation of Iridium."
Competition in Paging Services
In addition to competing with paging services offered by proposed global
and regional MSS systems, if any, the IRIDIUM paging service will face
competition from regional and nationwide terrestrial paging services, and from
M-Tel's SkyTel service which currently provides paging services to approximately
20 countries around the world. SkyTel operates by forwarding paging messages via
satellite to a foreign paging network that subsequently transmits the message
over its local network. Also, in 1995 Inmarsat introduced an international
satellite-based one-way messaging service.
Competition Related to New Technologies and New Satellite Systems
Iridium may also face competition in the future from companies using new
technologies and new satellite systems which could render the IRIDIUM System
obsolete or less competitive. Such new technologies, even if not ultimately
successful, could have a material and adverse effect on Iridium as a result of
associated initial marketing efforts. Iridium's business could be materially and
adversely affected if competitors begin operations or existing
telecommunications service providers penetrate Iridium's target markets before
completion of the IRIDIUM System.
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, in turn, is relying to a significant extent on subcontractors
and suppliers
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to perform many of the critical tasks in constructing the IRIDIUM System. In
addition, Iridium is currently relying on Motorola to maintain the necessary
operating licenses for the system control facilities in the United States, and
the license from the FCC to construct, launch and operate the system, and to
operate and maintain the space segment for the benefit of Iridium. Any
assignment or transfer of control of these licenses could be subject to the
prior consent of the FCC. See "Regulation of Iridium -- Licensing Status."
Motorola has developed the specifications for the gateways and subscriber
equipment. 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. Motorola's liability
under the agreements for damages for any breach thereof is limited. See
"Principal Contracts for the Development of the IRIDIUM System" and
"-- Conflicts of Interest with Motorola."
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. Iridium has
entered into Gateway Authorization Agreements with its gateway operators with
respect to these obligations and gateway operators have entered into gateway
equipment purchase agreements with Motorola for the purchase of gateway
equipment for 11 gateways. Motorola has committed to deliver the gateway
equipment for these gateways including voice functionality by September 1998
although, in certain circumstances such as a gateway's failure to perform its
payment obligations or comply with import license requirements and beneficial
occupancy dates, the relevant contracts permit Motorola to delay delivery or
cancel the agreement. Several gateways are late in complying with some of these
conditions. Motorola currently intends to activate the gateway equipment for
paging functionality at a portion of the gateways by September 1998 with the
remainder activated by October 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 the Gateway Authorization Agreements or
gateway equipment purchase agreements. In addition, the ICRS functionality and
enhanced call intercept modifications being negotiated with Iridium will require
all gateway operators to sign agreements with Motorola for this functionality.
No such agreements have been signed. See "Principal Contracts for the
Development of the IRIDIUM System -- Gateway Authorization 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
motivation and 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. As Iridium will
not control the retail pricing of IRIDIUM Services or equipment to subscribers,
decisions on pricing by gateway operators and service providers could materially
and adversely affect Iridium. The failure of one or more gateway operators to
fulfill their obligations to Iridium on a timely basis could have a material and
adverse effect on Iridium, particularly in view of the fact that the appeal of
the IRIDIUM System will be dependent in part upon the extent to which its
services are accessible from, and deliverable to, most of the world. There can
be no assurance that service providers will provide sufficient economic or
contractual incentive for service providers to successfully execute Iridium's
business plan with respect to customer acquisition and retention, pricing,
customer service and marketing, particularly in light of the fact that sales of
IRIDIUM Services and
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subscriber equipment are likely to represent only a portion of each service
provider's business. In addition, while Iridium anticipates devoting significant
resources to advertising, Iridium is dependent on gateway operators and service
providers effectively cooperating in the marketing of IRIDIUM Services in their
territories. Failure of the gateway operators and service providers to
adequately fund and implement the marketing of IRIDIUM Services could have a
material adverse effect on Iridium.
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 March 31, 1997, Iridium had paid $2.284
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
subject to the Motorola Liability Limitations (defined below) 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. Following the January 1997 launch failure
involving the McDonnell Douglas Delta II launch vehicle, Motorola advised
Iridium of its position that the United States government's temporary
postponement of Delta II launches pending completion of a failure review
analysis constituted an "excusable delay" under the Space System Contract, the
Operations and Maintenance Contract and the Terrestrial Network Development
Contract. Motorola then began the process of reworking the original launch
schedule and notified Iridium that it would not claim either a cost adjustment
under the Space System Contract, the Operations and Maintenance Contract or the
Terrestrial Network Development Contract or a schedule extension of the final
Space System Contract milestone as a result of the January 1997 Delta II launch
failure. The reworked launch schedule will require that there are no additional
significant launch delays and that all three launch providers -- McDonnell
Douglas, Khrunichev and China Great Wall -- are able to provide launch services
as currently planned. Iridium and Motorola intend to amend the Space System
Contract to reflect the new planned launch schedule. 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. See "-- Potential for Delay
and Cost Overruns -- Deployment of Satellites" and "Principal Contracts for the
Development of the IRIDIUM System."
The Space System Contract may be terminated upon the occurrence of certain
events of default. If Iridium defaults, it is obligated to (i) make certain
payments to Motorola, including the reasonably anticipated profits Motorola
could have earned had it been permitted to complete its contracts, a portion of
the prices of all partially completed milestones and all costs of stopping work,
including Motorola's costs of terminating subcontracts and purchase commitments
and (ii) assign certain permits and licenses to Motorola which were previously
transferred to Iridium. If Motorola defaults, Motorola's liability is limited to
reasonable costs of completion in excess of the contract price, subject to the
Motorola Liability Limitations discussed below. Motorola would also be entitled
to withhold certain intellectual property associated with various aspects of the
IRIDIUM System, as a result of which Iridium might not be able to complete the
construction of the system. See "Principal Contracts for the Development of the
IRIDIUM System."
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
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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.
Each contract also provides that Motorola shall not be liable to Iridium,
whether in contract, tort or otherwise, for special, incidental, indirect or
consequential damages, including, without limitation, lost profit or revenues.
As described under "Principal Contracts for the Development of the IRIDIUM
System," the Space System Contract, Operations and Maintenance Contract and
Terrestrial Network Development Contract each contain other significant
limitations on Motorola's potential liability. The foregoing are the "Motorola
Liability Limitations."
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. In the event that completion of the Space System Contract and,
therefore, the commencement of the five year period of the Operations and
Maintenance Contract, is delayed more than six months for any reason (other than
causes within the reasonable control of Motorola), the specified quarterly
payments will be adjusted to account for any additional costs incurred by
Motorola. See "Principal Contracts for the Development of the IRIDIUM System."
Motorola does not make any warranty with respect to the services, materials or
equipment supplied under this contract. In the event that the Operations and
Maintenance Contract terminates or expires (including termination arising from
certain defaults by Motorola or Iridium), Iridium would be obligated to make
certain additional payments to Motorola. However, if the termination arises from
certain defaults of Motorola, Motorola could also be required to make certain
payments to Iridium (subject to the Motorola Liability Limitations). See
"-- Limited Life of Satellites; Cost of Maintaining the Space Segment; Risk of
Satellite Failure or Damage." The remedies of Iridium and Motorola specified in
the contract for a default under the contract are exclusive of all other
remedies.
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 subject to the Motorola Liability Limitations. In the event that the
Space System Contract is terminated for whatever reason, the Operations and
Maintenance Contract will also terminate. See "Principal Contracts for the
Development of the IRIDIUM System."
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 $178.9 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 subject to the Motorola Liability
Limitations 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.
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Amendments to Principal Contracts
As a result of technological developments, changes in the desired product
mix and features of the IRIDIUM Services, the addition of enhanced system
capabilities (including ICRS, "follow-me paging" and enhanced call intercept),
and scheduling adjustments, there are a variety of pending and anticipated
amendments and interpretations to the principal supply contracts and other
agreements and letters with Motorola which are estimated by Motorola to
approximate an aggregate of $125 million, which amount is reflected in Iridium's
estimates of its funding requirements. Many of the service enhancements
contemplated by these amendments will not be available until after the
commencement of commercial operations. Certain of these enhancements may require
the gateway owners to sign additional agreements with Motorola. There can be no
assurance that these agreements will be executed or approved by the Iridium
Board. Further, there can be no assurance future technological, market or
regulatory developments will not necessitate further amendments to such
contracts and agreements or that Motorola or other vendors will be willing or
able to provide for these new capabilities on terms acceptable to Iridium.
Furthermore, Iridium has no assurance of having alternative suppliers to
Motorola for provision of these capabilities.
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.
PRICING RISK
Under Iridium's pricing strategy it will set wholesale prices for IRIDIUM
Services and service providers will control the retail price. Service providers
may price IRIDIUM Services in a manner that is sub-optimal to Iridium, including
setting too high a retail price, and thereby reducing total demand without an
offsetting increase in per minute revenue to Iridium. Moreover, Iridium and its
service providers may be forced to lower retail prices in response to
competition. In addition, pricing for telecommunication services, including long
distance rates, has trended downward in recent years. This downward trend may
make it difficult for Iridium to hold or raise its wholesale prices.
LIMITED SATELLITE CAPACITY
To provide commercially adequate service, ensure user acceptance and
operate successfully, the IRIDIUM System will have to provide minimum levels of
availability of IRIDIUM Satellite Services, which will depend upon system
capacity. Various factors, including usage patterns, will have a significant
impact on the capacity of the IRIDIUM System for a particular geographic area
and on a system-wide basis. Most important among these are usage patterns and
spectrum allocation. Iridium could experience unexpected usage patterns which
could exceed the capacity of the IRIDIUM System through one or several gateways.
If Iridium faces significant capacity issues, its ability to increase its
spectrum assignment in any market is subject to significant regulatory hurdles.
There can be no assurance that the necessary spectrum assignments will occur or
that adverse and unanticipated usage patterns will not materialize. Failure to
achieve a commercially viable capacity level for any reason, including but not
limited to those mentioned in this section, would materially and adversely
affect Iridium.
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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 and a holder of a
security interest in substantially all of Iridium's assets. Although Motorola
does not have any employees who serve as directors on the Company Board, 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, through its position as (i) the holder of the largest
ownership interest in Iridium, (ii) potentially the largest holder of Class A
Common Stock (through exchanges of Class 1 Interests for shares of Class A
Common Stock), (iii) the guarantor of the debt of Iridium and (iv) the principal
supplier to Iridium, could in certain situations exercise significant influence
over Iridium and the Company. For example, in addition to its representation on
the Iridium Board, Motorola could have control over Iridium similar to that of a
creditor through its position as a guarantor of Iridium's outstanding debt and
as the holder of a security interest in substantially all of Iridium's assets.
Motorola and Iridium entered into the Space System Contract, the Operations
and Maintenance Contract and the Terrestrial Network Development Contract after
extensive negotiations. Iridium, however, was a wholly-owned subsidiary of
Motorola at the time the Space System Contract and Operations and Maintenance
Contract were negotiated and therefore these negotiations were not conducted on
an arm's-length basis. Moreover, although these agreements provide for specific
prices, Motorola's obligations and liabilities thereunder are subject to certain
limitations which allocate various risks to Iridium and may have the effect of
increasing the price paid by Iridium. Iridium's payment obligations under these
agreements are expected to comprise most of its expenses, and the proceeds of
the Offerings will be used primarily to make milestone payments to Motorola
under the Space System Contract and the Terrestrial Network Development
Contract. See "Principal Contracts for the Development of the IRIDIUM System"
and "Certain Relationships and Related Transactions of Iridium."
Under the Space System Contract, Motorola has agreed to license the rights
to manufacture, sell and use certain intellectual property to the extent
essential to manufacture IRIDIUM subscriber equipment to competent suppliers
that are acceptable to Motorola. Motorola maintains that it has substantial
discretion in its exercise of these rights and could limit the ability of
potential suppliers to manufacture and sell IRIDIUM subscriber equipment. See
"Principal Contracts for the Development of the IRIDIUM System -- Space System
Contract." If Motorola asserts its position and refuses to license intellectual
property to one or more potential manufacturers, the availability of subscriber
equipment and the characteristics and price thereof could be adversely affected,
which could in turn reduce the demand for IRIDIUM Services. Motorola has,
however, entered into a license agreement with Kyocera which allows Kyocera to
manufacture IRIDIUM phones and Iridium believes that if both Motorola and
Kyocera manufacture equipment, they will be able to produce a sufficient number
of IRIDIUM phones. In addition, Motorola has informed Iridium that it has not
declined to license the essential intellectual property to any third party.
Therefore, while Iridium believes that this risk has been reduced, such risk has
not been eliminated since there can be no assurance that Motorola will not
exercise its rights in the future in a manner that limits the access of other
potential manufacturers to the intellectual property essential for the
manufacture of subscriber equipment.
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. There can be no assurance that the allocation of revenues between
Iridium and the gateway owners or operators by the Iridium Board will
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<PAGE> 35
not have an adverse effect on Iridium. See "Principal Contracts for the
Development of the IRIDIUM System."
DEPENDENCE ON KEY MANAGEMENT AND QUALIFIED PERSONNEL
Iridium's success will be dependent upon the efforts of its management team
and its ability to attract and retain qualified management and personnel in the
future. Iridium has no employment contract with any employee and is subject to
the possibility of loss of one or more key employees at any time. Iridium must
also rely upon several employees of Motorola who play a key role in the
performance of Motorola's obligations under the Space System Contract, the
Operations and Maintenance Contract and the Terrestrial Network Development
Contract. Iridium has no control over the relationship between Motorola and such
employees. Iridium could be materially and adversely affected by the loss of one
or more key employees. In addition, Iridium's success will be dependent in part
upon gateway operators having qualified personnel at the various gateways to (i)
oversee the construction of and operate gateways and (ii) execute significant
aspects of Iridium's licensing, marketing and distribution efforts. Significant
and rapid growth in demand for IRIDIUM Services would also require Iridium and
possibly various gateway operators to make additions to personnel to manage such
growth while continuing to meet customer service expectations.
PATENTS AND PROPRIETARY RIGHTS
The Space System Contract and the Terrestrial Network Development Contract
provide generally that Motorola will retain all rights to the intellectual
property associated with the IRIDIUM System. Motorola's obligations under the
Space System Contract and the Terrestrial Network Development Contract to
license these intellectual property rights to third-party suppliers are subject
to significant conditions which could limit Iridium's ability to obtain
alternate suppliers of necessary components of the IRIDIUM System in the future.
Various aspects of the design of the IRIDIUM System are already covered by
Motorola patent, copyright and trade secret rights or are the subject of pending
patent applications. Motorola has filed numerous patent applications on the
IRIDIUM System to date and expects to file additional patent applications, both
in the United States and abroad, as the development of the IRIDIUM System
progresses. There can be no assurance that such applications will be granted in
a timely manner or at all, or that, if such patents are obtained that such
patents, and any copyrights or trade secret rights will be adequate to prevent
others from using the intellectual property used in Iridium's business.
Furthermore, many of Iridium's competitors have obtained, and may be expected to
obtain in the future, patents that may cover or affect products or services that
directly or indirectly relate to those offered by Motorola for the IRIDIUM
System. Iridium or Motorola may not be aware of all patents that may potentially
be infringed by products developed by Motorola for the IRIDIUM System. In
addition, patent applications in the United States are confidential until a
patent is issued and, accordingly, Iridium cannot evaluate the extent to which
the products developed by Motorola for the IRIDIUM System may infringe claims
contained in pending patent applications. In general, if it were determined that
one or more of such products infringe on patents held by others, Motorola and
Iridium could be required to (i) cease developing or marketing such products,
(ii) obtain licenses to develop and market such products from the holders of the
patents or (iii) redesign such products in such a way as to avoid infringing the
patent claims. The extent to which Iridium may be required in the future to
obtain licenses with respect to patents held by others and the availability and
cost of any such licenses is currently unknown. There can be no assurance that
Iridium would be able to obtain such licenses on commercially reasonable terms
or, if it were unable to obtain such licenses, that Motorola would be able to
redesign the products which it developed for the IRIDIUM System to avoid
infringement.
Motorola has agreed pursuant to the Space System Contract to indemnify
Iridium for claims of infringement of any valid and enforceable patent in any
country where IRIDIUM Services are authorized which is brought against Iridium
on account of the space segment or any part thereof that is supplied to Iridium
by Motorola under the Space System Contract. However, Motorola's liability
thereunder is subject to certain significant limitations. For example, if
Motorola's liability in respect of a claim or proceeding in any particular
country exceeds 10% of the actual income derived by Iridium from the provision
of IRIDIUM Services in that country, Iridium is required to cooperate to
mitigate Motorola's liability, including either
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<PAGE> 36
terminating the provision of IRIDIUM Services in that country or releasing
Motorola from liability for patent infringement in that country in excess of
such 10% amount. See "Principal Contracts for the Development of the IRIDIUM
System -- Space System Contract."
ALLEGED HEALTH RISKS
Certain media reports have suggested possible links between the use of
portable cellular telephones which integrate transmitting antennas into their
handsets and certain health risks, including cancer, as well as possible
interference between digital cellular telephones and pacemakers, hearing aids
and other electronic medical devices. The FCC has issued amended and updated
guidelines for evaluating environmental radio frequency radiation from
FCC-regulated transmitters. These guidelines are intended to protect the public
from health risks due to exposure to radio frequency energy. Similar guidelines
were issued in 1996 by the International Commission on Non-Ionizing Radiation
Protection, an international body assigned to develop guidelines regarding
non-ionizing radiation. Guidelines are also being considered by certain other
international agencies. No assurance can be given that in the future other
standards bodies will not issue standards that could require or otherwise result
in phone modifications which may materially and adversely affect Iridium. At
this time, there are no FCC proposals relating to the alleged health risks
associated with digital-based cellular phones and pacemakers, hearing aids and
other electronic medical devices. There can be no assurance that the FCC will
not regulate the use of digital technology in wireless communications devices in
a manner that would adversely affect Motorola's or Kyocera's ability to design
and develop a digital phone for use with the IRIDIUM System.
RISK OF ANTITRUST OR OTHER COMPETITION REGULATION
Antitrust and competition laws generally may affect Iridium's ability to
grant exclusive rights to construct and operate IRIDIUM gateway systems. See
"Principal Contracts for the Development of the IRIDIUM System -- Gateway
Authorization Agreements." Compliance with these and other laws and regulations
may, in some cases, require formal notification or informal consultation with
governmental enforcement or administrative authorities. This process may result
in delays in securing approval, where necessary, to offer, grant or exercise
rights, or may result in restrictions or prohibitions on the offer, grant or
exercise of such exclusive rights. It also could adversely affect the ability of
Iridium to operate or to obtain necessary licenses or otherwise to conduct
business in one or more areas of the world.
RISKS ASSOCIATED WITH GROWTH
While there can be no assurance that customer acceptance of and
satisfaction with IRIDIUM Services will result in substantial and increasing
demand for IRIDIUM Services, significant and rapid growth in demand for IRIDIUM
Services would require Iridium to make additions to personnel and management
information systems to manage such growth while continuing to meet customer
service expectations. In addition, spectrum and satellite infrastructure
characteristics of the IRIDIUM System set inherent capacity limitations that
would prevent growth above certain levels.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Class A Common
Stock or Class B Common Stock, and Iridium has never made distributions on its
Class 1 Interests. The Company and Iridium do not currently anticipate paying
any such dividends or distributions until some time following the date on which
Iridium achieves a positive operating cash flow. Cash distributions by Iridium
are expected to be restricted by certain debt covenants, potentially long after
the achievement of positive operating cash flow. The Company's sole asset is its
Class 1 Interests and the Company has no independent means of generating
revenues. See "Dividend Policy" and "-- Development Stage Company; Absence of
Revenues."
Iridium is intended to be treated as a partnership for United States
federal income tax purposes. The Company will be responsible for paying the
United States federal income tax on its distributive share of the income of
Iridium that is effectively connected with the conduct of a trade or business in
the United States. See "Tax Considerations -- United States Federal Income
Taxation -- Taxation of the Company." The
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Company will have no source of funds to pay United States federal income taxes
other than distributions from Iridium. The Iridium LLC Limited Liability Company
Agreement of Iridium requires the Iridium Board, to the extent of legally
available funds, to declare and pay a pro rata dividend in an amount which, when
added to any prior dividends paid with respect to the profits of the same year,
is sufficient to assure that each non-U.S. Class 1 Member receives an amount at
least equal to the amount of such Member's U.S. federal, state and local income
tax liability resulting from allocations of Iridium's income to such Member.
Iridium also has agreed under the Management Services Agreement to advance funds
to the Company, under certain
conditions, to enable the Company to pay any income tax liability that cannot be
satisfied by distributions to the Company on the Class 1 Interests. See
"Governance of the Company and Relationship with Iridium -- Management Services
Agreement." If for any reason Iridium were unable to comply with these
undertakings, the Company would be unable to make required tax payments to the
United States which would have a material adverse effect on the Company.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF CLASS A COMMON STOCK PRICE
Prior to the Offerings there has been no public market for the Class A
Common Stock and there can be no assurance that an active public market for the
Class A Common Stock will develop or continue after the Offerings. The initial
public offering price of the Class A Common Stock was determined by negotiation
between the Company and the Underwriters. See "Underwriting." The trading price
of the Class A Common Stock could be subject to wide fluctuation in response to
variations in operating results, announcements of the achievement of objectives
or delays in development by Iridium or its competitors, or other events or
factors.
DILUTION RISK
Upon the purchase by the Company of Class 1 Interests with the proceeds
from the Offerings, the Company will realize a substantial dilution in pro forma
net tangible book value per Class 1 Interest. In addition, the Company will
experience dilution in the future as a result of the purchase and sale of Class
1 Interests at prices below the price paid by the Company for its Class 1
Interests. At April 30, 1997 there were outstanding warrants to purchase
4,272,000 Class 1 Interests at $.00013 per Class 1 Interest; warrants to
purchase 4,997,292 Class 1 Interests at $.01 per Class 1 Interest; options to
acquire 1,863,150 Class 1 Interests at $13.33 per Class 1 Interest issued to
executive officers and managers of Iridium under the Iridium Option Plan; Series
A Class 2 Interests that convert into 672,006 Class 1 Interests without any
additional cash investment; and a currently exercisable warrant to purchase up
to the number of Series M Convertible Class 2 Interests that would be
convertible into 2.5% of the number of outstanding Class 1 Interests on the date
of exercise, calculated on a fully diluted basis, at the equivalent of $13.33
per underlying Class 1 Interest that, when issued, will be convertible into a
like number of Class 1 Interests without the payment of additional cash
consideration. See "Dilution." In addition to the warrants described above,
under guarantee arrangements with Motorola, Iridium has a continuing obligation
to issue comparable warrants to Motorola for so long as the guarantees of
borrowings under the Guaranteed Bank Facility remain in place. The maximum
aggregate warrant compensation Motorola can receive under these arrangements is
warrants to purchase 11,250,000 Class 1 Interests (subject to anti-dilution
adjustments) at $.00013 per Class 1 Interest in respect of the $750 million
guarantee through commencement of commercial operations, warrants to purchase
3,750,000 Class 1 Interests (subject to anti-dilution adjustments) at $.00013
per Class 1 Interest in respect of the $350 million conditional guarantee
through commencement of commercial operations, if such guarantee is issued, and
warrants to purchase up to 900,000 Class 1 Interests at $.00013 per Class 1
Interest per year for each $100 million of guaranteed commitments if the
Guaranteed Bank Facility is extended beyond its scheduled August 1998 maturity
date. Through April 30, 1997, Motorola had earned warrants to purchase 4,272,000
Class 1 Interests as compensation for its guarantee. The Class 1 Interests
acquired upon exercise of such warrants must be held for five years from the
date of issuance of such Interests. Up to 18,206,550 Class 1 Interests may be
issued to existing investors in Iridium at a purchase price of $13.33 per Class
1 Interest pursuant to the Reserve Capital Call. The Iridium Board has also
authorized the issuance of warrants to purchase up to 9,165,000 Class 1
Interests at a purchase price of $.00013 per Class 1 Interest to gateway owners
who meet certain performance criteria.
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There will be no immediate dilution to the purchasers of Class A Common
Stock in the Offerings with respect to the Class A Common Stock. However,
pursuant to the Interest Exchange Agreement, the Company has agreed to exchange
shares of Class A Common Stock for Class 1 Interests at an exchange rate of one
share of Class A Common Stock for each Class 1 Interest (subject to
anti-dilution adjustments) commencing 90 days after Iridium has achieved one
full quarter of positive earnings before interest, taxes, depreciation and
amortization. No exchange shall take place unless approved by Iridium pursuant
to authorization of Directors representing at least 66 2/3% of the Iridium
Board. See "Governance of the Company and Relationship with Iridium -- Exchange
Rights of Iridium Members." Also, the Company has authorized the issuance of up
to 2,500,000 shares of Class B Common Stock in the Global Ownership Program.
These shares of Class B Common Stock will be convertible into Class A Common
Stock on a share for share basis. See "Governance of the Company and
Relationship with Iridium -- Global Ownership Program." In addition, the Company
has agreed that in the future it will issue additional shares of Class A Common
Stock at the direction of Iridium and invest the net proceeds thereof in
exchange for one Class 1 Interest for each share of Class A Common Stock so
issued (subject to anti-dilution adjustments). See "Governance of the Company
and Relationship with Iridium -- Share Issuance Agreement."
Iridium needs to raise substantial additional funds to complete the
development and implementation of the IRIDIUM System. A portion of these funds
may be raised through the Reserve Capital Call which would result in the
issuance of up to 18,206,550 Class 1 Interests at $13.33 per Class 1 Interest.
Most of the balance of Iridium's cash needs is expected to be raised through the
incurrence of debt. In order to attract debt investors, Iridium may need to
offer such investors (and to persons providing guarantees or other forms of
credit support for such debt, if any) the right to acquire Class 1 Interests (or
similar interests) at prices substantially below the price per Class 1 Interest
price to be paid by the Company. Iridium may also decide to sell additional
Class 1 Interests directly to investors and the sale price of such Interests may
be substantially less than the price per Class 1 Interest to be paid by the
Company.
SHARES ELIGIBLE FOR FUTURE SALE
Following completion of the Offerings, the only shares of Class A Common
Stock of the Company that will be outstanding will be the 12,000,000 shares
issued in the Offerings (13,800,000 shares if the Underwriters' over-allotment
options are exercised in full). However, the Company has agreed in the Interest
Exchange Agreement that it will exchange shares of Class A Common Stock for
Class 1 Interests at the rate of one share of Class A Common Stock for each
Class 1 Interest and to register with the Securities and Exchange Commission
those shares for sale. Pursuant to the Interest Exchange Agreement, the holders
of Class 1 Interests may not exchange their Interests for shares of Class A
Common Stock prior to 90 days after the first fiscal quarter in which Iridium
achieves positive earnings before interest, taxes, depreciation and
amortization. No exchanges shall take place unless approved by Iridium, pursuant
to the authorization of Directors representing at least 66 2/3% of the Iridium
Board. Based upon the number of Class 1 Interests expected to be outstanding at
the time of completion of the Offerings, 129,219,150 shares of Class A Common
Stock would be issuable upon such exchange. Including all Class 1 Interests
which will be issuable in the future based upon warrants, options (excluding the
Underwriters' over-allotment options) and convertible securities expected to be
outstanding immediately following completion of the Offerings, and the Reserve
Capital Call, an aggregate of 171,163,530 shares of Class A Common Stock would
be issuable upon such exchange. See "Dilution."
Eligible employees of the Company and Iridium and persons having business
relationships with Iridium who are purchasing reserved shares of Class A Common
Stock in the Offerings have agreed, with certain exceptions, not to sell, offer
to sell or otherwise dispose of any shares of Class A Common Stock without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for
a period of 180 days after the date of this Prospectus.
Following completion of the Offerings, the Company will issue shares of
Class B Common Stock in the Global Ownership Program. These shares of Class B
Common Stock will be exchangeable for Class A Common Stock on a share for share
basis after the satisfaction of certain conditions, but in no event earlier than
one year after issuance. Following such exchanges, and if registered for resale
with the Securities and
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Exchange Commission, the Class A Common Stock issuable on exchange will be
freely transferable if held by persons who are not affiliates. See "Governance
of the Company and Relationship with Iridium -- Global Ownership Program."
Issuances of substantial amounts of Class A Common Stock, or the expectation of
such issuances, could adversely affect the market price of the Class A Common
Stock.
RISKS ASSOCIATED WITH INCORPORATION UNDER BERMUDA LAW
The Company is incorporated under the Companies Act 1981 of Bermuda, as
amended from time to time (the "Bermuda Act"). As a result, the rights of
holders of Class A Common Stock will be governed by Bermuda law and the
Company's Memorandum of Association and Bye-Laws. The rights of shareholders
under Bermuda law may differ from the rights of shareholders of companies
incorporated in other jurisdictions. The Company has been advised by its Bermuda
counsel, Conyers, Dill & Pearman, that uncertainty exists as to whether courts
in Bermuda will enforce judgments obtained in other jurisdictions (including the
United States) against the Company or officers or directors of the Company under
the securities laws of those jurisdictions or entertain actions in Bermuda
against the Company or its officers or directors under the securities laws of
other jurisdictions. There is no treaty in effect between the United States and
Bermuda providing for such enforcement, and there are grounds upon which Bermuda
courts may not enforce judgments of United States courts. Certain remedies
available under the United States federal securities laws would not be allowed
in Bermuda courts as contrary to that jurisdiction's public policy.
RISK OF LOSS OF MANAGEMENT RIGHTS UPON CHANGE IN CONTROL
Under the Limited Liability Company Agreement of Iridium, the Company has
certain special rights including the right to designate two members of the
Iridium Board, one of whom will act as a Vice Chairman of Iridium, and the right
to approve certain significant transactions involving Iridium. See "Governance
of the Company and Relationship with Iridium -- Participation in the Governance
of Iridium." Iridium will have the right to terminate these special rights
following a Company Change in Control (as defined), which includes circumstances
in which an entity other than Iridium becomes the beneficial owner of more than
30% of the Company's outstanding common stock or in which there is a change in a
majority of the members of the Company's Board of Directors (the "Company
Board") over a two year period that was not approved by a vote of 66 2/3% of the
members of the Company Board then still in office who were directors at the
beginning of the two year period or whose election or nomination for election
was previously so approved. As a result of these provisions, as well as the
risks described below under "-- Risks Related to the Investment Company Act of
1940," holders of Class A Common Stock may effectively be precluded from
replacing a majority of the Company Board, which initially consists of directors
selected by Iridium.
RISKS RELATED TO THE INVESTMENT COMPANY ACT OF 1940
Substantially all of the assets of the Company will consist of Class 1
Interests in Iridium. Under the United States Investment Company Act of 1940
(the "1940 Act"), the Company could be deemed to be an "investment company" if
the Class 1 Interests constitute "investment securities," as defined in the 1940
Act. If the Company were required to be registered as an investment company
under the 1940 Act, there would be a substantial risk that the Company would be
in violation of the 1940 Act because non-United States companies cannot so
register without applying for and receiving an order from the United States
Securities and Exchange Commission permitting such registration. Reincorporation
under the laws of a state in the United States would impose substantial tax
expense on the Company. The Company believes that it is not required to register
as an investment company under the 1940 Act. This decision is based upon the
Company's belief that the Class 1 Interests it will hold will not be
"securities" for purposes of the 1940 Act. This belief is based upon the
Company's role in the affairs of Iridium. There is a risk that a court could
reach a contrary conclusion. This risk would be substantially increased if there
were a Company Change in Control that resulted in the Company losing its special
management rights. See "-- Risk of Loss of Management Rights upon Change in
Control."
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TAX CONSEQUENCES RELATED TO PASSIVE FOREIGN INVESTMENT COMPANIES
Special U.S. tax rules apply to U.S. taxpayers who own stock in a "passive
foreign investment company" (a "PFIC"). Although the Company believes that it
will not become a PFIC, there is a risk that in the future it may become a PFIC.
Furthermore, if the Company becomes a PFIC in 1998, it will be deemed to have
been a PFIC in 1997 as well. In such an event, a U.S. shareholder would be
subject at his election either to (i) a current tax on undistributed earnings or
(ii) a tax deferral charge in certain distributions and in gains from a sale of
shares of the Class A Common Stock (taxed as ordinary income).
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THE COMPANY AND IRIDIUM'S STRATEGIC INVESTORS
THE COMPANY
The Company was incorporated by Iridium as a Bermuda company on December
12, 1996 and has its principal offices at Clarendon House, 2 Church Street,
Hamilton, Bermuda. The Company was formed for the purpose of acting as a member
of Iridium. The Company will use the net proceeds of the Offerings to acquire
Class 1 Interests in Iridium. Upon consummation of the Offerings and application
of the proceeds therefrom to the purchase of Class 1 Interests, the Company will
own approximately 8.5% of the outstanding Class 1 Interests (approximately 9.6%,
if the Underwriters' over-allotment options are exercised in full). The expenses
of the Offerings, estimated at $2,000,000, will be borne by Iridium. The
Company's only asset will be its interest in Iridium and its only activity will
be participating in the management of Iridium.
The following is a chart of Iridium's ownership structure, giving effect to
the Offerings assuming the Underwriters' over-allotment options are not
exercised.
<TABLE>
<CAPTION>
<S> <C>
Iridium Africa 2.1%
Iridium Andes-Caribe 3.1%
Iridium Brasil 2.0%
Iridium Canada 3.7%
Iridium China 3.7%
Iridium India 3.7%
Iridium Italia 3.9%
The Company Strategic
8.5% Investors Iridium Middle East 4.3%
91.5%
Khrunichev 4.3%
Iridium LLC Korea Mobile Telecom 3.7%
Lockheed Martin 1.1%
Motorola 18.8%
Nippon Iridium 11.2%
Pacific Electric Wire
& Cable Co. 3.7%
Raytheon 0.7%
South Pacific Iridium Holdings
Limited 5.3%
Sprint 3.7%
Thai Satellite 3.7%
Vebacom Holdings, Inc. 8.8%
</TABLE>
The above chart reflects percentage ownership in outstanding Class 1
Interests. For a description of the potential for dilution of the Company's
interest in Iridium see "Dilution."
For additional information on the Company's governance arrangements and its
relationship with Iridium, see "Governance of the Company and Relationship with
Iridium."
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IRIDIUM'S STRATEGIC INVESTORS
Iridium's strategic investors include market leaders in providing wireless
telecommunications services, manufacturing telecommunications equipment and
satellite systems and supplying satellite launch services. Iridium's strategic
investors have collectively invested, or committed to invest, approximately
$3.34 billion in Iridium, including equity, debt, guarantees, conditional
commitments to provide guarantees and the Reserve Capital Call, representing
more than 77% of Iridium's projected total funding needs through the end of
September 1998, the month Iridium expects to commence commercial operations, and
approximately 67% of Iridium's projected total funding needs through the end of
1999, the last year in which Iridium expects negative cash flow and a net
increase in year-end borrowings. See "Prospectus Summary -- Sources and Uses of
Funds by Iridium." Iridium believes that its ability to develop and
commercialize the IRIDIUM System and to compete in the highly competitive
wireless telecommunications market is greatly enhanced by the technical
expertise, regulatory experience, project management skills, distribution
capacity and market presence of its strategic investors.
Iridium's strategic investors which are telecommunications services
providers include such leading companies as Sprint and BCE Mobile Communications
Inc. in North America, STET and Vebacom in Europe and DDI (Japan), UCOM
(Thailand) and Korea Mobile Telecommunications in Asia. Motorola, one of the
world's leading providers of wireless communications systems and equipment,
Iridium Canada Inc. and Sprint Corporation have been allocated the North
American gateway service territory, which principally consists of the United
States and Canada. STET, a leading European telecommunications company, has been
allocated a gateway service territory consisting of countries in Western Europe,
including Belgium, Denmark, France, Greece, Italy, Luxembourg, the Netherlands
and Switzerland. o.tel.o communications GmbH, a provider of mobile and satellite
communications in Germany and an indirect subsidiary of VEBA AG, one of the
largest corporations in Germany, has been allocated a gateway service territory
consisting of countries in or near Europe, including Austria, Bulgaria, the
Czech Republic, Finland, Germany, Hungary, Ireland, Israel, Norway, Poland,
Portugal, Romania, Spain, Sweden, Slovakia, Ukraine and the United Kingdom.
Korea Mobile Telecommunications Corporation, a provider of cellular and paging
services, has been allocated the gateway service territory consisting of North
Korea and South Korea. Pacific Electric Wire & Cable Co., Ltd. ("PEWC"), a
leading provider of telecommunications services and equipment, has been
allocated a gateway service territory consisting of Taiwan, Indonesia, Brunei,
Papua New Guinea and the Philippines. Thai Satellite Telecommunications Co.,
Ltd., a company formed by UCOM, one of the largest cellular and paging
operations in Thailand, has been allocated a gateway service territory
consisting of Cambodia, Laos, Malaysia, Singapore, Thailand and Vietnam. Because
of the prominence of many of these investors, Iridium believes that its
strategic investors have provided significant assistance in the process of
seeking regulatory approvals and their assistance will continue to be of great
importance. In addition, Iridium expects that these investors will use their
existing wireless communications sales and services organizations to market and
distribute IRIDIUM Services and subscriber equipment for use with the IRIDIUM
System in their territories, which include their existing base of approximately
14 million wireless subscribers.
The IRIDIUM investor group also includes organizations with significant
satellite development and launch expertise, including Raytheon, a leading
developer and manufacturer of electronic systems, equipment and components,
Lockheed Martin, a world leader in defense and space system technology and
design, Khrunichev, a state-owned aerospace engineering and manufacturing
company in Russia, and China Aerospace, a major diversified industrial group. As
strategic investors, each has contributed significantly to major subsystems of
the space segment of the IRIDIUM System. Lockheed Martin designed and is
manufacturing the satellite bus; Raytheon is providing the main mission antennas
for the satellites; China Great Wall Industry Corporation, a subsidiary of China
Aerospace, will provide launches for the initial deployment of the satellites of
the space segment (and additional launches for the maintenance of the space
segment); and Khrunichev will provide several launches for the initial
deployment of the space segment. In addition, Iridium expects that Motorola and
Kyocera, two of the world's leading manufacturers of wireless telephones, will
manufacture and sell subscriber equipment for use with the IRIDIUM System. See
"Iridium Investors, Number of Class 1 Interests Owned, Percentage Ownership and
Principal Gateway Service Territories."
41
<PAGE> 43
USE OF PROCEEDS
The net proceeds from the Offerings are estimated to be approximately $225
million ($259 million if the Underwriters' over-allotment options are exercised
in full) and after deducting underwriting discounts. Expenses of the Offerings,
estimated at $2 million, will be borne by Iridium. The net proceeds of the
Offerings will be used by the Company to purchase 12,000,000 Class 1 Interests
(13,800,000 Class 1 Interests, if the Underwriters' over-allotment options are
exercised in full) pursuant to the terms of the 1997 Subscription Agreement
described under "Governance of the Company and Relationship with Iridium -- 1997
Subscription Agreement." Following application of the net proceeds of the
Offerings to the purchase of Class 1 Interests, the Company will own
approximately 8.5% of the outstanding Class 1 Interests (approximately 9.6%, if
the Underwriters' over-allotment options are exercised in full). See "Dilution"
and "Underwriting."
Iridium will use the net proceeds from the sale of Class 1 Interests to the
Company primarily for milestone payments under the Space System Contract and the
Terrestrial Network Development Contract and to a lesser extent for other
general corporate purposes related to commercialization of the IRIDIUM System.
See "Prospectus Summary -- Sources and Uses of Funds by Iridium."
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Class A Common
Stock or Class B Common Stock, and Iridium has never made distributions on its
Class 1 Interests. The Company and, except as described below, Iridium do not
currently anticipate paying any such dividends or distributions unless, and
until some time following the date on which, Iridium achieves positive operating
cash flow.
The Company's only assets will be its Class 1 Interests and the Company has
no independent means of generating revenues. Iridium will pay the Company's
operating expenses, which expenses are not expected to be material. To the
extent permitted by applicable law and agreements relating to indebtedness,
Iridium intends to distribute to its Class 1 Members, including the Company, net
cash, if any, received from its operations, less amounts required to repay
outstanding indebtedness, satisfy other liabilities and fund capital
expenditures and contingencies. The LLC Agreement requires the Iridium Board, to
the extent of legally available funds, to declare and pay a pro rata dividend in
an amount which, when added to any prior dividends paid with respect to the
profits of the same year, is sufficient to assure that each non-U.S. Class 1
Member receives an amount at least equal to the amount of such Member's United
States federal, state and local income tax liability resulting from allocations
of Iridium's income to such Member taking into account any withholding required
under United States federal, state and local law. Cash distributions by Iridium
are expected to be restricted by certain debt covenants.
The Company intends to distribute promptly, as dividends to its
shareholders, the distributions, if any, made to it by Iridium, less any amounts
reasonably required to be retained for payment of taxes, for repayment of any
liabilities and to fund any contingencies. Any dividend declared subsequent to
the Offerings must be declared and paid equally on the outstanding Class A
Common Stock and Class B Common Stock.
42
<PAGE> 44
DILUTION
Purchasers of Class A Common Stock in the Offerings will not experience
significant dilution with respect to the Class A Common Stock of the Company
upon completion of the Offerings. However, the Company will experience immediate
dilution with respect to the Class 1 Interests when it invests the net proceeds
from the Offerings in Class 1 Interests. In addition, dilution to new investors
with respect to the Class A Common Stock will occur at any time the holders of
Class 1 Interests exchange Class 1 Interests for Class A Common Stock pursuant
to the Interest Exchange Agreement. See "Governance of the Company and
Relationship with Iridium -- Exchange Rights of Iridium Members" and "Shares
Eligible for Future Sale."
The price per Class 1 Interest to be paid by the Company for the Class 1
Interests to be purchased with the proceeds of the Offerings will exceed the
price per Class 1 Interest paid by Iridium's present Class 1 Members. The
following table illustrates the dilution to the Company in pro forma net
tangible book value on a per Class 1 Interest basis after giving effect to the
sale by the Company of the 12,000,000 shares of Class A Common Stock in the
Offerings at the initial public offering price of $20.00 per share and the
application of the net proceeds to the Company therefrom (after deduction of
underwriting discounts) to purchase 12,000,000 Class 1 Interests. Net tangible
book value per Class 1 Interest is equal to Iridium's total tangible assets less
total liabilities as of March 31, 1997, divided by the number of Class 1
Interests outstanding at that date.
<TABLE>
<S> <C> <C>
Purchase price per Class 1 Interest purchased by the Company with the
proceeds of the Offerings................................................ $18.80
Net tangible book value per Class 1 Interest at March 31, 1997............. $12.60
Pro forma increase in net tangible book value per Class 1 Interest
attributable to the sale of Class 1 Interests(1)......................... .47
------
Pro forma net tangible book value per Class 1 Interest after the
Offerings................................................................ 13.07
------
Pro forma dilution per Class 1 Interest to the Company after the
Offerings................................................................ $ 5.73
======
</TABLE>
- ---------------
(1) Includes the 7,500,000 Class 1 Interests purchased by South Pacific Iridium
Holdings Limited on May 30, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Funding Requirements."
The following table summarizes the relative investment in Iridium of the
existing holders of Class 1 Interests and the Company, as adjusted to give
effect to the sale of 12,000,000 Class 1 Interests to the Company in exchange
for approximately $225 million, the net proceeds to the Company from the
Offerings (assuming the Underwriters' over-allotment options are not exercised).
<TABLE>
<CAPTION>
CLASS 1 INTEREST CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE PER
INTERESTS PERCENT PAID PERCENT CLASS 1 INTEREST
----------- ------- ------------- ------- -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Existing Holders of Class 1
Interests(1).................. 129,219,150 91.5% $ 1,728 88.5% $ 13.37
The Company..................... 12,000,000 8.5 225 11.5 18.80
----------- ----- ---------- -----
Total................. 141,219,150 100% $ 1,953 100% $ 13.83
=========== ==== ======= ====
</TABLE>
- ---------------
(1) Includes the 7,500,000 Class 1 Interests purchased by South Pacific Iridium
Holdings Limited on May 30, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Funding Requirements."
43
<PAGE> 45
The following table presents information with respect to the potential
issuances of Class 1 Interests pursuant to outstanding warrants and convertible
interests (assuming the Underwriters' over-allotment options are not exercised).
<TABLE>
<CAPTION>
CASH CONSIDERATION
CLASS 1 INTERESTS PAID OR PAYABLE
----------------------- -------------------------
INTERESTS PERCENT PAID PERCENT
----------- ------- ------------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Existing Holders of Class 1 Interests........... 129,219,150 70.6% $ 1,728 73.7%
Holders of Warrants Issued in Connection with
Debt Issuances(1)............................. 16,247,292 8.9 -- --
Management Option Holders(2).................... 1,863,150 1.0 25 1.1
Holders of Series A Class 2 Interests(3)........ 1,159,985 0.6 63 2.7
Participants in the Reserve Capital Call(4)..... 18,206,550 9.9 243 10.4
Holder of Warrant to acquire Series M Class 2
Interests(5).................................. 4,467,403 2.4 59 2.5
The Company..................................... 12,000,000 6.6 225 9.6
----------- ----- ------- -----
Total................................. 183,163,530 100% $ 2,343 100%
=========== ==== ======= ====
</TABLE>
- ---------------
(1) Includes warrants to purchase 4,997,292 Class 1 Interests (at an exercise
price of $.01 per Class 1 Interest) issued in connection with the issuance
and sale of Iridium's 14 1/2% Senior Subordinated Notes due 2006 and
warrants to purchase 11,250,000 Class 1 Interests (at an exercise price of
$.00013 per Class 1 Interest) anticipated to be held by Motorola, which is
the maximum number of warrants issuable to Motorola in respect of the $750
million Guaranteed Bank Facility through commencement of commercial
operations. Motorola also would be entitled to receive warrants to purchase
up to 3,750,000 additional Class 1 Interests at a price of $.00013 per Class
1 Interest in connection with the possible $350 million increase in the
Guaranteed Bank Facility through commencement of commercial operations and
warrants to purchase up to 900,000 Class 1 Interests at a price of $.00013
per Class 1 Interest per year per $100 million of guaranteed borrowings if
the Guaranteed Bank Facility is extended beyond its scheduled August 1998
maturity. No warrants with respect to the possible increase in or extension
of the Guaranteed Bank Facility or in respect of any anti-dilution
adjustment are included in the table.
(2) Up to 2,625,000 Class 1 Interests may be issued pursuant to the Iridium
Option Plan. Options vest pro rata over a five year period. See
"Management -- Iridium Option Plan." At April 30, 1997 there were options to
purchase 1,863,150 Class 1 Interests outstanding with an exercise price of
$13.33 per Class 1 Interest.
(3) Assuming future dividends are paid in kind through February 28, 2001, there
will be 62,668 Series A Class 2 Interests outstanding at that date and each
Series A Class 2 Interest was convertible into 18.51 Class 1 Interests. The
cash consideration represents the cash payment for the Series A Class 2
Interests (including the liquidation preference of the Series A Class 2
Interests issued in satisfaction of dividend obligations).
(4) Up to 18,206,550 Class 1 Interests may be issued at a purchase price of
$13.33 per Class 1 Interest pursuant to the Reserve Capital Call. See
"Description of Iridium LLC Limited Liability Company Agreement -- Capital
Contributions; Reserve Capital Call."
(5) Motorola holds a warrant to acquire Series M Class 2 Interests in Iridium in
an amount that would be convertible into 2.5% of the fully diluted number of
Class 1 Interests outstanding at the time of exercise. The exercise price is
$1,000 per Series M Class 2 Interest. Each Series M Class 2 Interest is
currently convertible into 75 Class 1 Interests.
Iridium has also authorized the issuance of warrants to acquire up to
9,165,000 Class 1 Interests at a price of $.00013 per Interest to gateway owners
who complete construction and installation of their gateways on schedule and who
meet certain revenue criteria thereafter. None of such warrants has been issued.
The Company has authorized the issuance of up to 2,500,000 shares of Class B
Common Stock as part of the Global Ownership Program. None of such shares have
been issued. See "Governance of the Company and Relationship with
Iridium -- Global Ownership Program." The table does not give effect to any of
these contingent issuances.
44
<PAGE> 46
CAPITALIZATION
THE COMPANY
The following table sets forth as of March 31, 1997: (i) the capitalization
of the Company; and (ii) the capitalization of the Company as adjusted to
reflect the issuance and sale by the Company of 12,000,000 shares of Class A
Common Stock in the Offerings and the receipt of the net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' Equity:
Class A Common Stock, par value $.01 per share, 50,000,000 shares
authorized; 1,200,000 shares issued and outstanding; 12,000,000 shares
issued and outstanding as adjusted..................................... $ 12 $ 120
Class B Common Stock, par value $.01 per share, 2,500,000 shares
authorized; no shares issued and outstanding........................... -- --
Additional paid-in capital............................................... -- 225,480
Retained earnings........................................................ -- --
------ -----------
Total stockholders' equity..................................... -- 225,600
------ -----------
Total capitalization..................................................... $ 12 $ 225,600
===== =========
</TABLE>
IRIDIUM
The following table sets forth as of March 31, 1997: (i) the capitalization
of Iridium and (ii) the capitalization of Iridium as adjusted to reflect the
issuance and sale by Iridium of 12,000,000 Class 1 Interests to the Company in
exchange for the net proceeds of the Offerings less the expenses of the
Offerings payable by Iridium (estimated to be $2,000,000) and the 7,500,000
Class 1 Interests purchased by South Pacific Iridium Holdings Limited on May 30,
1997.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Guaranteed Bank Facility............................................ $ 665,000 $ 665,000
Long-term debt due to Members....................................... 240,178 240,178
Members' equity:
Class 2 Interests, 50,000 interests authorized for Series M; an
aggregate of 300,000 interests authorized for Series A, Series B
and Series C
Series M, no interests issued and outstanding..................... -- --
Series A, 49,268 interests issued and outstanding; 35,878
interests issued and outstanding............................... 49,268 35,878
Series B, 1 interest issued and outstanding....................... -- --
Series C, 75 interests issued and outstanding..................... -- --
Class 1 Interests, 225,000,000 interests authorized, 120,836,025
interests issued and outstanding and 141,219,150 interests issued
and outstanding, as adjusted(1)................................... 1,674,869 2,011,859
Deficit accumulated during the development stage.................... (169,768) (169,768)
Adjustment for minimum pension liability............................ (733) (733)
---------- ----------
Total members' equity..................................... 1,553,636 1,877,236
---------- ----------
Total capitalization...................................... $2,458,814 $2,782,414
========== ==========
</TABLE>
- ---------------
(1) See "Dilution" for a discussion of additional interests issuable pursuant to
options, warrants, convertible interests and the Reserve Capital Call.
45
<PAGE> 47
SELECTED FINANCIAL DATA
THE COMPANY
The following balance sheet data as of December 31, 1996 is derived from
the Company's balance sheet which has been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The balance sheet data as of March 31,
1997 is derived from the unaudited condensed balance sheet of the Company. In
the opinion of management of the Company, such unaudited condensed balance sheet
includes all adjustments necessary for a fair presentation of financial position
as of such date. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the balance sheet of the Company and notes thereto included
herein. The Company has had no operations to date.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------- -------------------------
ACTUAL ACTUAL AS ADJUSTED(1)
----------------- ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Cash................................................. $ -- $ 12 $ --
Investment in Iridium LLC............................ -- -- 225,600
Total assets......................................... -- 12 225,600
Stockholders' equity................................. -- 12 225,600
</TABLE>
- ---------------
(1) As adjusted to reflect the issuance and sale by the Company of the
12,000,000 shares of Class A Common Stock offered hereby at the initial
public offering price of $20 per share, the receipt of the net proceeds
therefrom and the purchase by the Company of 12,000,000 Class 1 Interests at
an aggregate purchase price of approximately $225 million and the repurchase
of the 1,200,000 shares of Class A Common Stock held by Iridium for $12,000.
See "Use of Proceeds" and "Capitalization." Does not reflect the issuance of
shares of Class B Common Stock in connection with the Company's Global
Ownership Program or the application of the proceeds therefrom to acquire
Class 1 Interests. See "Governance of the Company and Relationship with
Iridium -- Global Ownership Program."
46
<PAGE> 48
IRIDIUM
The following selected financial data of Iridium as of December 31, 1992
(predecessor company), 1993, 1994, 1995 and 1996 and for the year ended December
31, 1992 (predecessor company), the period January 1, 1993 to July 28, 1993
(predecessor company) and the period July 29, 1993 (the Initial Contribution
Date) to December 31, 1993, and the years ended December 31, 1994, 1995 and
1996, have been derived from the consolidated financial statements of Iridium
(and its predecessor prior to the Initial Capital Contribution Date), which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The selected financial data of Iridium as of March 31, 1997 and for the three
months ended March 31, 1996 and 1997 are derived from the unaudited condensed
consolidated financial statements of Iridium. In the opinion of management of
Iridium, such unaudited condensed consolidated financial statements include all
adjustments necessary for a fair presentation of the financial position and the
results of operations as of and for such periods. The selected financial data
set forth below should be read in conjunction with "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of Iridium and notes thereto included
herein.
<TABLE>
<CAPTION>
PERIODS PRIOR TO
INITIAL CAPITAL PERIODS FOLLOWING INITIAL
CONTRIBUTION DATE(1) CAPITAL CONTRIBUTION DATE
----------------------------- -------------------------------------------------------------
JAN. 1, 1993 JULY 29, 1993 YEAR ENDED DEC. 31,
YEAR ENDED TO TO ---------------------------------------------
DEC. 31, 1992 JULY 28, 1993 DEC. 31, 1993 1994 1995 1996
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS EXCEPT PER CLASS 1 INTEREST DATA)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Loss Data:
Revenues(2)..................... $ -- $ -- $ -- $ -- $ -- $ --
Sales, general and
administrative............... 8,773 5,309 7,141 17,561 27,187 71,404
Interest income................. -- -- 390 4,252 5,226 2,395
Provision for income taxes...... -- -- 173 1,525 1,684 4,589
------- ------- ---------- -------- -------- --------
Net loss........................ $ 8,773 $ 5,309 $ 6,924 $ 14,834 $ 23,645 $ 73,598
======= ======= ======= ======== ======== ========
Net loss per Class 1 Interest... $ -- $ -- $ .43 $ .38 $ .27 $ .64
======= ======= ======= ======== ======== ========
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1996 1997
------------- -------------
(IN THOUSANDS EXCEPT PER
CLASS 1 INTEREST DATA)
<S> <C> <C>
Consolidated Statement of Loss Dat
Revenues(2)..................... $ -- $ --
Sales, general and
administrative............... 8,410 36,054
Interest income................. 1,234 126
Provision for income taxes...... 487 --
-------- ----------
Net loss........................ $ 7,663 $ 35,928
======== == =======
Net loss per Class 1 Interest... $ .07 $ .32
======== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
------------------------------------------------------- ---------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(3)
------- -------- -------- ---------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........ $ -- $ 23,496 $202,391 $ 51,332 $ 1,889 $ 15,659 $ 339,259
System under construction........ -- 275,000 646,000 1,448,000 2,376,884 2,395,597 2,395,597
Total assets..................... -- 299,886 851,809 1,505,383 2,434,081 2,483,505 2,807,105
Long-term debt (net of
discount)..................... -- -- -- -- 735,904 905,178 905,178
Total Members' equity
(deficit)..................... (9,530) 294,308 795,813 1,404,610 1,572,029 1,553,636 1,877,236
</TABLE>
- ---------------
(1) These amounts reflect certain costs incurred by Motorola prior to July 29,
1993, which were reimbursed by Iridium.
(2) Iridium is a development stage company and accordingly has no revenue for
the periods presented.
(3) As adjusted to reflect (i) the purchase by the Company of 12,000,000 Class 1
Interests with the net proceeds from the Offerings, assuming the
Underwriters' over-allotment options are not exercised and (ii) the purchase
of 7,500,000 Class 1 Interests by South Pacific Iridium Holdings Limited.
Does not reflect the issuance of Class 1 Interests to the Company in
connection with the Company's Global Ownership Program. See "Governance of
the Company and Relationship with Iridium -- Global Ownership Program."
47
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company will act as a member of Iridium and will have no other
business. The Company's sole asset will be its Class 1 Interests in Iridium and
the Company's results of operations will reflect its proportionate share of the
results of operations of Iridium on an equity accounting basis. In its annual
and quarterly reports, the Company will present separate financial statements
for the Company and Iridium.
Iridium is currently devoting its entire efforts to commercializing and
establishing 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 "Business" and Iridium's financial
statements and notes thereto included elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
Funding Requirements
Iridium is a development stage company and as such will require substantial
amounts of continued outside financing to acquire and develop its assets and
commence operations. 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 Operations and Maintenance 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 and (iii) the Terrestrial Network
Development Contract to design the gateway hardware and software. 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 $178.9 million over the 1996 to 1999 period. As a
result of technological developments, changes in the product mix of the IRIDIUM
Service, and scheduling adjustments, including the implementation of ICRS into
Iridium's service offerings, there are a variety of pending and anticipated
amendments and interpretations to the Space System Contract, the Terrestrial
Network Development Contract and the Operations and Maintenance Contract and
other agreements and letters with Motorola totaling approximately $125 million,
which amount is reflected in Iridium's estimates of its funding requirements.
These amendments and interpretations will affect the price and terms of those
agreements." See "Risk Factors -- Risks Associated with Principal Supply
Contracts -- Amendments to Principal Contracts."
Through March 31, 1997, Iridium has incurred expenditures totaling $2.284
billion to Motorola under the Space System Contract in respect of completed
milestones and payments totaling $64 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 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Space System Contract......................................... $577 $589 --
Terrestrial Network Development Contract...................... 68 47 --
Operations and Maintenance Contract........................... -- 140 $538
</TABLE>
48
<PAGE> 50
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. See
"Prospectus Summary -- Sources and Uses of Funds by Iridium." 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 total funding requirements of approximately $4.361 billion through
September 1998, the month Iridium expects to commence commercial operations, and
$5.0 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 borrowings.
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. See "Risk
Factors -- Risk of Error in Forward Looking Statements," "-- Potential for Delay
and Cost Overruns," and "-- Satellite Launch Risks -- Impact of Excusable
Delays."
Sources of Funding
As of March 31, 1997, Iridium had equity investments of $1.659 billion with
an additional $243 million available in the form of a Reserve Capital Call. Debt
investments and commitments equaled $990 million, including the $750 million
Guaranteed Bank Facility. In addition, Motorola has conditionally agreed to
guarantee up to an additional $350 million of borrowings under the Guaranteed
Bank Facility to bring the total commitments thereunder to $1.1 billion. Iridium
is seeking to, and expects to be able to, amend the Guaranteed Bank Facility to
permit these additional borrowings. There can be no assurance that Iridium will
satisfy the terms of Motorola's conditional commitment to guarantee or that the
bank lenders will agree to increase the size of the Guaranteed Bank Facility.
The Guaranteed Bank Facility matures in August 1998. Motorola has conditionally
committed to extend its guarantee through December 31, 2000. Iridium believes
that it will be able to extend the Guaranteed Bank Facility through that date.
Motorola receives compensation in the form of warrants for its guarantees. See
"Dilution." Motorola has also been granted a security interest in Iridium's
assets.
Iridium expects to have sufficient cash after completion of the Offerings
to meet its anticipated cash requirements through December 1997, assuming
exercise and full funding of the Reserve Capital Call and $1.1 billion of
borrowings under the Guaranteed Bank Facility.
Taking into account the net proceeds of the Offerings, Iridium will have
raised, or have commitments to fund, total investments of $3.564 billion,
leaving approximately an additional $1.436 billion to be raised to meet its
projected financing requirements of $5.0 billion through year-end 1999. The
remaining funds needed to meet Iridium's projected funding requirements are
expected to be raised through additional financings. Iridium is seeking to
obtain a senior bank facility in an amount of up to approximately $1.7 billion.
Iridium expects that, in connection with additional debt financings, guarantees
and other credit support are likely to be required and that
compensation -- including equity (which may be in the form of warrants) -- will
likely be required for such guarantees or other credit support. There are
currently no agreements with Motorola or Iridium's other investors or vendors to
provide such guarantees or credit support. In addition to or in lieu of the
senior bank facility Iridium is seeking to obtain, additional financing may need
to be obtained through the issuance of equity or debt securities in the public
or private markets. The availability and terms of such financing are uncertain
and are dependent, in part, on market conditions existing at the time of any
proposed financing. Iridium expects that, in connection with any issuance of
debt securities in the public or private market, equity compensation in the form
of warrants to purchase shares of Class A Common Stock will likely be required.
Iridium's estimated funding requirements do not reflect any contingency amounts
and therefore those requirements will increase, perhaps substantially, in the
event of unexpected cost increases or schedule delays.
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Additional equity financing, if pursued, may be raised either privately
from strategic or financial investors, or through additional public offerings.
See "Governance of the Company and Relationship with Iridium -- Share Issuance
Agreement."
On May 30, 1997, South Pacific Iridium Holdings Limited ("SPI"), an
indirect, wholly owned subsidiary of P.T. Bakrie Communications Corporation,
purchased 7,500,000 Class 1 Interests at $13.33 per Class 1 Interest. Pursuant
to the terms of its purchase agreement with Iridium, SPI exercised its right to
defer payment of 60% of the total purchase price payable and is required to pay
10% of the total purchase price on or before November 15, 1997 and the remaining
50% on or before May 15, 1998. The total purchase price of such Class 1
Interests will increase to approximately $110 million in the event SPI elects in
full its right to defer payment. All information in this Prospectus with respect
to Class 1 Interests gives effect to the issuance of 7,500,000 Class 1 Interests
to SPI. In connection with its investment in Iridium, SPI was allocated the
South Pacific gateway service territory.
Iridium expects to incur a substantial amount of secured bank debt in
satisfying a portion of its expected funding requirements. The bank lenders are
expected to require a security interest in all or substantially all of Iridium's
assets and a pledge of all of the membership interests in Iridium. In order to
facilitate the pledge of membership interests, Iridium expects to enter into a
transaction following the consummation of the Offerings whereby Iridium will
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 will pledge all of the membership
interests in the new entity to the bank lenders in connection with any secured
bank facility. The new entity is expected to be a member-managed limited
liability company with Iridium acting as the sole member.
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. 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 or be able to refinance indebtedness. The debt
instruments governing future indebtedness will contain restrictions on, among
other things, the incurrence of indebtedness. See "Risk Factors -- Significant
Additional Funding Needs," "-- Risk of Highly Leveraged Capital Structure; Risk
of Default on Existing Commitments."
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 $12.4 million from the initial
capital contribution date to March 31, 1997. During the same period, Iridium
recorded a net loss of $155.0 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 foreseeable 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. See "Risk Factors -- Development Stage
Company; Absence of Revenues."
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 date of delivery in orbit of
each such satellite. Depreciation related to the ground control stations
commences with the placement in service of each such station. Capitalized
amounts under the Space System Contract and the Terrestrial Network Development
Contract
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aggregated $2.35 billion through March 31, 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. Payment of these costs and charges has
resulted in significant negative operating cash flow. Certain interest expenses
will also be capitalized. See "-- Interest Expense."
A portion of the payments made under the Operations and Maintenance
Contract will be capitalized and depreciated. The amount so capitalized will be
determined on a yearly basis depending upon the number of replacement satellites
put into service. 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 March 31,
1997, marketing, general and administrative expenses were approximately $159.3
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 current interest cost being capitalized during 1995 and 1996 and
will likely have similar results in 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 the 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. See "Tax
Considerations -- United States Federal Income Taxation."
BUSINESS
The Company will act as a member of Iridium and will have no other
business. The business of Iridium is described below.
OVERVIEW
Iridium is developing and commercializing a global mobile wireless
communications 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. The IRIDIUM System will combine the convenience of
terrestrial wireless systems with the global reach of Iridium's satellite
system. Launch of the first five IRIDIUM satellites occurred on May 5, 1997, and
Iridium expects to commence commercial service in September 1998.
Iridium believes there is a significant market comprised of individuals and
businesses who need global communications capability and are willing to pay for
the convenience of a hand-held wireless phone or belt-worn pager. The
availability of terrestrial wireless communications service is often constrained
by the limited geographic coverage of terrestrial systems, the incompatibility
of differing wireless protocols or the absence of roaming agreements among
wireless operators. The combination of ICRS, IRIDIUM Satellite Services and
IRIDIUM paging will extend wireless access globally and allow Iridium's
customers to be reached by phone or pager, and to place phone calls from or to,
virtually anywhere in the world with one phone and one phone
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number. ICRS is expected to enable customers to roam internationally among
terrestrial wireless networks, even those using different protocols, that have
roaming agreements with Iridium. IRIDIUM Satellite Services will extend voice
services to the regions of the globe not served by terrestrial systems. Iridium
intends to offer global paging both in combination with IRIDIUM voice services
and as a stand-alone service. Iridium believes that the signaling capabilities
of the IRIDIUM System will enable Iridium to track a voice customer's location
effectively and with minimal customer cooperation, thereby allowing Iridium to
direct pages and calls as customers travel globally. Iridium also expects to
offer, commencing in 1999, a broad range of in-flight passenger communications
services with participating airlines, including global incoming and outgoing
voice, data and facsimile services. In addition, Iridium expects to market
IRIDIUM Services to governmental, industrial and rural users of wireless
communications systems. Iridium believes it will be the only wireless
communications system in operation prior to 2000 that will be able to offer this
array of global communications services. See "Risk Factors -- Consequences of
Satellite Service Limitations on Customer Acceptance" and "-- Consequences of
IRIDIUM Phone and Pager Characteristics on Customer Acceptance."
The IRIDIUM System encompasses four components: the "space segment," which
will include the low earth orbit satellite constellation and the related control
facilities; the ground stations or "gateways," which will link the satellites to
terrestrial communications systems; the IRIDIUM subscriber equipment, which will
provide mobile access to the satellite system and terrestrial wireless systems;
and the terrestrial wireless interprotocol roaming infrastructure, which will
facilitate roaming among the IRIDIUM satellite system and multiple terrestrial
wireless systems that use different wireless protocols. The satellite
constellation of the IRIDIUM System, which will consist of 66 operational
satellites arranged in six polar orbital planes, is being assembled and
delivered in orbit by Motorola pursuant to a fixed price contract, subject to
certain adjustments. Motorola also will operate and maintain the satellite
constellation for five years (extendible to seven years at Iridium's option).
Each of the 11 gateways will be owned, operated and financed by one or more
investors in Iridium or their affiliates. Iridium expects that portable,
hand-held IRIDIUM phones will be manufactured by at least two experienced
suppliers, Motorola and Kyocera, both of which have hand-held IRIDIUM phones
under development. The phones are expected to be available in satellite only and
multi-mode models, with the multi-mode model allowing subscribers to access the
IRIDIUM System and most terrestrial wireless systems using different protocols
with a single phone. ICRS will support roaming among the two principal types of
terrestrial wireless protocols -- IS-41 (AMPS, NAMPS and CDMA) and GSM (GSM900,
DCS1900 and DCS1800). Roaming between these protocols requires cross-protocol
translation which will be accomplished for ICRS through the IIU, being developed
under the direction of Motorola. The IIU will permit system management
information, including customer authentication and location, to be relayed
between systems using different technologies.
STRATEGY
Iridium's strategy is to launch and operate the premier global mobile
wireless network. The key components of this strategy are set forth below:
Provide a unique service package to traveling professionals enabling them
to be reached and make calls virtually anywhere in the world. IRIDIUM Satellite
Services will complement terrestrial wireless services and provide the traveling
professional with communications capability in areas where terrestrial wireless
service is unavailable, inconvenient, of poor quality or unreliable. Iridium
intends to offer ICRS and global paging as complements to IRIDIUM Satellite
Services and as stand-alone services. Iridium believes that it will be the only
wireless communications system in operation prior to 2000 that will be able to
offer virtually global mobile voice and paging services, including:
- Global coverage. An IRIDIUM subscriber will generally have worldwide
wireless coverage wherever IRIDIUM Services are authorized, including
mid-ocean and remote areas. The availability of the IRIDIUM Satellite
Service will not be limited by the customer's proximity to a gateway.
Iridium believes this feature will make its Satellite Services
particularly well suited for aeronautical and shipping communications and
for service in land areas where LEO MSS systems using "bent pipe"
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technology are not expected to have the more extensive gateway
infrastructure needed by such systems to provide global coverage.
- Convenient roaming onto terrestrial wireless networks. Iridium will offer
subscribers a combination of IRIDIUM Satellite Services and ICRS. With
the addition of ICRS, customers will be able to overcome (i) the
incompatibility of differing wireless protocols and (ii) the service
limitations of satellite-only voice services in buildings and urban
canyons. Iridium expects to be able to deliver all of its voice services
with one phone, one phone number and one customer bill.
- Global paging with belt-worn pagers. The IRIDIUM belt-worn pager will
have the capability of receiving alphanumeric messages of up to 63
characters and numeric messages of up to 20 digits virtually anywhere in
the world. With Iridium's global paging, users of IRIDIUM Satellite
Services or ICRS will generally be able to update their location on the
IRIDIUM System by briefly turning on their phone, thereby allowing the
IRIDIUM System to send a targeted page. Iridium believes that it will be
the first company, and the only company prior to 2000, which will offer
global paging to a belt-worn pager.
- Greater signal strength. The IRIDIUM System is designed to provide
greater signal strength than proposed competing MSS systems. Iridium
believes this greater signal strength will allow it to better serve
hand-held phones, and provide a higher degree of in-building signal
penetration for pagers, than competing MSS systems.
Be the first to market with a global wireless communications system.
Iridium plans to capitalize on the substantial design, development, fabrication
and testing efforts and financial investment to date of its strategic investors
to bring the IRIDIUM Services to market at the earliest practicable date, which
is currently expected to be September 1998. Iridium believes that it will be the
only wireless communications system in operation prior to 2000 that will be able
to offer global mobile voice and paging services in each country in which
IRIDIUM Services are authorized.
Adapt proven technologies through an industrial team led by Motorola. The
IRIDIUM System adapts proven technology, including GSM cellular call processing
technology, intersatellite links, FDMA/TDMA radio transmission technology, a
2,400 bps vocoder and business support software. Iridium believes that the
primary technological challenge is the integration of these proven technologies
into a single system. Motorola, the principal investor in Iridium, is a leading
international provider of wireless communications systems, cellular phones,
pagers, semiconductors and other electronic equipment. The industrial team
assembled by Motorola to build and deliver in orbit the IRIDIUM System consists
of major companies experienced in aerospace and telecommunications, including
Nuova Telespazio, Lockheed Martin, Raytheon, McDonnell Douglas, Khrunichev and
China Aerospace.
Capitalize on the strengths of its strategic investors. A number of
Iridium's strategic investors provide telecommunications services in various
parts of the world and have significant operating, regulatory and marketing
experience in their service territories. Iridium expects that its investors with
existing wireless communications sales and service organizations will use these
organizations to market and distribute IRIDIUM Services and equipment to
potential subscribers. Because of the prominence of many of these investors,
Iridium believes that their efforts to obtain the necessary regulatory approvals
have been, and will continue to be, of great importance.
Utilize existing wireless distribution channels. Iridium's strategy is to
target primarily traveling professionals, who are generally wireless phone
users. Iridium's strategy is to provide customers with an enhancement to their
existing terrestrial wireless service through existing marketing and
distribution channels rather than to focus on individuals who have no or limited
landline or wireless communications experience and live in areas where no
marketing and distribution channels currently exist.
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IRIDIUM SERVICES
General
IRIDIUM will provide global communications services primarily to
individuals who require the convenience of having a hand-held wireless phone and
belt-worn pager that can be used virtually anywhere. Iridium will offer IRIDIUM
Satellite Services to customers who need to send or receive telephone calls in
areas not currently served by terrestrial wireless services. Iridium will offer
ICRS to customers who require wireless communications but travel frequently to
areas served by terrestrial wireless services that are incompatible with their
"home" wireless service. For customers who require continuous wireless
communications outside their terrestrial wireless coverage areas, IRIDIUM
Satellite Services and ICRS will be offered in combination as IRIDIUM Universal
Service, which will allow the customer to conveniently switch between the
IRIDIUM satellite system and any terrestrial wireless system that has a roaming
agreement with Iridium. Iridium expects to be able to deliver all of its voice
services with one phone, one phone number and one customer bill. Iridium also
intends to offer global paging both in combination with Iridium's voice services
and as a stand-alone service.
IRIDIUM Satellite Services
Because the IRIDIUM System will consist of a global network of satellites,
it will generally provide service to subscribers anywhere on the surface of the
Earth where IRIDIUM Services are authorized. The IRIDIUM System is designed to
provide a satellite-mode link margin (signal strength) for voice communication
that averages approximately 16dB with an unobstructed view of the satellite,
which Iridium believes will be a significantly higher link margin than other
proposed MSS systems. Iridium believes its greater signal strength will allow it
to better serve portable, hand-held telephones than competing MSS systems. See
"Risk Factors -- Consequences of Satellite Service Limitations on Customer
Acceptance" for a discussion of certain of the service limitations of IRIDIUM
Satellite Services. Iridium also expects to be able to offer a full array of
features including call waiting, call hold, conference calling, call forwarding
and call barring, although certain of these features are not expected to be
available until after commencement of commercial operations.
The IRIDIUM System has not been designed to provide high-speed data and
facsimile transmission capability. IRIDIUM satellite fax service will allow
subscribers to send and receive facsimiles at 2,400 bps over the IRIDIUM System.
Subscribers will be provided with a fax mailbox through which faxes are sent to
the subscriber and retrieved by the subscriber when convenient. The mailbox
notifies subscribers of received faxes and can allow them to be automatically
forwarded to any facsimile device. Iridium expects that its facsimile services
will commence in 1999. Iridium will also provide data services commencing in
1999 which will enable customers to send or receive asynchronous data over the
IRIDIUM System at speeds of up to 2,400 bps.
IRIDIUM Cellular Roaming Services
Iridium is planning to establish the broadest global terrestrial wireless
roaming service. To meet this goal, Iridium intends to enter into roaming
agreements with wireless service providers worldwide and to offer ICRS as a
complement to IRIDIUM Satellite Services. Iridium's business plan currently
calls for roaming agreements covering networks in more than 50 countries by the
commencement of commercial operations in September 1998, with roaming agreements
covering networks in more than 150 countries in place by 2002. ICRS will permit
subscribers to roam among terrestrial wireless networks that have roaming
agreements with Iridium, with Iridium essentially acting as the customer's
"home" system or as an interface between the visited wireless network and the
customer's home terrestrial wireless network, even if the visited and home
networks use differing cellular protocols (e.g., IS-41, including AMPS, NAMPS
and CDMA; and GSM, including GSM900, DCS1900 and DCS1800). With ICRS, customers
are expected to be able to overcome (i) the coverage limitations of their "home"
wireless network when traveling to a city served by a wireless operator that
does not have a roaming agreement with the customer's home wireless network but
does have one with Iridium and (ii) the service limitations of satellite-only
service when in buildings and urban canyons, where terrestrial wireless service
will typically be available. Customers who travel between cities that are
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served by different terrestrial wireless protocols but do not travel beyond the
reach of terrestrial wireless services will be able to realize the interprotocol
benefits of ICRS with either Iridium's planned single phone that is compatible
with multiple protocols, or with a combination of cellular phones, one for each
protocol. See "Risk Factors -- Risks Related to ICRS." The availability of ICRS
depends upon the successful development of the IIU. See "-- The IRIDIUM
System -- ICRS."
IRIDIUM Universal Services
Iridium intends to offer its Universal Services to customers who require
both satellite and terrestrial wireless service while traveling outside of their
"home" territories. IRIDIUM's Universal Service will allow a customer to
conveniently use both the IRIDIUM satellite system and any terrestrial wireless
network that has a roaming agreement with Iridium. For Universal Service, a user
will require an IRIDIUM phone and a phone that is compatible with the local
wireless protocol. To meet this requirement with a single phone, Motorola is
developing a multi-mode phone that will work alternatively with the IRIDIUM
System and most major terrestrial wireless systems, with the user able to adapt
the phone to the appropriate terrestrial protocol by inserting the corresponding
TRC into the phone (e.g. a GSM900-TRC in Europe or an AMPS-TRC in North
America), although the CDMA TRC will not be available until some time after
commencement of commercial operations. Kyocera is developing a multi-mode phone
that is expected to be configured as a satellite phone casing into which
terrestrial wireless phones using differing wireless protocols can be inserted.
In addition, like IRIDIUM Satellite Services and ICRS customers, Universal
Service customers will be able to have one phone number, which can either be an
IRIDIUM phone number (i.e., it will begin with "8816" or "8817," the
international country codes assigned to Iridium by the ITU) or the customer's
"home" cellular number.
Paging
Iridium intends to offer global paging both as a stand-alone service and
bundled with its voice service offerings. Iridium believes that its bundled
paging and voice service offering will be particularly attractive to Iridium's
principal target customer, the traveling professional, who desires constant
communication capability. The IRIDIUM pager is expected to have a 26dB link
margin and provide the ability to receive alphanumeric messages of up to 63
characters and numeric messages of 20 digits. Iridium believes it will be the
first company, and the only company prior to 2000, that will be able to offer
global paging to a belt-worn pager. See "Risk Factors -- Consequences of IRIDIUM
Phone and Pager Characteristics on Customer Acceptance."
To use the L-band capacity of the IRIDIUM System efficiently, a page will
be sent to specified message delivery areas ("MDAs"). Iridium intends to vary
the size of each MDA in light of demand, capacity and competition. Since the
pager is a one-way device and cannot tell the network its location, it is
anticipated that the subscriber will be required to choose up to three MDAs for
normal delivery of the message. It is anticipated that, when traveling,
subscribers will be able to update their MDAs via a touch-tone phone, operator
assistance or Internet access. An IRIDIUM Satellite Service or ICRS customer
will have the benefit of "follow-me paging." Unlike the pager, the IRIDIUM
satellite phone and cellular phones are two-way devices and, when turned on,
identify the location of the subscriber. With "follow-me paging," customers will
generally be able to register their location by briefly turning on their IRIDIUM
phone (at no charge) or, in the case of ICRS customers, their terrestrial
wireless phone. The network then can identify the appropriate MDAs to send a
page, without further customer cooperation.
Iridium expects that a caller who is unable to reach an Iridium customer,
because the phone is turned off or the customer is in a building or urban canyon
where satellite voice service is unavailable, will be given the option to send a
page, leave a voice-mail message for the customer or both. By this means,
Iridium expects to provide communications capability virtually anywhere in the
world.
Aeronautical Services
Iridium expects to offer cabin and flightdeck communications to and from
business and commercial aircraft commencing in 1999. This service is expected to
be an extension of Iridium's voice services, since
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airline passengers, especially business travelers, have a heightened demand for
telephone services due to the isolated, restrictive, and often time-consuming
nature of air travel. Subscribers to the IRIDIUM Satellite Services will not be
able to use their IRIDIUM phone within aircraft due to regulatory constraints
and the inability of the voice signal to penetrate the exterior of the aircraft,
although Iridium pagers should be able to receive pages unless prohibited by the
carrier. Therefore, a specialized IRIDIUM communications subsystem is expected
to be manufactured and sold to carriers to serve this market segment. Using this
communications subsystem, the IRIDIUM System would offer passengers (whether or
not they are IRIDIUM subscribers) and the flight-deck global voice, data and
facsimile communications capability. This would extend cabin coverage beyond
traditional land-based air-to-ground services. Iridium believes it will be able
to provide aeronautical services with less voice delay and smaller exterior
equipment than competing satellite-based systems. Iridium has entered into a
non-binding memorandum of understanding with AlliedSignal to design and provide
these services and equipment and Iridium, Motorola and AlliedSignal are in the
process of negotiating definitive agreements. See "Risk Factors -- Reliance on
Motorola, Gateway Owners and Other Third Parties."
In December 1996, Motorola submitted a request to the FCC to authorize the
IRIDIUM System to provide Aeronautical Mobile-Satellite Route Service
("AMS(R)S") in its authorized band. The IRIDIUM System is the only mobile
satellite system, licensed or in development, that can provide a communication
capability that is truly global, while using spectrum already allocated for
AMS(R)S. Several parties filed comments with and have petitioned the FCC to deny
Motorola's application to provide AMS(R)S service. Among other arguments,
petitioners claim that the AMS(R)S proposal is inconsistent with International
Telecommunication Union and FCC rules and allocations. In addition to FCC
approval, approval is needed from the FAA, which must certify that the avionics
satisfy other international certification requirements. There can be no
assurance that the FCC application will be granted, or that the avionics
certification requirements will be satisfied at all, or in a timely fashion. See
"Regulation of Iridium -- Licensing Status." Assuming all necessary
authorizations are obtained, Iridium expects to provide both the FCC required
"safety" communications capabilities to the flightdeck and passenger
communications, including voice and facsimile. An individual aircraft may be
served by multiple satellite communications carriers.
THE IRIDIUM MARKET
General
The market for IRIDIUM Satellite Services and ICRS is the worldwide market
for global personal voice, paging and data communications. IRIDIUM Services are
targeted at meeting the communications needs of users who (i) travel outside
their "home" wireless network to areas that are not served by terrestrial
wireless systems or are served only by local wireless standards that are
incompatible with their "home" wireless network standard, (ii) find it important
to be able to make or receive calls, or receive pages, at any time by means of a
single phone or belt-worn pager, with a single phone or pager number or (iii)
are located where terrestrial landline or wireless services are not available or
do not offer an attractive and convenient option.
Global MSS systems such as the IRIDIUM System are designed to address two
broad trends in the communications market: (i) the worldwide growth in the
demand for portable wireless communications -- according to industry sources,
the worldwide wireless communications market had approximately 135 million
subscribers at year-end 1996 and is estimated to grow to over 400 million
subscribers by year-end 2000; and (ii) the growing demand for communications
services to and from areas where landline or terrestrial wireless service is not
available or accessible. The IRIDIUM System architecture and the IRIDIUM
Services are primarily designed to serve customers who place the greatest value
on global mobile communications capability and have the ability to pay for
premium service.
To estimate potential demand for its services, Iridium has engaged in
extensive market analysis, including primary market research which involved
screening over 200,000 persons and interviewing more than 23,300 individuals
from 42 countries and 3,000 corporations with remote operations. Based on this
market analysis, Iridium has identified five target markets for IRIDIUM
communications services: traveling professionals; corporate/industrial;
government; rural; and aeronautical. Iridium expects the traveling profes-
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sional and corporate/industrial markets will provide most of the demand for
IRIDIUM Services. Iridium expects that individuals in these markets are more
likely to need and have the ability to afford hand-held, global mobile
communications capability than, for example, individuals who live in remote
areas outside existing distribution channels for wireless communications.
Iridium estimates that the addressable traveling professional market, which
it defines as all employed adults living in urban areas who own a wireless phone
and travel at least four times per year beyond the coverage of their current
wireless phone, will include approximately 42 million individuals by 2002. The
global corporate/industrial addressable market, which consists of companies with
more than 1,000 employees in industries with operations that are likely to need
mobile satellite services, is estimated by Iridium to include over 8,800
companies by 2002. Iridium believes that its unique service package is
well-tailored to meet the demands of, and will give Iridium an advantage over
competing MSS systems in, these target markets. For a discussion of the forward
looking nature of Iridium's estimates and various of the factors which could
cause actual addressable markets to differ materially from these estimates see
"Risk Factors -- Risk of Error in Forward Looking Statements."
Target Markets
Iridium believes that the traveling professional and corporate/industrial
communications markets will be its principal target markets.
Traveling Professional. Individuals in the traveling professional market
segment are expected to represent a major market opportunity for IRIDIUM
Services. Currently, the ability of terrestrial wireless service subscribers to
roam outside their home territory or region is limited by (i) the absence or
unavailability of local wireless service in many regions, particularly
lesser-developed regions of the world; (ii) the absence of roaming agreements
between the user's local wireless provider and the wireless providers in the
country or region in which the user is traveling; and (iii) the inability of the
user's phone to operate with wireless phone systems employing a different
wireless protocol than in the user's "home" wireless system. Iridium expects
that its satellite, ICRS and paging services will appeal to traveling
professionals as a logical extension of their existing communications
capabilities. Iridium believes traveling professionals will use this increased
capability to remain in contact with their home or office and a substantial
portion of these calls will be international calls. The defining element for
this segment is that the handset purchase decision is made by the individual,
with the IRIDIUM account registered in his or her name.
Corporate/Industrial. Iridium believes that the corporate/industrial market
segments constitute a significant opportunity for IRIDIUM Services. The
corporate sub-segment consists of national and multinational companies whose
executives travel outside of their home terrestrial wireless coverage area and
who will have a need for MSS services in the regular course of business. The
industrial sub-segment includes industries that are expected to demand MSS
services at remote industrial sites and on land and water transportation
vehicles, such as utilities, oil and mineral exploration, pipeline,
construction, engineering, fishing and forestry. For companies that have
multiple locations around the globe, or a requirement for remote fleet
management and communications, the IRIDIUM System is expected to provide a
single technical and operational communications solution regardless of location,
in contrast to MSS and terrestrial systems that cannot provide global coverage.
IRIDIUM Satellite Services and paging services are expected to be used in this
market segment for business communication and emergency backup communication.
The defining element for this group is that the handset purchase decision is
made by the business and that the end user is an employee of that business.
Aeronautical. The worldwide aviation fleet is expected to number over
250,000 aircraft in the year 2002 with 44,000 aircraft expected to be users of
either satellite or terrestrial communications services. Unlike the
geostationary systems currently in use, the size and weight of the expected
IRIDIUM aeronautical product line make it feasible to include aircraft from all
segments of the aviation industry in the addressable market for MSS services.
Iridium expects its satellite communications services to co-exist with existing
terrestrial aeronautical system installations, providing regional coverage in
areas not served by terrestrial networks, such as mid-ocean and remote areas.
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Government. Currently, governments are significant users of satellite
services, and Iridium anticipates that the coverage and portability
characteristics of IRIDIUM Satellite Services and paging services will make them
attractive for a variety of governmental applications. The government
communications addressable market is expected to encompass use of MSS services
by governmental departments and agencies and international organizations for
civilian and military applications, including law enforcement, official travel
and disaster relief. In addition, governments are expected to demand MSS
services for operations in areas where inadequate terrestrial communication
capability is common, such as for border patrols, customs officials,
communication with ships at sea and embassy communications.
Rural. The rural communications market segment for MSS systems is comprised
of two main subcategories: services to users based in (i) areas with inadequate
or inconvenient access to any telephone services, typically in developing
countries, and (ii) areas in which potential demand for terrestrial wireless
service exists but such services have yet to be deployed, or, if deployed, are
of poor quality, typically in rural areas of developed countries. The variety of
available subscriber equipment is expected to permit a range of applications
that would enable IRIDIUM Satellite Services to be a precursor to a permanent
wired or terrestrial wireless service in the geographic area. IRIDIUM Satellite
Services could also be used as a long-term communications solution for those
geographic areas around the world for which no terrestrial system can be
economically justified.
DISTRIBUTION AND MARKETING
Iridium's distribution strategy reflects its role as a wholesaler of
IRIDIUM Services and is primarily designed to leverage off established retail
distribution channels by using existing distributors of wireless services as
IRIDIUM service providers and marketing IRIDIUM Services to their customers.
Iridium will implement the distribution of IRIDIUM Services through its gateway
operators, all of which have agreed to become or engage IRIDIUM service
providers within their exclusive gateway territories. IRIDIUM service providers
will generally have primary responsibility for marketing IRIDIUM Services within
their territories in accordance with marketing policies and programs established
by Iridium. They will also be responsible for customer service, billing and
collection. Iridium anticipates that gateway operators will distribute IRIDIUM
Services through their own distribution channels or through, or in conjunction
with, one or more existing wireless service providers (including ICRS roaming
partners). Iridium expects that its service providers also will include affinity
partners (e.g., airlines, hotels and car rental companies).
Iridium has targeted key markets and is in active discussions in
conjunction with its gateway operators to contract with entities to act as
service providers and roaming partners in each of these markets. Within each
market, Iridium is targeting those potential service providers and roaming
partners that can reach the targeted Iridium market segments in the most
effective manner. The ability to provide roaming capabilities onto terrestrial
wireless networks is a critical element of establishing a roaming relationship
between roaming partners and the IRIDIUM System. When acquiring a terrestrial
wireless carrier as a retail distribution access point, the benefit of the
incremental roaming revenue brought to that roaming partner from around the
world through the Iridium network relationships could prove to be important in
signing the roaming partner. IRIDIUM Services can also be easily added to the
terrestrial wireless providers' bundle of services offered to its customer base.
Iridium's marketing strategy is to position IRIDIUM as the premier brand in
global wireless communications services. Iridium believes that its principal
target markets -- traveling professional and corporate/industrial -- can be
accessed through established marketing channels, which will permit more
effective marketing compared to MSS systems targeting individuals in remote
areas where marketing opportunities and distribution channels are limited.
Iridium is coordinating with its gateway partners to determine the optimum
allocation of marketing expenditures based on the primary market research that
Iridium has conducted. Iridium plans to engage in direct marketing to certain
markets, such as the utility, oil and gas, mining and maritime industries.
Iridium believes that a coordinated and comprehensive global marketing strategy,
supported by its market research, will promote a consistent message and permit
Iridium to establish a global brand identity.
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PRICING
Iridium intends to implement a pricing strategy for its voice services
similar to the prevailing pricing structure for terrestrial wireless calls.
Prices for terrestrial wireless calls generally reflect two components -- a
charge based on the landline "dial-up" rate for a comparable call (primarily the
long distance charges) and a mobility premium for the convenience of wireless
service (including any roaming charges). Pricing for both IRIDIUM Satellite
Services and ICRS is expected to be based on this structure.
For international IRIDIUM Satellite Services calls, which Iridium expects
will constitute the majority of calls over the IRIDIUM satellite system, the
"dial-up" rate component will be designed to approximate the rates for
comparable landline point-to-point international long distance calls. Iridium
has analyzed and will continue to analyze published international direct dial
rates around the world as well as published international calling card rates of
many of the largest international telecommunications carriers in establishing
the "dial-up" rate component. Iridium intends to set the global mobility premium
with reference to the premium charged by other wireless services, including
cross-protocol international terrestrial wireless roaming services and competing
MSS systems.
Iridium will set the wholesale prices for its services to allow for a
suggested retail price that will approximate the "dial-up" plus mobility
premium. Iridium's wholesale price will be designed to compensate Iridium, as
the network provider, and the originating and terminating gateways, as well as
to cover the PSTN tail charges. The home gateway will mark up the wholesale
price and the service provider will establish the final retail price. Iridium
expects that for international wireless calls, Iridium's suggested retail prices
will be competitive with other global MSS systems. In addition, from a
regulatory approval perspective in markets where the monopoly telecommunications
provider and the licensing authority are the same entity, a pricing strategy
that takes into account the "dial-up" alternatives allows Iridium to respond to
concerns that Iridium will capture the local monopoly provider's long-distance
revenues by undercutting terrestrial "dial-up" rates.
For ICRS pricing, the "dial up" rate component is primarily the long
distance charge, if any, which will be passed through to the customer. The
mobility premium will be set to compensate the parties involved, primarily the
serving network for its airtime charges, the visited gateway for customer
authentication and Iridium for protocol translation services. The retail price
will include the markup of the home gateway and service provider. Iridium
believes that its ICRS suggested retail prices will be comparable to other
cross-protocol roaming services.
In addition to airtime charges, IRIDIUM subscribers will pay a monthly
subscription fee in the same manner that terrestrial wireless customers pay
monthly charges. Iridium will permit service providers that are wireless network
operators to offer IRIDIUM Services as additional features to their existing
wireless services, permitting their customers to remain customers of the
wireless network and to roam onto the IRIDIUM System. These customers will pay a
feature charge to Iridium for the roaming privilege that will be significantly
below the IRIDIUM monthly subscription fee, but they will pay an additional
roaming premium for calls made over the IRIDIUM System.
Initially, Iridium paging subscribers will pay a fixed monthly subscription
fee for unlimited paging. Iridium expects to implement per page pricing after
commencement of commercial operations, with the cost per page based, in part, on
the size of the geographic area covered by the page. The monthly paging
subscription fees will be reduced for persons who are also subscribers to
IRIDIUM voice services.
While Iridium expects to compete with other MSS systems and other
cross-protocol roaming services, Iridium does not intend to compete with
terrestrial cellular telephone systems for the vast majority of personal
communications services, because, among other reasons, IRIDIUM satellite voice
services are expected to be priced significantly higher than most terrestrial
wireless services.
THE IRIDIUM SYSTEM
The IRIDIUM System is comprised of four functional components: the space
segment, the gateways, the IRIDIUM subscriber equipment and the terrestrial
wireless interprotocol roaming infrastructure. The space segment, which includes
the satellite constellation and the related ground control facilities, will
allow Iridium
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to route voice, data and paging communications virtually anywhere in the world.
The gateways will link the satellite constellation with terrestrial
communications systems and will provide other call-processing services, such as
subscriber validation and billing information collection. The Iridium subscriber
equipment, which is expected to include single-mode and multi-mode, portable,
hand-held phones, aeronautical equipment, including installed phones, and
belt-worn pagers, will allow subscribers to access the IRIDIUM System or be
contacted via the IRIDIUM System virtually anywhere in the world. The
terrestrial wireless interprotocol roaming infrastructure will facilitate
roaming among the IRIDIUM System and multiple terrestrial wireless systems that
use different wireless protocols. Iridium will own the space segment and the
interprotocol roaming infrastructure, gateway owners will own and operate the
gateways, and subscribers will own the subscriber equipment.
Iridium believes that the capabilities of the IRIDIUM System will allow
Iridium to provide service features that Iridium's principal target markets,
traveling professional and corporate/industrial, will find desirable and that
will differentiate Iridium from its competitors. The number and distribution of
satellites in the IRIDIUM constellation should allow Iridium to provide
virtually global coverage, including mid-ocean and remote area access to the
IRIDIUM System. Multi-mode phones are expected to allow ICRS subscribers to
operate first with a local terrestrial cellular service (if one having a roaming
agreement in effect with Iridium is available) and then switch to the IRIDIUM
satellite system if a terrestrial service cannot be accessed. With Iridium's
global paging service, a subscriber will be able to receive a targeted page
virtually anywhere in the world with minimal customer cooperation. Iridium
believes that its expected signal strength will allow it to better serve
hand-held phones and provide a higher degree of in-building penetration for
pagers than competing MSS systems. Iridium believes that the 2,400 bps vocoder
selected by Motorola will provide voice quality that is acceptable to
terrestrial wireless customers. See "Risk Factors -- Consequences of Satellite
Service Limitations on Customer Acceptance" and "-- Consequences of IRIDIUM
Phone and Pager Characteristics on Customer Acceptance."
Space Segment
The satellite constellation of the space segment will consist of a
constellation of 66 operational satellites arranged in six orbital planes in low
earth orbit. To minimize the cost of the constellation and reduce production
time, the design of the satellites emphasizes attributes which facilitate
production in large quantities. The satellites will be placed in six distinct
planes in near-polar orbit at an altitude of approximately 780 kilometers and
will circle the Earth approximately once every 100 minutes. Each satellite will
communicate with subscriber equipment on the ground using main mission antennas,
with gateways using gateway link antennas and with other IRIDIUM satellites in
space using crosslink antennas.
The main mission antennas will communicate with subscriber units through
tightly focused antenna beams forming a continuous pattern on the Earth's
surface. The main mission antenna subsystem of each satellite will include three
phased array antennas, each containing an array of transmit/receive modules.
Collectively, the 48 beams produced by a single satellite will combine to cover
a circular area with a diameter of approximately 4,340 kilometers. The IRIDIUM
System architecture will incorporate certain characteristics, such as call
hand-off, which will allow the space segment communications link with subscriber
equipment to be transferred from satellite to satellite as the satellites move
over the area where the subscriber is located.
The cross-link antennas will permit satellites in the constellation to
communicate with one another. Each IRIDIUM satellite will have four cross-link
antennas to allow it to communicate and route traffic to the two satellites that
are fore and aft of it in the same orbital plane as well as neighboring
satellites in the adjacent co-rotating orbital planes. This intersatellite
networking capability is a significant distinguishing feature of the IRIDIUM
System and provides a number of benefits. These intersatellite links, which
enable the satellites to function as switches in the sky, will allow the IRIDIUM
System to (i) select the optimal space-to-ground path of each call, thereby
enhancing system reliability and capacity while reducing the costs associated
with the use of terrestrial phone systems, (ii) service subscribers in all areas
(including, mid-ocean and remote areas) regardless of the proximity to a
gateway, (iii) provide full global service with a relatively small number of
gateways, thereby lowering total ground segment build-out and operating costs
and (iv) provide enhanced
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ability to track the location of a voice customer, allowing Iridium to target
calls and pages as customers travel globally.
Operation of the satellites will be monitored, managed and controlled by
the system control segment. The master control facility is located in Virginia,
the back-up control facility is located in Italy, and the TT&C stations are
located in northern Canada and Hawaii, with an additional transportable
telemetry system currently located in Iceland. These facilities will manage the
performance and status of each of the individual satellites. The master control
facility will also manage the network by developing and distributing routing
tables for use by the satellites and gateways, directing traffic routing through
the network, and controlling cell formation by the satellites' main mission
antennas. In addition, the master control facility will manage the system
control segment itself by, for example, assigning earth terminals to satellites
and controlling data flow between the master and back-up control facilities.
Implementation of the Space Segment. The space segment of the IRIDIUM
System is being designed and constructed for Iridium by Motorola. See "Principal
Contracts for the Development of the IRIDIUM System."
Launch of the first five IRIDIUM Satellites occurred on May 5, 1997. Under
the Space System Contract, Motorola has completed 31 of the 47 contract
milestones. Contract milestone 30 -- initial launch of Iridium satellites -- was
scheduled for completion in January 1997, but the launch did not occur until May
5, 1997. See "Risk Factors -- Potential for Delay and Cost Overruns." The
remaining 16 milestones relate to the deployment, testing and completion of the
space segment of the IRIDIUM System, including the related ground control
facilities. The space segment is scheduled under the Space System Contract for
completion on September 23, 1998. Ground testing of satellite hardware has been
substantially completed. By early May 1997, eight satellites had been produced,
seven additional satellites had been assembled and were in testing and
additional satellites were being produced at a rate of approximately five per
month. Motorola has completed construction of most of the terrestrial facilities
necessary to command the in-space movements of the satellites, including the
master control facilities and the associated TT&C facilities.
Motorola has entered into subcontracts with suppliers for the provision of
major subsystems of the Space Segment. The principal Space Segment
subcontractors include:
Manufacturers
- Lockheed Martin Corporation. Lockheed has designed and is manufacturing
the satellite bus. Lockheed is an investor in Iridium.
- Raytheon Company. Raytheon is providing the main mission satellite
antennas. Raytheon is an investor in Iridium.
- Nuova Telespazio. Telespazio is providing system engineering on system
control segment development and is expected to operate the back-up
control facility. Telespazio is an affiliate of STET, an investor in
Iridium.
Launch Providers
The requirements for the deployment of the initial satellite constellation
entail the placement into orbit of a large number of satellites in a relatively
short period of time, using conventional expendable launch vehicles. Based on
technical, commercial and other considerations, Motorola selected the following
three commercially offered launch systems for the deployment phase: Long March
2C through China Great Wall; Proton through Khrunichev; and Delta II through
McDonnell Douglas.
- China Great Wall Industry Corporation. China Great Wall has contracted
with Motorola to provide some of the launches for the initial deployment
of the space segment (and additional launches for the maintenance of the
space segment) utilizing its Long March 2C vehicle, which is expected to
launch two IRIDIUM satellites into orbit with each launch. An affiliate
of China Great Wall, Iridium China
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(Hong Kong) Ltd., is an investor in Iridium and has been allocated the
IRIDIUM gateway service territory for China, Hong Kong, Macau and
Mongolia.
- Khrunichev State Research and Production Space Center. Khrunichev has
contracted to provide some of the launches for the initial deployment of
the space segment utilizing the Proton launch vehicle, which is expected
to launch seven IRIDIUM satellites into orbit with each launch.
Khrunichev is an investor in Iridium and has been allocated the IRIDIUM
gateway service territory for Russia and eight other republics of the
former Soviet Union.
- McDonnell Douglas Corporation. McDonnell Douglas has contracted to
provide the majority of the launches for the initial deployment of the
space segment utilizing its Delta II launch vehicle, which is expected to
launch five IRIDIUM satellites into orbit with each launch.
Under the Space System Contract and the Operations and Maintenance
Contract, Motorola has agreed to procure the necessary space segment launch
services, and to place into orbit, and maintain in orbit, the space segment. In
light of the magnitude of the launch services procurement, the risks inherent in
satellite launch activity and the potential impact on Iridium's business if the
provision of launch services fails (including the potential that launch service
problems could give rise to excusable delays under the space System Contract and
Operations and Maintenance Contract), Motorola has developed numerous space
segment launch scenarios using various combinations of available launch systems
to fit the requirements of the IRIDIUM System in terms of cost, reliability,
availability, technical performance, credibility of suppliers and other factors.
The launch of the first five IRIDIUM satellites occurred on May 5, 1997 on
a McDonnell Douglas Delta II launch vehicle. This launch had been scheduled for
January 1997 but was delayed on four successive days and then postponed
following a launch failure involving the McDonnell Douglas Delta II launch
vehicle (which is the type of launch vehicle that McDonnell Douglas is using for
the IRIDIUM satellites). The first one-day delay was as a result of a software
problem at Motorola's satellite communications control facility, the second
one-day delay was as a result of a microwave link failure at the Vandenburg Air
Force base, the third one-day delay was as a result of a manual water valve not
being opened for cooling of the launch pad and the fourth one-day delay was as a
result of a problem with the insulation on the side of the Delta II launch
vehicle. Following the January 1997 failure of a Delta II launch vehicle, the
United States government ordered a halt to all further Delta II launches pending
completion of an internal review of the failure. That failure review was
completed on May 2, 1997 and concluded that the launch failure resulted from an
explosion of one of the nine solid rocket boosters attached to the first stage
of the launch vehicle. Thereafter, the launch suspension was lifted. The first
launch of IRIDIUM satellites occurred on May 5, 1997 (following successive
postponements on May 2, May 3 and May 4 due to weather conditions and a faulty
warning light). Motorola has informed Iridium that it is in the process of
reworking the original launch schedule as a result of the initial delays and
that it currently believes its new launch schedule should permit Iridium to meet
its planned September 1998 commencement of commercial operations. The reworked
launch schedule will require that there are no additional significant launch
delays and that all three launch providers -- McDonnell Douglas, Khrunichev and
China Great Wall -- are able to provide launch services as currently planned.
The reworking of the launch schedule also creates risks because it has
compressed the time otherwise available for testing. There can be no assurance
that succeeding launches will proceed on the new schedule or that the space
segment will be operational on schedule. See "Risk Factors -- Risk of Delay and
Cost Overruns."
Following the initial deployment of the satellite constellation, launch
services will be required in connection with the maintenance of the system. This
will entail the placement into orbit of satellites for the replacement of failed
or degraded satellites originally placed into orbit as part of the deployment
mission. The maintenance mission for satellite launch services may be performed
by a number of launch systems. Motorola has conducted technical and commercial
discussions with a number of potential suppliers and has selected a Long March
2C launch vehicle for what it expects will be a minority portion of the
maintenance launch services. Motorola expects that a number of other launch
systems currently under development would satisfy the remaining requirements of
the maintenance mission. Motorola intends to select a supplier or suppliers for
the remaining maintenance launches based on technical, commercial and other
considerations.
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See "Risk Factors -- Potential for Delay and Cost Overruns -- Deployment of
Satellites" for a discussion of various risks associated with the deployment of
the satellites.
In addition, Motorola has constructed the master control facility located
in Virginia, two TT&C stations in northern Canada and one TT&C station in
Hawaii, with an additional transportable telemetry system currently located in
Iceland. The back-up control facility is nearing completion in Italy and is
expected to be operated by Telespazio under contract with Motorola. Telespazio
will also provide engineering support services in connection with the
integration and construction of the facility.
Gateways
Gateway earth stations will provide call-processing services, such as
subscriber validation and the interconnection between the world's PSTNs and the
IRIDIUM System by connecting calls made through the IRIDIUM System to and from
the local PSTN generally through an international switching center. Gateways
will communicate with the space segment via gateway link antennas on the
satellites and ground-based antennas, or earth terminals, at each terrestrial
gateway facility. Each gateway facility will typically include three or four
antennas, a controller to manage communications with the constellation, an
operations center to perform local network management, a paging message
origination controller, and a switch that connects the gateway to the local
PSTN. Each gateway will also include a subscriber database used in
call-processing activities, such as subscriber validation. Gateways will
generate call detail records used in billing. Iridium has authorized the
issuance of warrants to acquire up to 9,165,000 Class 1 Interests at a price of
$.00013 per Class 1 Interest to gateway owners who complete construction and
installation of their gateways on schedule and who meet certain revenue criteria
thereafter. None of such warrants has been issued.
Implementation of Gateways. The success of Iridium is dependent upon the
efforts of its gateway owners, all of whom are investors, or affiliates of
investors, in Iridium. Iridium is focusing considerable efforts on the
coordination of the development of the gateway infrastructure and business
systems. See "-- Distribution and Marketing."
Iridium has assigned all of its 14 gateway service territories to its
equity investors or their affiliates. Iridium expects these gateway service
territories to be served initially through 11 gateways. Iridium has entered into
Gateway Authorization Agreements with all investors or their affiliates having
gateway service territory allocations. Each Gateway Authorization Agreement
obligates the gateway operator to use its reasonable best efforts to perform,
among other obligations, the following with respect to its designated territory:
(i) contract with Motorola to supply the gateway equipment; (ii) provide gateway
services; (iii) obtain all required governmental licenses and permits necessary
to construct and operate gateways; (iv) designate IRIDIUM service providers,
which may include the gateway operator; (v) require compliance by each service
provider with established guidelines; and (vi) support Iridium-approved
positions at the WRC of the ITU. See "Principal Contracts for the Development of
the IRIDIUM System -- Gateway Authorization Agreements."
Under the Space System Contract, Motorola has agreed to (i) design and make
available to Iridium as proprietary information the gateway interface
specification, (ii) develop and sell IRIDIUM gateway equipment, and (iii)
license to responsible and competent suppliers of that equipment the rights to
use the information in that specification for certain purposes to the extent
essential to manufacture and sell IRIDIUM gateways. Iridium does not anticipate
that companies other than Motorola will manufacture gateway equipment. In order
to assure timely development of the gateway equipment and to coordinate the
development effort, Iridium entered into the Terrestrial Network Development
Contract in 1995 which has allowed it to implement a more disciplined and
systematic development plan for the gateways and which Iridium believes will
increase the likelihood of a timely in-service date for the gateways. Under the
Terrestrial Network Development Contract, Motorola is designing and developing
the gateway hardware and software. See "Principal Contracts for the Development
of the IRIDIUM System -- Terrestrial Network Development Contract."
Iridium and the gateway operators have established a schedule for the
construction of the necessary gateway facilities by the gateway operators. While
some gateway operators are behind in meeting some of the
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milestones in this schedule, Iridium believes that eleven gateway facilities
will be completed and operational at the time commercial operations commence.
Eleven gateway operators have entered into gateway equipment purchase agreements
with Motorola. Pursuant to the executed gateway equipment purchase agreements,
gateways have been configured to match the owner's anticipated initial capacity
requirements for the relevant gateway service territory. Capacity requirements
vary from gateway to gateway, based on PSTN interface requirements and the
number and availability of switching trunks, as well as projections regarding
the number of calls originated by IRIDIUM subscribers within the gateway service
territory and the number of calls over the IRIDIUM System originated from or
terminated in the gateway service territory's PSTN. The construction of the
Iridium North America (Tempe, Arizona) and Nippon Iridium Corporation (Nagano,
Japan) gateway facilities is substantially complete and the telecommunications
equipment is now being installed at both locations. Equipment procurement has
commenced for seven other gateways pursuant to gateway equipment purchase
agreements with Motorola. Two gateways are behind schedule with equipment
procurement for their gateways. While Iridium believes that it is probable that
these two gateways will be operational by the planned September 1998
commencement of commercial operations, in order for them to do so they will need
to move forward promptly, including making certain overdue payments under their
gateway equipment purchase agreements with Motorola. 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.
Subscriber Equipment
Subscribers will communicate via the system of satellites and gateways
using IRIDIUM subscriber equipment that will provide one or more of voice,
paging, data, and facsimile services. Iridium expects that subscriber equipment
will be made available by at least two suppliers, Motorola and Kyocera. In
addition to portable, hand-held phones Iridium expects that vehicle-mounted,
transportable, fixed telephones, as well as simplex alphanumeric belt-worn
pagers will be made available. Based on information received from Motorola,
Iridium expects that Motorola's version of the portable, multi-mode, hand-held
phone will have an initial retail price of approximately $3,000, including at
least one TRC, and its version of the alphanumeric pager will have an initial
retail price of approximately $500. The Company has not been advised by Kyocera
as to the possible pricing of Iridium subscriber equipment that is expected to
be manufactured by Kyocera.
Iridium does not currently intend to manufacture or distribute IRIDIUM
subscriber equipment or derive any income from the sale of IRIDIUM subscriber
equipment. See "Risk Factors -- Potential for Delay and Cost
Overruns -- Development, Manufacture and Distribution of Subscriber Equipment"
and "-- Consequences of Satellite Service Limitations on Customer Acceptance."
Such equipment is expected to be manufactured by existing manufacturers of
similar terrestrial subscriber equipment and to be distributed by such
manufacturers through gateway owners and operators, service providers and other
telecommunications equipment distributors. Motorola has committed substantial
resources to develop, and plans to sell, IRIDIUM subscriber equipment including
portable, hand-held phones and belt-worn pagers. Motorola has informed Iridium
that it has entered into a license agreement with Kyocera relating to the basic
intellectual property rights essential to develop and manufacture personal voice
subscriber equipment for use on the IRIDIUM System. This license agreement does
not obligate Kyocera to develop, manufacture or sell any IRIDIUM subscriber
equipment. If other subscriber equipment manufacturers wish to develop and sell
IRIDIUM subscriber equipment, they will be required to enter into similar
licensing agreements with Motorola. See "Principal Contracts for the Development
of the IRIDIUM System" for a description of Motorola's agreement with Iridium to
grant certain licenses for intellectual property rights. See "Risk Factors --
Conflicts of Interest with Motorola."
The IRIDIUM System phones are still under development, although a
functional unminiaturized prototype has been developed. Motorola has informed
Iridium that the portable, hand-held phone that Motorola has been developing is
expected to be larger and heavier than today's pocket-sized, hand-held cellular
telephones and is expected to have a longer and thicker antenna than hand-held
cellular telephones. Motorola has informed Iridium that the pager Motorola will
develop is expected to be slightly larger than today's standard alphanumeric
belt-worn pagers. The unminiaturized prototypes have been built using the
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same or similar components expected to be used in the production model of the
IRIDIUM phone. The prototypes have been built in a larger housing to facilitate
testing and problem solving.
Business Support Systems
The IRIDIUM System will be capable of supporting basic "back office"
business functions required by Iridium, gateway operators, and service
providers, including a clearinghouse operated by Iridium to calculate the
amounts owed to and from Iridium and each gateway operator in order to determine
net settlements of such amounts among such entities. These business support
functions include service provision, customer service, and billing and
collection, as well as clearing and settlements. These functions will be
provided by means of computer and manual processes at each gateway and service
provider location and, most likely, at a central processing point. The gateway
owners and operators will be required to license or purchase software and
equipment in order to exchange information with the clearinghouse and to handle
settlements with service providers, inter-exchange service providers, government
entities and others. Iridium has proposed to develop, and to provide to the
gateways, some of the required software and hardware. In addition, the gateways
will have to enter into settlement agreements with service providers, on behalf
of Iridium, in order to account for and settle the ICRS and the non-satellite
service portions of the IRIDIUM Services. The coordination of business support
functions among Iridium, the gateways and the service providers necessary to the
provision of the IRIDIUM Services is a large and complex undertaking which will
require the establishment of comprehensive data exchange capabilities and the
negotiation and execution of hundreds of settlement agreements with gateway
operators and service providers. See "Risk Factors -- Reliance on Motorola,
Gateway Owners and Other Third Parties."
ICRS
ICRS allows different protocol-based networks to communicate with each
other. Protocol formats are the "language" by which networks communicate.
Similar protocol networks can communicate easily with one another by sending
signals between the networks in a standard language that is understood by both
networks. Different protocol networks require a translator in order to
communicate with each other.
An ICRS customer who roams onto a cellular network that has a roaming
agreement with Iridium will be recognized by the visited network as an Iridium
ICRS customer when the customer turns on his phone. The visited network, using
an Iridium gateway, will send a request for authentication either terrestrially
or over the IRIDIUM System to the IIU, the protocol translation device that is
being developed under the direction of Motorola for Iridium. The IIU will search
for the home location of the customer and convert the signal to the appropriate
protocol of the customer's home network. The home network will authenticate the
customer by signaling back to the IIU which will then convert the signal back to
the protocol of the visited network and send the response in the appropriate
protocol to the visited network. At the end of this authentication process
(which is expected to be completed in seconds), the home network knows to
forward a call to the customer to the visited network for completion and the
visited network has the necessary authentication to allow the roaming customer
to access the visited network as a roaming customer and complete a call.
An ICRS customer can be "homed" on a cellular network, in which case the
customer's phone number will be his home cellular phone number. Alternatively,
the customer can be "homed" on the IRIDIUM System, in which case the customer's
phone number will begin with "8816" or "8817," the international "country" codes
assigned to Iridium. Customers "homed" on the IRIDIUM System will pay a monthly
subscription fee and a fee for calls made over the IRIDIUM System. Customers
"homed" on a cellular network will pay a feature charge to Iridium that will be
significantly below the monthly subscription fee, but they will pay an
additional roaming premium for calls made over the IRIDIUM System. In general,
customers who place a large number of IRIDIUM satellite service calls will have
an incentive to be "homed" on the IRIDIUM System, while customers who place a
small number of IRIDIUM satellite service calls will have an incentive to be
"homed" on a terrestrial network.
For inter-protocol terrestrial cellular roaming, a user must have a
telephone that operates with the visited network (e.g., a GSM phone if roaming
onto a GSM network or a DCS1800 phone roaming onto an IS-41
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network that uses the DCS1800 frequency). An ICRS customer will not be required
to own an IRIDIUM phone. Subscribers will be able to use any terrestrial
wireless handset that can support a GSM SIM card or have an IS-41 handset that
has been programmed for ICRS service. Motorola has indicated that it intends to
develop TRCs compatible with most major terrestrial wireless networks, although
some (including CDMA) will be developed and distributed after the commencement
of commercial operations.
Iridium's business plan currently calls for roaming agreements with
wireless operators in more than 50 countries by the commencement of commercial
operations in September 1998 expanding to approximately 150 countries by 2002.
Many wireless systems as currently configured, including systems covering large
portions of South America, use a form of wireless technology that does not
permit sufficient anti-fraud security or certain international dialing and,
therefore, it is unlikely that Iridium will provide ICRS coverage in areas that
are principally served by this type of technology. See "Risk Factors -- Risks
Related to ICRS." ICRS is not expected to be available between certain IS-41
systems before 1999 or in Japan before 1999.
PROGRESS TO DATE
The following chart sets forth Iridium's past and projected development
milestones. Estimates for the commencement of service do not account for
potential delays. There can be no assurance that the IRIDIUM System will
commence commercial operations in September 1998 as planned. See "Risk
Factors -- Potential for Delay and Cost Overruns."
<TABLE>
<S> <C>
1987: - IRIDIUM System conceived by Motorola
- Research and development begins
1990: - Planned IRIDIUM System announced worldwide
- FCC license application filed
1991: - Iridium, Inc. incorporated
1992: - Global MSS spectrum allocated at WARC-92
- Experimental license granted by FCC
- Full scale research and development by Motorola, Lockheed and Raytheon
underway
1993: - Stock purchase agreements executed covering $800 million in equity
commitments
- Space System Contract and Operations and Maintenance Contract become
effective
- Key subcontracts signed by Iridium and Motorola
- System procurement and build-out commenced
1994: - IRIDIUM System preliminary design reviews completed
- Additional stock purchase agreements executed covering an additional $798
million
- IRIDIUM satellite communications payload application-specific integrated
circuits designed, fabricated and validated
- Gateway Authorization Agreements executed
1995: - Space Segment license awarded by FCC, subject to certain conditions
- IRIDIUM System critical design reviews completed
- Terrestrial Network Development Contract executed
- Nine Gateway Equipment Purchase Agreements executed
- Prototype phones available for lab testing
1996: - Additional $300 million raised
- Full-scale IRIDIUM satellite manufacture begins
- $750 million bank facility established
- Kyocera begins development of Iridium phones
- Construction of gateways begins
</TABLE>
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<TABLE>
<S> <C>
1997: - First IRIDIUM satellites launched
- Master control facility substantially complete
- Significant portion of satellite launches expected to occur
- Gateway construction expected to continue and initial testing to begin
- Prototype phones expected to be available for testing with in-orbit
satellites
- Significant progress expected in obtaining service providers, roaming
agreements and L-band licenses
1998: - Satellite launches expected to be completed
- Gateway construction expected to be completed
- Subscriber trials expected to be completed
- Continued progress expected in obtaining service providers, roaming
agreements and L-band licenses
- Commercial operations expected to begin
</TABLE>
COMPETITION
Certain sectors of the telecommunications industry are highly competitive
in the United States and other countries. The uncertainties and risks created by
this competition are intensified by the continuous technological advances that
characterize the industry, regulatory developments that affect competition and
alliances between industry participants. While no single existing wireless
communications system serves the global personal communications market today,
Iridium anticipates that more than one system will seek to serve this market in
some fashion in the future. Iridium believes that its most likely direct
competition will come from the planned ICO telecommunications service and from
one or both of the other two FCC licensed MSS applicants -- Loral/Qualcomm
Partnership, L.P., on behalf of Globalstar, and TRW, on behalf of Odyssey.
Iridium believes that its ability to compete successfully in the market for
global personal communications will depend primarily upon the timing of its
entry into the market, the technological qualities of the IRIDIUM System,
including its global coverage, signal strength, dependability and capacity and
the market appeal of Iridium's service offerings, including ICRS. Successful
competition will also depend on the cost of service to subscribers and the
success of the marketing, distribution and customer service efforts of gateway
operators and service providers. Iridium believes that it currently has an
earlier planned full global service capability than any of the licensed MSS
applicants or ICO (based upon information contained in their FCC filings or
public announcements).
While Iridium's system and proposed competing mobile satellite systems have
different planned technical capabilities, Iridium believes that the
distinguishing features of the IRIDIUM System will include: (i) its higher
signal strength for Satellite Services which Iridium believes will afford both
better voice quality and signal penetration to portable, hand-held phones and a
higher degree of in-building penetration for pagers; (ii) its intersatellite
networking capability, which Iridium believes will permit full global coverage,
reduce the number of gateways required to provide global coverage, enhance
system reliability and capacity and reduce tail charges incurred for the
landline portion of telephone calls; and (iii) its ICRS offering, which will
offer one number, one phone, one bill, voice, fax and data communication and
"follow-me paging" through either a cellular or an IRIDIUM phone number. Iridium
believes that these distinguishing features will make IRIDIUM Services better
suited, compared with other potential MSS competitors, to meet the global
coverage and service quality demanded from the high-end, traveling professional.
In addition, Iridium believes that it will be the first MSS system to offer full
global coverage in all authorized jurisdictions.
Mobile Satellite Systems
Inmarsat has announced plans for a 12-satellite, MEO system consisting of
ten operational and two spare satellites. This system is to operate in the 2 GHz
band and will be owned by a new Inmarsat affiliate, ICO, formerly known as
Inmarsat-P. Many of the investors in Inmarsat, including numerous state-owned
telecommunications companies, have announced that they will participate in the
ownership of the new venture and ICO has announced the receipt of significant
equity commitments from these investors. Iridium believes
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that ICO will be the most direct competitor to Iridium for the traveling
professional market. However, ICO has announced that the full constellation will
not be operational before the year 2000, which should provide Iridium with a
first-to-market advantage.
Globalstar, a 48-satellite LEO system, has been proposed by Loral/Qualcomm.
It will offer both fixed and mobile telecommunications services. The Globalstar
system will employ CDMA digital modulation technology and Globalstar has
announced an expected in-service date of 1998, with the full constellation in
place by early 1999. The Globalstar system utilizes "bent pipe" technology and
Globalstar has indicated that it will require between 100 and 210 gateways to
provide full global land-based coverage of virtually all inhabited areas of the
globe. The target market for Globalstar, like the regional GEO systems described
below, covers persons who lack telephone service or are underserved or not
served by existing or future cellular systems.
Odyssey, a 12-satellite MEO system, has been proposed by TRW. The proposed
system would offer mobile satellite service globally and would be based on CDMA
digital modulation technology. TRW has announced an expected in-service date of
2001, with full service available in 2002.
Iridium also expects to encounter competition from regional mobile
satellite systems, two of which have been launched and several of which are in
the planning stage, as well as from Inmarsat. In April 1995, AMSC launched a GEO
satellite covering North America to provide fixed and mobile voice and data
services to briefcase-sized mobile terminals and car-mounted units. Mobilesat,
launched in 1994, is a GEO satellite covering Australia, New Zealand and parts
of the Pacific Basin which provides mobile and fixed, voice and data services to
briefcase-sized mobile terminals and car-mounted units. The Asian Cellular
Satellite ("ACeS") has proposed a one- or two-satellite GEO satellite systems
covering Asia, including Thailand, Indonesia and the Philippines, and offering
mobile voice and data telecommunications to briefcase-sized mobile terminals,
car-mounted units and hand-held units. The Asia Pacific Mobile
Telecommunications Satellite ("APMT") has proposed a two-satellite GEO satellite
system covering India, China and certain Southeast Asian nations, offering
mobile telecommunications to dual-mode, hand-held terminals. Sataphone and
Thuraya are two consortia proposing GEO systems to serve the North Africa/Middle
East region, with dual-mode hand-held phones. EAST is a hybrid system proposed
by Matra-Marconi to provide fixed services, and mobile services to hand-held
units, with a GEO satellite covering Europe, the Middle East and Africa.
Afro-Asian Satellite Communications has proposed a two GEO satellite system
covering 55 countries in the Middle East, the Asia-Pacific region and eventually
Africa, serving dual-mode, hand-held terminals. Elekon-Stir is a proposed
Russian LEO system consisting of seven satellites offering store and forward
mobile data services and with limited voice capabilities. Inmarsat currently
operates a world-wide GEO system that is capable of providing fixed and mobile
voice and data services to laptop-sized "Mini-M" terminals and to
briefcase-sized mobile terminals and car-mounted units. Other regional systems
that may be established could also provide services that compete with the
IRIDIUM Satellite Services. The regional GEO systems do not provide full global
coverage and, therefore, are expected to generally target persons not currently
served by landline or cellular telephone service. It is possible that one or
more regional mobile satellite services could enter into agreements to provide
intersystem roaming that could be global or nearly global in scope.
Land-based Telecommunications Systems
Iridium does not intend to compete with terrestrial cellular telephone
systems for the vast majority of personal communications services, because,
among other reasons, IRIDIUM satellite voice services will be priced
significantly higher than most terrestrial wireless services, the IRIDIUM System
will lack the operational capacity to provide local service to large numbers of
subscribers in concentrated areas and Iridium's satellite system is not expected
to afford the same voice quality, signal strength, or ability to penetrate
various environments (such as buildings) as terrestrial wireless systems.
Rather, Iridium expects its subscribers to use IRIDIUM Satellite Services in
areas or situations where local cellular systems use a standard incompatible
with that of the users' home markets or where terrestrial service is
unavailable, inconvenient, of poor quality or unreliable. As terrestrial
cellular systems expand their geographical penetration, particularly outside of
major urban and suburban areas and improve the quality of coverage in
already-served areas, potential customers for IRIDIUM Satellite Services and
other satellite-based services will be lost. Moreover, the advent of near global
terrestrial cellular roaming described below will represent a
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significant competitive threat to Iridium's satellite-based service and ICRS,
particularly with respect to travelling professionals who spend most of their
time in regions that are well served by terrestrial-based wireless services.
Terrestrial Cellular Interprotocol Roaming Services
Iridium's ICRS service offering, which will allow IRIDIUM subscribers to
roam onto a variety of cellular networks, will face competition from existing
and future terrestrial cellular interprotocol roaming services, which provide
roaming services across similar cellular networks.
GTE Mobilnet (GTE) and Deutsche Telekom Mobil ("DeTeMobil") of Germany
currently offer GlobalRoam, a two-way cellular roaming service between certain
North American AMPS cellular networks and GSM cellular networks in certain
countries where DeTeMobil has GSM roaming agreements. AT&T Wireless Services of
the United States and Vodafone of the United Kingdom offer CellCard, a service
which provides one-way roaming from certain North American AMPS networks to
certain GSM networks in certain countries which have roaming agreements with
Vodafone.
Three other proposed MSS systems, ICO, Globalstar and Odyssey, and at least
one regional GEO, ACeS, have indicated that they may also offer some form of
dual-mode satellite/cellular service, which may include interprotocol roaming
capabilities such as those expected to be offered by Iridium.
In addition, a number of rental services, primarily United States based,
provide cellular phones to persons travelling in countries with cellular
standards that differ from the traveler's home market. For example, Worldcell
provides United States based travelers GSM phones for travel to Europe, while
Shared Technologies Cellular, in conjunction with United Airlines, provides AMPS
phones for visitors to the United States. These businesses often have rental
locations at airports, hotels and auto rental locations and will also deliver
phones by mail service. These companies' services may compete with Iridium's
ICRS service and satellite-based service offerings. See "Risk
Factors -- Competitive Risks; Factors Affecting Iridium's Competitive
Position -- Competition from Interprotocol Roaming Service Providers, GSM
Roaming Services, Regional MSS Systems and Wireless Phone Rentals."
Paging
In addition to competing with paging services offered by proposed regional
MSS systems, the IRIDIUM paging service will face competition from regional and
nationwide terrestrial paging services, and from M-Tel's SkyTel service which
currently provides paging services to 20 countries around the world. SkyTel
operates by forwarding paging messages via satellite to a foreign paging network
that subsequently transmits the message over its local network. Also, in 1995
Inmarsat introduced an international satellite-based one-way messaging service.
Iridium believes that the relatively higher link margins of the IRIDIUM paging
service will provide superior performance to any proposed satellite paging
systems and that Iridium will be the only global paging service using a
belt-worn pager before 2000.
EMPLOYEES
As of April 30, 1997, Iridium had approximately 217 full-time employees.
None of Iridium's employees are covered by a collective bargaining agreement.
Iridium's management considers its relations with its employees to be good.
PROPERTIES
Motorola has constructed the master control facility on a 10.4 acre parcel
of land in Loudoun County, Virginia, TT&C facilities on leased or licensed land
in Yellowknife and Iqualuit, Northwest Territories, Canada and Oahu, Hawaii and
the backup control facility, which is nearing completion in Rome, Italy. The
backup control facility is located on one floor of a building owned by Nuova
Telespazio and pictured on the inside front cover of this Prospectus. Title to
these properties is scheduled to be passed to Iridium prior to the time Motorola
completes the final milestone under the Space System Contract.
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Iridium leases approximately 128,750 square feet of space at three
locations in metropolitan Washington, D.C. under leases that expire in January
1999, with renewal options. Iridium's principal executive office is located at
1575 Eye Street, N.W., Washington, D.C. 20006.
REGULATION OF IRIDIUM
TELECOMMUNICATIONS REGULATION AND SPECTRUM ALLOCATION: OVERVIEW
The allocation and use of the radio frequency spectrum for the provision of
communications services are subject to international and national regulation.
The implementation and operation of the IRIDIUM System, like those of all other
satellite and wireless systems, are dependent upon obtaining licenses and other
approvals.
The international regulatory framework for spectrum allocation and use is
established by the International Telecommunication Union ("ITU"). The ITU, which
is composed of representatives from most of the countries of the world, meets
officially at conferences known as World Radiocommunications Conferences
("WRC"s) (previously known as World Administrative Radio Conferences or "WARC"s)
to decide the radio services that should be permitted to operate in various
radio bands and the rules for operating in those bands.
The national administration of each country decides how the radio
frequencies that the ITU has allocated to particular communications services
should be allocated and assigned domestically to specific companies. In
addition, the provision of communications services in most countries is subject
to regulatory controls by the national governments of each country.
In the United States, the FCC is the regulatory agency responsible
domestically for allocating spectrum and for licensing and regulating
communication systems, facilities, and services. The FCC regulates satellites in
accordance with laws passed by the United States Congress, particularly the
Communications Act of 1934, as amended (the "Communications Act"), regulations
adopted pursuant to those laws, and judicial opinions rendered by U.S. courts.
IRIDIUM SYSTEM LICENSING REQUIREMENTS
The IRIDIUM System is being built with the capability to link phones to
IRIDIUM satellites using up to 10.5 MHz of spectrum in L-band frequencies from
1616-1626.5 MHz on a bi-directional time division basis, Earth-to-space and
space-to-Earth. The system will also be capable of operating "feeder" links in
the frequencies 19.4-19.6 GHz and 29.1-29.3 GHz (connecting satellites to ground
earth station gateway facilities) and intersatellite links in the frequencies
23.18-23.38 GHz (linking the satellites in the constellation to each other).
The licensing requirements for the IRIDIUM System include: (i) the FCC
license for the space segment; (ii) the licenses in each country where there is
a gateway or TT&C earth station; and (iii) the licenses in each country for the
IRIDIUM subscriber equipment and service and for the use of required
frequencies. In addition, the IRIDIUM System must be coordinated with other
users of spectrum that have rights to use the same or adjacent frequencies to
the frequencies assigned to the IRIDIUM System. It is only necessary for one
country to license the space segment, which includes authorizing the
construction, launch, and operation of the satellites, including the use of the
intersatellite links and the operation of the primary satellite control center
in the country.
The gateway earth stations provide the feeder link between the satellite
network and the PSTNs around the world. Iridium expects that IRIDIUM gateways
will be located in at least eleven different countries during the first years of
operation. A radio license to operate a gateway earth station in a significant
portion of the 29.1-29.3 GHz (Uplink) and 19.4-19.6 GHz (Downlink) frequency
bands must be issued by the appropriate governmental authority of each of the
countries in which an IRIDIUM gateway is to be located. Similar authorizations
may be obtained in the United States and Canada to operate TT&C earth stations.
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Each country in which Iridium intends to operate must authorize the use of
the frequencies linking the phones to the satellites, allowing communication
between end users and the satellite network. At a minimum, the IRIDIUM System
needs exclusive use of the frequencies 1621.35-1626.5 MHz for this purpose, with
authority to operate bi-directionally within that band. In order to operate the
IRIDIUM subscriber equipment in a country, Iridium must obtain from the country
a radio license to permit the operation of phones and pagers within the country.
The licensing procedures vary in different countries. Generally there are three
aspects to the required license(s): (i) authorization for the use of the
frequencies requested; (ii) authorization for the equipment to be marketed and
used (including subscriber equipment that may circulate from country to
country); and (iii) authorization for the service to be provided.
Because of the global mobile nature of the service, each national
administration will be asked to grant a blanket or class license authorizing a
substantial number of handsets, recognizing equipment that has been type
approved or certified by other countries, and allowing for the free circulation
and transborder roaming of terminal equipment.
LICENSING STATUS
General
Iridium, Motorola, and the gateway owners have made substantial progress in
taking the regulatory steps needed for the IRIDIUM System to obtain the coverage
assumed in its business plan, but a significant number of additional regulatory
approvals outside the United States remain to be obtained. See "Prospectus
Summary -- Progress to Date." Each gateway must be licensed by the jurisdiction
in which it is located. Three final and four experimental licenses to build and
operate gateways have been received. The final licenses have been granted for
the gateways in the United States (Tempe), Thailand (Bangkok) and Taiwan
(Taipei) and permit the gateways to engage in commercial operations, including
use of the gateway links with the IRIDIUM satellites. The experimental licenses
have been granted for the gateways in Korea (Seoul), Brazil (Rio De Janeiro),
Russia (Moscow) and Italy (Fucino) and permit the gateways to test their links
between the IRIDIUM satellites and terrestrial services. Two of the remaining
four unlicensed gateways -- the gateways in Japan (Nagano) and India
(Bombay) -- are under construction in the expectation that they will be
licensed. Iridium expects that the gateway in Japan will be completed in August
1997 and that the gateway in India will be completed in March 1998. The gateways
to be located in China (Beijing) and Saudi Arabia (Jeddah) have not received
licenses or commenced construction. The final licenses that have been received
by the gateways are subject to conditions that relate to the completion of
construction and the provision of technical information to regulatory
authorities. Iridium expects that the licenses its other gateways are seeking
will have similar conditions. There can be no assurance that the additional
licenses necessary for Iridium to obtain the service capability assumed in its
business plan will be obtained on a timely basis or at all. In addition, while
Iridium believes the conditions specified in the final gateway licenses that
have been received can be satisfied, there can be no assurance that such
conditions will be satisfied or that conditions to licenses received in the
future will be satisfied.
To date, seven administrations have granted conditional licenses for the
provision of IRIDIUM Satellite Services in their respective countries. The seven
countries are the United States, Venezuela, New Zealand, Taiwan, Thailand,
Afghanistan and Micronesia. Iridium is seeking licenses throughout the world.
However, Iridium is placing emphasis on obtaining approvals by September 1998
from the 70 to 90 countries where Iridium expects substantially all of the
demand for, and usage of, IRIDIUM Services is likely to be generated. There can
be no assurance that additional authorizations will be granted at all, or in a
timely manner, or without burdensome conditions. There can be no assurance that
sufficient licenses for Iridium to obtain the coverage assumed in its business
plan will be obtained on a timely basis or at all. Nor can there be any
assurance that Iridium will be able to secure additional spectrum, if needed. In
addition, while Iridium is not aware of any country that has indicated that it
will not provide a service license by the commencement of commercial operations,
the process of obtaining service licenses in each country of the world is
complex and certain gateway operators, in particular those with responsibility
for obtaining licenses in numerous countries such as Iridium Africa and Iridium
SudAmerica, have indicated that they may not receive regulatory
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approvals for some of the countries of their territories at the anticipated
commencement of commercial operations in September 1998.
Spectrum Allocation
At the WARC-92, the ITU allocated to the MSS service: (i) on a primary
basis, 16.5 MHz of spectrum in the 1610-1626.5 MHz band (Earth-to-space); and
(ii) on a secondary basis, 12.7 MHz of spectrum in the 1613.8-1626.5 MHz band
(space-to-Earth). The ITU had previously authorized the other frequency bands
used in the IRIDIUM System for the purpose for which Iridium intends to use
them. At the 1995 World Radio Conference ("WRC 95"), the ITU defined the
coordination procedure for systems operating in the bands proposed to be used by
Iridium for its feeder links. The ITU's role in allocating frequencies necessary
for the operation of the first generation IRIDIUM System is now essentially
complete.
United States Licensing
The space segment of the IRIDIUM System, including the use of the
intersatellite frequency band (23.18 to 23.38 GHz), has already been licensed by
the FCC in the United States. The license has a term of ten years and contains
other conditions typical of satellite system licenses granted by the FCC. The
license term begins on the date the first satellite is in orbit and the first
transmission occurs. The license states that, absent extensions, the IRIDIUM
System must be fully constructed and operational by October 2002. Any
significant change to the operating parameters of the IRIDIUM satellites could
require an application for modification of the current FCC license. Any such
application could be subject to competing applications and there can be no
assurance that it would be granted at all, or that it would not be subject to an
auction process. Two applicants have appealed the FCC decision which (i) found
that they initially had failed to establish the necessary financial
qualifications, and gave them additional time to demonstrate such
qualifications; and (ii) granted licenses to the IRIDIUM System and two other
global MSS systems, and also have appealed the FCC decision which adopts
qualification standards for the applicants. The license for the IRIDIUM System
remains in full force and effect while these appeals are pending and Iridium
expects that the FCC decision to issue a license for the IRIDIUM System will be
affirmed, although there can be no assurance that the courts will do so.
Although the FCC has stated that it will renew the IRIDIUM System
authorization unless extraordinary circumstances prevent it from doing so, there
can be no assurance that the IRIDIUM System license will be renewed.
The IRIDIUM System license is held by Motorola Satellite Communications,
Inc., a wholly owned subsidiary of Motorola, which is contractually bound to
operate it for the exclusive benefit of Iridium. As a result, Motorola, rather
than Iridium, has the responsibility to construct, launch, operate, and maintain
the IRIDIUM System in accordance with the terms of the license. Any request to
renew or modify the IRIDIUM System license must be filed and prosecuted by
Motorola. If the Space System Contract or the Operations and Maintenance
Contract is ever terminated or not renewed, Motorola would have to assign the
IRIDIUM license to Iridium or a third party. Any such assignment would be
subject to FCC approval.
Under both the ITU's rules and the terms of the IRIDIUM System license, the
IRIDIUM System must be coordinated with all other domestic and foreign users of
the frequency bands assigned to the IRIDIUM System. The United States has
essentially completed the process of registering the IRIDIUM space segment
operations with the ITU. It has submitted the advance publication and
coordination materials to the ITU and coordinated the use of the space segment
with all those administrations expressing concerns that the system might cause
or receive interference to their systems. On this basis, the United States has
requested the ITU to notify the IRIDIUM System in the ITU's Master Frequency
Register, which will give it a legal right to protect it from interference from
future systems. Once the request is published, administrations that have
previously engaged in coordination with the United States regarding the IRIDIUM
System may file comments on the claim that coordination is complete. Any
comments will need to be resolved before the IRIDIUM System will be listed in
the Master Frequency Register. Iridium believes that coordination has been
completed successfully between the IRIDIUM System and all existing or planned
systems that have
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been identified under the coordination process. If further coordination is
required with any identified system, it is possible that such coordination would
not be completed prior to Iridium's projected commencement of commercial
operations. However, Iridium believes that failure to complete such coordination
would be unlikely to have a material adverse effect on Iridium. There is no
other action required from any other country to license the space segment.
Under the FCC's rules and the terms of the license, prior to commencing
operations Motorola must complete coordination with U.S. radioastronomy sites
and complete consultations with the Inmarsat and Intelsat systems. See
"Regulation of Iridium -- Consultations and Coordinations."
In the United States, frequencies have been assigned to the IRIDIUM System
feeder links in the 29.1-29.25 and 19.4-19.6 GHz bands. The 29.1-29.25 GHz
frequencies are shared with the local multipoint distribution service ("LMDS"),
and the FCC has adopted restrictions on LMDS operations that are designed to
protect MSS feeder links from interference. The 19.4-19.6 GHz frequencies are
shared with terrestrial microwave stations and each gateway earth station must
be coordinated in advance with licensed microwave stations. Both frequency bands
are also shared with the proposed feeder link operation of TRW's Odyssey system.
TRW's earth stations must be separated geographically from the IRIDIUM System
gateways in order to avoid causing harmful interference. The FCC recently
granted a license for the first IRIDIUM System gateway to be located in Tempe,
Arizona. Licenses have also been granted in the United States for authority to
construct and operate TT&C facilities in Arizona and Hawaii.
The United States license authorizing construction, launch and operation of
the space segment includes the use of 1621.35 to 1626.5 MHz radio frequency band
in the United States exclusively for the IRIDIUM subscriber links. This
frequency assignment may be increased if no more than one CDMA satellite system
becomes operational in the adjacent frequency band. The FCC has issued a license
permitting 200,000 IRIDIUM mobile phones to be used in the United States,
conditioned upon Motorola submitting a study showing its terminals will comply
with radiation hazard requirements. Iridium believes that Motorola will comply
with this requirement.
Licensing Outside the United States
In countries other than the United States, the remaining significant
regulatory steps include: (i) in each country in which a gateway or system
control terminal will be located, authorization to construct and operate those
facilities, including necessary gateway feeder link spectrum assignments, must
be obtained; (ii) in each country in which IRIDIUM subscriber equipment will
operate, authority to market and operate that equipment with the IRIDIUM System,
and the use of the necessary user link spectrum, must be granted; and (iii)
coordination of the use of the frequencies to be used by the IRIDIUM System must
be achieved. As discussed under "-- General," applications for authorizations
for gateway, subscriber, and TT&C facilities are in varying stages of processing
in countries other than the United States and there can be no assurance that
these applications will be granted or that sufficient spectrum for initial needs
will be assigned. Of the gateway and subscriber authorizations granted to date,
several are conditional and there can be no assurance that these conditions will
be satisfied. If the initial spectrum assignments prove insufficient as demand
increases over time, there is no assurance Iridium will be able to obtain
additional spectrum from the FCC or other administrations.
Countries in Europe are approaching frequency assignments and licensing
issues on a regional basis. CEPT, an organization of forty-three countries in
greater Europe, is in the process of adopting recommendations regarding the
frequency assignment plan and the authorization process which it will recommend
that member countries follow. These recommendations are voluntary but many
European countries -- especially EU members -- are expected to follow these
recommendations. These draft recommendations currently give Iridium the
opportunity to obtain the spectrum it needs to operate initially in Europe,
provided it can meet certain milestones. There is a risk that Iridium may have
to share this spectrum with other planned satellite systems using an FDMA/TDMA
access mode. Because European countries must follow ITU procedures which Iridium
believes will protect Iridium's minimum spectrum requirements, Iridium believes
this risk is
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unlikely to occur. However, there can be no assurance that Iridium will meet all
the milestones or will receive all the spectrum it needs to operate in Europe.
IRIDIUM mobile subscriber equipment must be type accepted in many countries
in accordance with national, regional and/or internationally-recognized
standards relating to unwanted emissions, network controls, etc. At the 1996 ITU
World Telecommunication Policy Forum, the participating countries agreed to
start a process that has become known as the GMPCS memorandum of understanding
(the "GMPCS MOU"). If the participating countries can reach agreements covering
the IRIDIUM System and the IRIDIUM subscriber equipment, it will facilitate (i)
the free circulation of subscriber equipment and (ii) universal handset type
approvals. Absent such multilateral agreements, IRIDIUM subscriber equipment
circulation from country to country would require numerous bilateral agreements.
While substantial work has progressed to date on developing these standards for
IRIDIUM subscriber equipment, there can be no assurance that these standards
will ever be established or approved on time.
In connection with Iridium's efforts to obtain worldwide regulatory
approval for IRIDIUM Services, governmental, political and security concerns
have arisen. One such concern is that authorization of IRIDIUM Services by many
countries will be contingent upon Iridium providing such countries with the
ability to legally monitor calls made to or from such countries. Iridium
believes that it will be able to address the concerns of many of these countries
by the date commercial service is expected to begin and of other countries after
the expected commencement of commercial operations. However, there can be no
assurance that it will be able to do so or that the emergence of governmental or
political concerns will not impair the ability to obtain licenses or the
offering of IRIDIUM Services on a timely basis. See "Risk Factors -- Risks
Associated with Principal Supply Contracts -- Amendments to Principal
Contracts."
CONSULTATIONS AND COORDINATIONS
Intelsat and Inmarsat are international organizations that own and operate
satellite systems. International obligations undertaken by the nations which
have signed the international agreements creating Intelsat and Inmarsat,
including the United States, impose special requirements on the licensing and
operation of other satellite systems, including the IRIDIUM System.
Specifically, under these international agreements the United States must
consult with both Intelsat and Inmarsat prior to authorizing any international
satellite system to ensure that the system will not cause significant economic
or technical harm to the Intelsat system or significant technical harm to the
Inmarsat system. The FCC license to construct, launch, and operate the IRIDIUM
System is expressly subject to the completion of these consultations and
notification by the United States Department of State that the United States has
completed its international obligations with respect to Intelsat and Inmarsat.
The consultation with Intelsat has been completed, although the Department of
State has not yet issued its notification and, therefore, the condition in the
FCC license has not technically been fulfilled. The consultation with Inmarsat
has not begun, but Iridium believes the consultation will be successfully
concluded.
Currently, the Russian aeronautical navigation satellite system, GLONASS,
operates in a frequency band that overlaps the 1610-1626.5 MHz MSS band. When
operating co-channel with GLONASS, MSS systems are required to coordinate their
operations with the previously registered operations of GLONASS. In addition,
even when not operating co-channel, out-of-band emission limits protect GLONASS
operations from harmful interference. Iridium believes that a bilateral
coordination agreement between Russia and the United States is in the final
stages of negotiation, under which Russia would agree to move the GLONASS
system's operations to frequencies below 1610 MHz by January 1, 1999, and to
frequencies below approximately 1605 MHz by the year 2005. The FCC has
conditioned the IRIDIUM blanket subscriber license upon compliance with a level
of protection from interference to the GLONASS system which has yet to be
determined. During the three-month period between September 1, 1998, the month
Iridium expects to commence commercial operations, and January 1, 1999, the
month the GLONASS operational frequencies will shift from being below 1616 MHz
to being below 1610 MHz, and during the interim period between 1999 and when
GLONASS shifts to below 1605 MHz, Iridium believes it will be able to satisfy
any reasonable level of protection that is required although there can be no
assurance as to what level of protection will be required. Iridium believes that
it can meet the protection requested for GLONASS when GLONASS shifts
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down in frequency to below 1605 MHz by January 1, 2005. Other administrations
will also need to coordinate with the Russian Federation concerning the level of
protection that will be afforded to GLONASS in their territory. In Russia
itself, additional restrictions are expected to be imposed which may limit the
amount of spectrum available to Iridium in Russia. There can be no assurance
that sufficient spectrum will be available to meet subscriber demand in Russia
or any other country that requires a higher level of protection for GLONASS than
the United States. Moreover, there can be no assurance that CDMA systems will be
able to meet the levels of protection required for GLONASS, either in the United
States, Russia or elsewhere. If such systems do not meet the protection
requirements, the FCC and/or other countries' regulatory authorities might
consider requests to reassign the CDMA systems to higher frequencies within the
1610-1626.5 MHz allocation in order to protect GLONASS. This development might
in turn reduce the amount of spectrum available to Iridium.
Under the FCC's rules, the IRIDIUM System also must protect U.S.
radioastronomy sites during periods when they are observing in the 1610.6-1613.8
MHz band. Coordination with each such site must be completed before Iridium may
commence operations. To date, Motorola has entered into memoranda of
understanding and letter agreements establishing principles for coordinating
spectrum use (or, in one case, determining that coordination is not required)
with entities representing all of the 15 U.S. radioastronomy sites. Iridium
believes that Motorola will be able to demonstrate that Iridium's operations
will not materially and adversely affect the ability of radioastronomers to
observe in the 1.6 GHz band, but there can be no assurance that final
coordination agreements with these sites will be concluded in a timely manner
or, if FCC intervention is required, that the FCC will impose a coordination
solution that is acceptable to Iridium. Also, there can be no assurance that the
technical assumptions underlying the memoranda of understanding will not differ
from the manner in which the IRIDIUM System performs once it is operational.
Other administrations may also require that the IRIDIUM System be
coordinated with radioastronomy sites that observe in the 1.6 GHz band. Iridium
believes there are approximately 13 other countries that have such
radioastronomy sites observing in that band. Iridium and Motorola have commenced
coordination discussions with numerous non-U.S. radioastronomy sites. While
Iridium believes that it will be able to demonstrate that IRIDIUM's operations
will not materially and adversely affect the ability of radioastronomers at
these sites to observe in the 1.6 GHz band, there can be no assurance that these
coordinations will be concluded successfully or in a timely manner.
In addition to potential interference between MSS systems and other users
of the 1.6 GHz band, there is a potential for intersystem interference among the
MSS systems themselves. Although the FCC declined to impose an unwanted
emissions requirement on CDMA MSS systems to limit their out-of-band emissions
in order to protect IRIDIUM subscriber units from interference, it has directed
the parties to negotiate an agreement imposing an out-of-band emissions mask on
the CDMA systems; if an agreement cannot be reached, the FCC has stated that it
will resolve the issue.
Emissions standards are now under consideration in various international
forums which would limit out-of-band emissions into the IRIDIUM System to a
level which Iridium believes would not cause harmful interference to the
operation of the IRIDIUM System. These standards would apply to all CDMA MSS
systems, including any subsequent CDMA MSS systems which are authorized to use
the 1610-1621.35 MHz band. There can be no assurance, however, that the
standards adopted would not cause harmful interference to the operation of the
IRIDIUM System.
The IRIDIUM System MSS downlinks operate on a secondary basis. Under the
rules of the ITU and the FCC, these secondary downlinks may not cause harmful
interference to any primary spectrum user that is operating co-frequency and
must accept any interference caused to them by such primary spectrum users. In
light of the secondary nature of IRIDIUM's MSS downlinks, if the FCC is required
to resolve the inter-system interference issue, there can be no assurance that
it will protect IRIDIUM subscriber units from harmful interference. Any failure
to implement an acceptable CDMA emissions mask could significantly reduce the
total capacity of the IRIDIUM System. Furthermore, the downlinks of the IRIDIUM
System may need to accept interference from Inmarsat terminals, including
Inmarsat aeronautical and land mobile terminals, when they are in the vicinity
of an IRIDIUM terminal.
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ELECTRONIC SURVEILLANCE LAWS
The Communications Assistance for Law Enforcement Act of 1994 ("CALEA") was
enacted on October 25, 1994. CALEA requires that telecommunications carriers
deploy equipment, facilities, and services that meet certain electronic
surveillance requirements identified in the statute. Penalties of $10,000 a day
could be imposed under CALEA as well as an order of compliance in the case of a
failure to comply, and other unspecified penalties, including injunctions, might
otherwise be imposed. The United States government has indicated that CALEA
imposes requirements on the IRIDIUM System similar to the requirements that the
United States government has requested to be implemented by the cellular
industry. Discussions with the United States government are ongoing to determine
the extent of the IRIDIUM System's obligations and the timing of the
implementation of these requirements into the IRIDIUM System. It is unknown
whether an agreement will be reached with the U.S. government which resolves
these issues. Thus, there exists the possibility of a dispute over the IRIDIUM
System's obligations. See "-- Licensing Status" for a description of the
surveillance requirements of countries outside the United States.
See "-- Licensing Status -- Licensing Outside the United States" for a
discussion of the surveillance requirements of countries outside the United
States.
UNITED STATES INTERNATIONAL TRAFFIC IN ARMS REGULATIONS; EXPORT ADMINISTRATIONS
ACT
The United States International Traffic in Arms Regulations under the
United Sates Arms Export Control Act authorize the President of the United
States to control the export and import of articles and services that can be
used in the production of arms. Among other things, these regulations limit the
ability to export certain articles and related technical data to certain
nations. The scope of these regulations is very broad and extends to certain
spacecraft, including certain satellites. Certain information involved in the
performance of Iridium's operations will fall within the scope of these
regulations.
The Export Administrations Act and the regulations thereunder control the
export and re-export of United States-origin technology and commodities capable
of both civilian and military applications (so-called "dual use" items). These
regulations may prohibit or limit export and re-export of certain
telecommunications equipment and related technology which are not affected by
the International Traffic in Arms Regulations by requiring a license from the
Department of Commerce before controlled items may be exported or re-exported to
certain destinations. Although these regulations should not affect Iridium's
ability to put the space segment in place, the export or re-export of IRIDIUM
subscriber equipment as well as earth stations and related equipment and
technical data, may be subject to these regulations, if such equipment is
manufactured in the United States and then exported or re-exported. These
regulations may also affect the export, from one country outside the United
States to another, of United States-origin technical data or the direct products
of such technical data.
Motorola has obtained authorization to export the IRIDIUM satellites,
including associated launch support equipment, currently scheduled to be
launched in Kazakhstan on Khrunichev's Proton launch vehicle. Motorola has also
applied for, and expects the near-term grant of, the authorization needed to
export the IRIDIUM satellites, including associated launch support equipment,
currently scheduled for launch in China on China Great Wall's Long March 2C
launch vehicle. See "Risk Factors -- Satellite Launch Risks -- Risks Related to
Non-U.S. Launches."
COMPETITION
At the time that the FCC authorized the construction of the IRIDIUM System,
it also authorized two other competitive MSS systems to operate in the
1610-1626.5 MHz band. These were the Globalstar system, proposed by
Loral/Qualcomm Partnership, L.P. ("Loral/Qualcomm"), and the Odyssey system,
proposed by TRW. The Globalstar, Odyssey, and IRIDIUM System are the only Big
LEO systems that have been licensed by the FCC. While the IRIDIUM System was
granted exclusive use of the 1621.35-1626.5 MHz band in the United States,
Odyssey and Globalstar were granted shared use of the bands 1610-1621.35 MHz and
2483.5-2500 MHz. All three competitive systems have been licensed to operate;
and they are not mutually exclusive.
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At the same time the FCC authorized the IRIDIUM, Globalstar and Odyssey
systems, the FCC afforded three other applicants (that had initially failed to
establish their qualifications) additional time in which to demonstrate that
they were financially qualified: Mobile Communications Holdings, Inc. ("MCHI,"
also known as "Ellipsat"); Constellation Communications, Inc. ("Constellation");
and American Mobile Satellite Corporation ("AMSC"). MCHI and Constellation
recently submitted updated financial information to the FCC. In September 1996,
AMSC chose not to proceed and the FCC dismissed its application.
MCHI and Constellation have filed challenges to the FCC's licensing rules,
as well as the FCC's determination that they were each not financially
qualified, with the United States Court of Appeals for the District of Columbia
Circuit. These challenges include an appeal from the FCC's decision to license
the IRIDIUM, Globalstar and Odyssey Systems. If these appeals are successful or
if the FCC approves of the recently submitted financial information, the FCC
could grant licenses to MCHI and Constellation. While such a result would not
have an immediate impact on the amount of spectrum assigned to the IRIDIUM
System, it could prevent Iridium from being assigned more spectrum in the 1.6
GHz MSS band in the future.
Competition with the IRIDIUM System is also expected from ICO, the private
company affiliated with Inmarsat to provide a mobile satellite service using
satellites to be positioned in medium earth orbit. ICO's system is expected to
become a significant competitor of the IRIDIUM System. ICO's proposed service
will not operate in the same set of user link frequencies in which the IRIDIUM,
Globalstar, and Odyssey systems are proposed to operate.
INTERCONNECTION
The IRIDIUM System is predicated upon an international dialing and
signalling model that treats the system as if it were a separate "country." Most
traffic moving to or from the IRIDIUM network will be considered as
international traffic. The IRIDIUM gateway serves as the link between the
IRIDIUM System and the PSTNs within the gateway territory. Consistent with this
"country" model, an IRIDIUM gateway needs to route traffic between the IRIDIUM
System and the international PSTN. For a country to send a call originating in
its PSTN to the IRIDIUM System, it must send the call via its international
network to the nearest IRIDIUM gateway, which may be in a neighboring country.
Similarly, for the IRIDIUM System to send an IRIDIUM System-originated call to a
country's PSTN, it must send the call through its gateway to the international
PSTN. In both cases, IRIDIUM gateways need to interconnect to the PSTN. Thus,
interconnection agreements need to be established between the IRIDIUM gateway
operators and the local PSTN operators in the country in which the gateway is
located.
Every country should be able to send traffic from its PSTN to the nearest
IRIDIUM gateway. Since the IRIDIUM System will be treated like a "country" with
a dedicated country code, each country will route traffic based on that country
code to the IRIDIUM gateway. To route IRIDIUM System traffic properly, the
network operators in every country must update their international switches (and
domestic ones, if necessary) to include the IRIDIUM country code and signaling
point codes.
It is also important that each IRIDIUM gateway be granted, by the country
in which the gateway is located: (i) any necessary and appropriate international
carrier status to route traffic to and from the country in which it is located;
(ii) the right to route IRIDIUM System traffic through the PSTN as an
international carrier and not as an end user (classification as an international
carrier, versus an end user, would enable IRIDIUM gateways to negotiate with
other carriers on a carrier-to-carrier basis); and (iii) the right to route
traffic using leased lines.
COUNTRY CODE
The ITU Telecommunication Standardization Bureau ("TSB") is empowered to
allocate international dialing codes for countries, geographic areas, and global
services. Although there are numerous three-digit "country codes" still
available for allocation, until recently such codes have generally been granted
only to countries and to geographic areas, in order to conserve this limited
resource. The TSB is advised on international code issues by its Study Group 2,
which is composed primarily of representatives of telecommunications service
organizations and representatives of government administrations. Iridium applied
to the TSB
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for a country code for the IRIDIUM System. ICO, Globalstar and Odyssey submitted
requests for country code resources, as well.
In May 1996, Study Group 2 decided that these systems should share a
country code and allocated code "881" for this purpose. Each eligible system
will receive two values of the digit following the code 881. For example, the
IRIDIUM System will use codes 8816 and 8817, which will enable Iridium to
identify 200 million subscribers. The Director of the TSB will let each system
reserve its codes for testing and officially assign them later. Iridium has
already been advised by the Director of the TSB that codes have been reserved
for the IRIDIUM System.
The four-digit country code must be used by domestic and international
carriers in each country to route calls to the IRIDIUM System and to recognize
those calls for billing purposes as calls to the IRIDIUM network. Although the
typical three-digit country code is supported by all carriers for the call
routing and billing systems, it is expected that some carriers will have to
modify their routing and billing systems, and in some cases, enhance their
switch capacity, to be able to route and bill for calls destined for the IRIDIUM
System and other MSS systems. It is possible that some carriers will not agree
to make the necessary modifications, to make them in a timely fashion, or to
make them without Iridium and other MSS system operators paying for some or all
of the costs of such modifications. It is generally expected that resistance to
making the modifications is most likely to occur in developing countries that
employ less modern switching equipment.
PRINCIPAL CONTRACTS FOR THE DEVELOPMENT OF THE IRIDIUM SYSTEM
Iridium and Motorola have entered into the Space System Contract, the
Operations and Maintenance Contract and the Terrestrial Network Development
Contract. In addition, Iridium has entered into a Gateway Authorization
Agreement with each of its investors that has been allocated a gateway service
territory. Iridium has also entered into contracts with Andersen Consulting LLP
for the development and deployment of the IRIDIUM business support systems and
the associated gateway business systems that will be deployed in each gateway.
The following summary discusses the material provisions of the contracts.
Capitalized terms used in the following summary that are defined in the
contracts have the meanings assigned to them in the contracts. Each of these
contracts has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part and prospective investors are urged to read the
exhibits for a complete understanding of the terms of these contracts. Certain
planned additional contracts or contract amendments are currently under
negotiation with Motorola and other vendors, relating to system and service
capabilities. See "Risk Factors -- Potential for Delay and Cost Overruns" and
"-- Risks Associated with Principal Supply Contracts -- Amendments to Principal
Contracts." Capitalized terms used in the following summary that are defined in
the contracts have the meanings ascribed to them in the contracts.
SPACE SYSTEM CONTRACT
Motorola has agreed under the Space System Contract to design, develop,
produce and deliver in orbit the Space Segment of the IRIDIUM System consisting
of the Constellation and System Control Segment. The Space System Contract
provides for a price of $3.45 billion, scheduled to be paid by Iridium to
Motorola over approximately a five-year period upon the completion of 47
performance milestones. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." This price is not subject to change based
upon inflation but is subject to certain other adjustments. The Space System
Contract generally requires that the Space Segment must pass an acceptance plan
demonstrating, among other things and as specified therein, specified minimum
performance coverage and capacity criteria by a specified date (as extended for
certain excusable delays) as a condition to Iridium's obligation to accept the
Space Segment and make the final contract payment of $150 million. Following
acceptance by Iridium, the coverage and capacity performance level of the Space
Segment will be governed by the Operations and Maintenance Contract. In
addition, the Space System Contract provides that the warranty made by Motorola
that the Space Segment will comply with the requirements specified in the
acceptance plan immediately upon completion of the
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contract, but not thereafter, is in lieu of all other warranties. The liability
of Motorola to Iridium under the Space System Contract is subject to certain
limitations (discussed below).
The Space System Contract also requires Motorola to deliver the Satellite
Subscriber Unit (Voice) Interface Specification and the Space System Operations
Plan. The Satellite Subscriber Unit (Voice) Interface Specification was
delivered by Motorola and accepted by Iridium in October 1996. Motorola has also
agreed to license the rights to use the information in the Voice Encoding
Algorithm to the extent essential to implementation of the Satellite Subscriber
Unit (Voice) Interface Specification to telecommunications equipment
manufacturers on mutually acceptable terms and conditions (which may include
royalty payments), provided that the government of such manufacturer's country
has authorized the operation of the IRIDIUM System in that country. Motorola has
indicated to Iridium that it interprets the word "essential" as used in the
prior sentence to mean "technically essential." Iridium does not agree that this
qualification of the term "essential" can or should be implied from the
applicable language in the Space System Contract. In the Space System Contract
Motorola has agreed to design and make available to Iridium as proprietary
information: (i) the Gateway Interface Specification; (ii) the Paging Unit
Interface Specification; and (iii) the Satellite Communication Link Interface
Specification. Separate agreements have been and are expected to be entered into
between Motorola and other appropriate parties providing for the production and
sale of IRIDIUM gateways, subscriber units and other components of the IRIDIUM
System. Motorola has also agreed to develop and sell IRIDIUM gateway equipment,
phones, paging units and MXUs to third parties and to license to responsible and
competent suppliers acceptable to Motorola, all on reasonable terms and
conditions (which may include royalty payments) mutually acceptable to Motorola
and such third parties and suppliers, the right to use the information in these
interface specifications to the extent essential for the supplier to manufacture
and sell the applicable Iridium products. The Space System Contract provides
that in connection with the grant of licenses referred to in this paragraph
Motorola may require reciprocal rights to intellectual property of the
prospective licensee.
The Space System Contract provides for 47 milestones with scheduled
completion dates ranging from January 29, 1994 to September 23, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Upon completion of each such milestone in accordance with the
contract, Iridium is obligated to pay Motorola the price corresponding to such
milestone. The contract generally provides that Iridium's exclusive remedy for
Motorola's failure to complete any or all of the interim milestones by the
scheduled dates shown on an exhibit to the Space System Contract (as they may be
adjusted) is relief of Iridium's obligation to pay the applicable amount for
such milestones until Motorola completes or is deemed to have completed such
milestones. Iridium has the right, in the event it disagrees with Motorola's
assertion that it has completed a milestone and is therefore permitted to
receive payment, to challenge such assertion by Motorola. Failure to complete
any given milestone will not relieve Iridium of its obligation to make payments
with respect to subsequent completed milestones. Failure to complete one or more
of the milestones on a timely basis so as to prevent completion of the final
milestone within twelve months of the scheduled date (as that date may have been
adjusted under the contract) in accordance with the terms of the contract as
established by clear and convincing evidence would permit Iridium to terminate
the contract if Motorola does not act to commence correction of that failure
within 30 days after receipt of notice from Iridium specifying that failure.
Failure to complete the final milestone by the scheduled completion date (as it
may be adjusted) may cause Motorola to forego all or a portion of the $150
million final milestone payment. The final milestone payment is payable in full
only if Motorola completes the final milestone on the scheduled completion date
(as that date may have been extended under the contract). The payment will be
reduced ratably each day from $150 million to $115 million if completion of the
final milestone is delayed to December 23, 1998 or to the extent that the
commitment to deliver a specified number of gateways is not met. Thereafter,
failure to complete the final milestone will result in a monthly reduction of
the remaining $115 million ratably on a monthly basis from $115 million to zero
if the final milestone is delayed to on or after September 23, 1999. The final
milestone payment penalty is stated in the Space System Contract to be Iridium's
exclusive remedy for Motorola's failure to complete the final milestone on a
timely basis, except that, under certain circumstances, Iridium may declare
Motorola in default if the final milestone is not completed within 12 months of
the scheduled date (as that date may have been adjusted under the Space System
Contract).
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Motorola will have no liability under the Space System Contract for
failures or delays in performance, including with respect to the failure to
complete the final milestone on a timely basis, to the extent that such failure
or delay results from an event that is an excusable delay or certain other
specified delays or occurrences. Further, milestone payments under the Space
System Contract will be adjusted to account for any additional costs incurred by
Motorola as a result of an excusable delay. An excusable delay is defined under
the Space System Contract to include any event beyond the reasonable control and
without the fault or negligence of Motorola and its subcontractors, which may
therefore limit the effect of the specified payment penalties. Delays in
launches of satellites caused by the actions or inactions of Motorola's launch
service subcontractors directly pursuant to their subcontracts with Motorola do
not constitute excusable delays under the contract. All other delays in the
launch of satellites arising for whatever reason not caused by Motorola would
constitute excusable delays under the contract, including delays in launches of
IRIDIUM satellites due to delays in prior launches scheduled for third parties.
Motorola has the burden of proving that an event constitutes an excusable delay.
In the event of an excusable delay, Motorola will have an obligation to use its
best efforts to mitigate the additional costs or schedule impact of the
excusable delay to the extent reasonable.
The Space System Contract provides that Motorola generally will retain
rights to the intellectual property associated with the Space Segment. Motorola
has agreed to indemnify Iridium, subject to specified qualifications and
limitations, for claims of infringement of any valid and enforceable patent on
account of the Space Segment or any part thereof provided by Motorola to Iridium
under the Space System Contract in any country of the world where an IRIDIUM
service provider has been authorized to provide IRIDIUM Services by an
authorized gateway operator and licensed, to the extent required, by the
government of such country to provide IRIDIUM Services. These qualifications and
limitations include the following: (i) Motorola's total indemnity liability for
attorneys' fees, costs and adverse judgments is limited to the amount Iridium
paid Motorola for the particular items found to infringe; (ii) if Motorola's
liability in respect of a claim or proceeding in any particular country exceeds
10% of the actual income derived by Iridium from operation of the IRIDIUM System
in that country, Iridium will cooperate in mitigating Motorola's liability,
including either terminating service in that country or releasing Motorola from
liability for patent infringement in that country in excess of such 10% amount;
and (iii) Motorola's total liability in respect of this indemnity obligation is
subject to, and counted against, the Motorola Liability Limitations set forth
under "Risk Factors -- Risks Associated with Principal Supply Contracts -- Space
System Contract." Iridium has agreed to indemnify Motorola for claims or losses
resulting from Motorola's compliance with Iridium's designs, specifications or
instructions. See "Risk Factors -- Patents and Proprietary Rights."
Motorola has agreed under the Space System Contract that it, or one of its
wholly owned subsidiaries, shall use its reasonable best efforts to obtain all
permits, licenses and approvals required by the FCC or by any applicable United
States law or regulation, as well as obtain and coordinate the necessary orbital
locations and radio frequency spectrum, to construct, launch and operate the
Space Segment. Under the Space System Contract, Motorola is responsible for all
of its costs in applying for, obtaining and renewing these licenses and
approvals and Iridium is responsible for any other expenses of Motorola in
connection with the licenses and approvals. The Space System Contract provides
that Motorola must use its reasonable best efforts to apply for and obtain
appropriate authorization from the FCC to transfer such permits, licenses and
approvals to Iridium if Iridium so requests and is, in the written opinion of
Motorola's legal counsel, lawfully qualified to hold them. Motorola is not
entitled to any reimbursement by Iridium of its expenses in obtaining or
transferring the FCC permits, licenses and approvals. As part of the security
interest granted to Motorola in conjunction with Motorola's $750 million
guarantee of the borrowings under the Guaranteed Bank Facility. Iridium has
agreed that it will not request such a transfer so long as the guarantee is
outstanding.
In addition, the Space System Contract provides that Motorola will have no
liability to Iridium or its direct or indirect customers for any damages
resulting from any loss, destruction, degradation or failure of the Space
Segment or its subsystems to operate satisfactorily. Iridium has agreed in the
Space System Contract to indemnify Motorola and its affiliates without limit
against any and all claims by third parties caused by or arising out of the
development, operation or use of any part of the Space Segment after passage of
title thereto to Iridium, except liabilities, losses and damages caused by the
willful misconduct or gross negligence of Motorola. Iridium has also granted
Motorola certain waivers of liability and has agreed to maintain at least
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$500 million of general liability insurance during the term of the Space System
Contract to cover certain third party liability risks arising out of the
development, operation or use of any part of the Space Segment after passage of
title thereto to Iridium. The remedies of Iridium and Motorola specified in the
contract for a default under the contract are exclusive of all other remedies.
The Space System Contract provides that title and risk of loss or damage to
each individual satellite will pass to Iridium upon the arrival of each
satellite at its designated orbital location in the satellite constellation.
Title and risk of loss or damage of the System Control Segment shall pass to
Iridium upon the earlier of (i) Motorola's demonstration to Iridium of each
Constellation and System Control Segment facility's acceptance plan pursuant to
the Space System Contract or (ii) completion of Milestones 40 (backup control
facility integration and test complete) and 41 (master control facility
integration and test complete) in respect to each facility.
Motorola has agreed in the Space System Contract that, without Iridium's
consent, it will not produce for itself or others a similar satellite-based
space system of a global communication system for commercial use prior to the
earlier of July 31, 2003 or the termination date of the Space System Contract.
OPERATIONS AND MAINTENANCE CONTRACT
In order to provide for the operation and maintenance of the IRIDIUM System
at a specified level of performance once it is completed pursuant to the Space
System Contract, Iridium has entered into the Operations and Maintenance
Contract with Motorola. This contract obligates Motorola, for a period of five
years after completion of the final milestone under the Space System Contract,
to operate the Space Segment and to exert its best efforts to monitor, upgrade
and replace the hardware and software of the Space Segment (including the
individual satellites) necessary to maintain it at specified minimum coverage
and capacity factors, in exchange for specified quarterly payments. The
Operations and Maintenance Contract provides for fixed quarterly payments that
range from $129.4 million per quarter in 1998, increasing annually to $178.8
million per quarter in 2006. Such payments during the initial five-year term are
expected to aggregate approximately $2.88 billion, subject to certain
adjustments. In addition, Iridium has the option to extend this contract for an
additional two years with payments based upon the quarterly payments specified
above. Such payments for the two year extension are expected to aggregate
approximately $1.33 billion. In the event that completion of the Space System
Contract and, therefore, the commencement of the five year period of the
Operations and Maintenance Contract is delayed more that six months for any
reason other than causes within the reasonable control of Motorola, the
specified quarterly payments shall be adjusted to account for any additional
costs incurred by Motorola.
Specifically, the Operations and Maintenance Contract requires Motorola to
provide the necessary labor to operate the system control segment facilities as
specified in the Space System Operations Plan and to control the satellites of
the satellite constellation and the day-to-day Space Segment management
functions, including the monitoring of the Space Segment interface with the
gateways, phones, paging units and MXUs. It also requires Motorola to exert its
best efforts to monitor, upgrade and replace the hardware and software of the
Space Segment, including the launch of additional satellites, as necessary to
maintain the Space Segment at specified minimum coverage and capacity factors.
In the event of any excusable delay, Motorola would be relieved of the
obligation to exert its best efforts to meet the specified factors, but would be
required to maintain the coverage and capacity factors at the best reasonable
level it can, and it would also be entitled to continued payment of the full
quarterly amounts under the contract and any additional costs it incurs as a
result of such excusable delay.
The Operations and Maintenance Contract provides that the title and risk of
loss or damage to each spare satellite passes to Iridium upon the earlier of its
arrival in low earth storage orbit or the date on which Motorola demonstrates to
Iridium the arrival of the satellite in its designated orbital location. The
Operations and Maintenance Contract provides for additional payments by Iridium
to Motorola (as much as $46 million per satellite) where satellites in low earth
orbit (including satellites in low earth orbit storage) are damaged by the acts
of third parties (as described therein, including contact with space debris) and
replaced by Motorola at the request of Iridium. If the cause of a partial or
complete degradation or inoperability of a satellite is not
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known to have been caused by contact with an object in space, its loss will
nonetheless be assumed to have been caused by a third party (and its replacement
cost therefore the responsibility of Iridium rather than Motorola) if the
evidence available to the parties suggests to reasonable and prudent experts
knowledgeable in the field of spacecraft orbital operations and/or space debris
that a space object (i.e., space debris) may have impacted a satellite and
caused it to become partially or completely inoperative. Iridium's cost for a
replacement satellite will be $26 million in this circumstance rather than $46
million. Moreover, the effect of damage to satellites by acts of third parties
is to be disregarded in determining the coverage and capacity factors, so that
the required performance of the Space Segment under the contract would be
reduced while the affected satellites were repaired or replaced.
TERRESTRIAL NETWORK DEVELOPMENT CONTRACT
Iridium and Motorola have entered into the Terrestrial Network Development
Contract. Under the Terrestrial Network Development Contract, Motorola agreed 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 gateway equipment from sources other
than Motorola. The Terrestrial Network Development Contract specifies certain
performance standards and service requirements for the gateways, and provides
common specifications for the gateways and improved oversight by Iridium of the
development process for the gateways. Iridium believes this streamlined the
development process and resulted in better integration of the gateways into the
IRIDIUM System. Iridium has currently agreed to pay Motorola $178.9 million
under the contract in increments tied to the completion of milestones, including
milestones relating to acceptance tests of the completed gateway design. As a
result of technological developments, changes in the desired product mix and
features of the IRIDIUM Services and the addition of enhanced system
capabilities (including ICRS, "follow-me-paging" and enhanced call intercept)
there are several pending amendments to the Terrestrial Network Development
Contract, which are estimated by Motorola to approximate an aggregate of $110
million. The cost of these amendments is reflected in Iridium's estimates of its
funding requirements.
IRIDIUM BUSINESS SUPPORT SYSTEM CONTRACT
Iridium has entered into a contract with Andersen Consulting, LLP
("Andersen") under which Andersen is developing the business support system for
the IRIDIUM System. This computer system is called the Iridium Business Support
System ("IBSS"). The IBSS will provide for typical telecommunications business
support functions, including billing, settlement, customer records, service
activation, and equipment management. In conjunction with the development of the
IBSS, Andersen is developing the gateway and service provider business systems
that will be deployed at each gateway and service provider location and which
are necessary for the gateways and service providers to operate with the IBSS
and to perform essential gateway and service provider back office business
functions.
The Iridium component of the IBSS will be located and operated at Iridium
facilities in the United States. The gateway and service provider components
will be located throughout the world. The components will be connected by a
terrestrial data network and will operate together to support the functions of
the IBSS. The IBSS is to be deployed using both custom designed software and
currently existing software purchased from commercial vendors. Because
components of the IBSS will have to be deployed around the world, it will be
necessary to meet U.S. export requirements and import requirements of other
countries.
The contract with Andersen for the development of the IBSS has been entered
into at a fixed price of $43 million. Andersen has also agreed to perform
deployment and maintenance functions of the IBSS. Andersen and Iridium are
currently negotiating the terms and conditions for the deployment and
maintenance functions. An agreement for the incorporation of the changes
necessary to accommodate the ICRS has not been negotiated.
Although Iridium believes that the development of the IBSS is proceeding in
accordance with its expectations and with its commercial activation plan, there
is no assurance that Andersen will be successful or timely in the development
and delivery of the IBSS. While the contract with Andersen for the IBSS provides
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that Iridium can secure damages from Andersen up to a set limit in the event of
Andersen's breach, the amount of such damages would be insufficient to
compensate Iridium for the loss of revenue should the IBSS fail to function for
a substantial period of time.
OTHER SYSTEM DEVELOPMENT CONTRACTS AND AMENDMENTS
In addition to the contracts described above, Iridium is currently in
negotiations with Motorola and other vendors or prospective vendors relating to
new contracts, or amendments to existing contracts, providing for the
development of new or enhanced system or service capabilities. In addition,
Iridium anticipates that it is likely that requirements will arise in the future
for additional contracts, or additional amendments to existing contracts, for
the development of system or service capabilities not currently identified, or
for other changes regarding system development or implementation. In general,
Iridium believes that it will be able to successfully complete such
negotiations, on terms that it finds acceptable, and in a time frame consistent
with the implementation of the system and service capabilities described herein,
but there can be no assurance that such negotiations will be successfully, or
timely, concluded or that the work to be performed thereunder will be
satisfactorily and timely completed.
Pending Amendments
As a result of technological developments, changes in the product mix of
the IRIDIUM Services, and scheduling adjustments, there are a variety of pending
amendments to the Space System Contract, the Terrestrial Network Development
Contract, the Operations and Maintenance Contract and the IBSS Contract. These
amendments will increase the price and may change the terms of those agreements.
The changes are likely to include delivery dates for some items and features
that are beyond the date Iridium expects to commence commercial operations.
Gateway and Service Provider Rights
Iridium has granted certain exclusive rights to most of its equity
investors to be gateway operators in specified gateway service territories. Each
investor who has been allocated a gateway service territory has entered into a
Gateway Authorization Agreement with Iridium. See "-- Gateway Authorization
Agreements." The allocation of gateway service territories is subject to any
applicable antitrust laws. The allocation of gateway rights to any investor in
Iridium is also subject to forfeiture for a number of reasons, including the
failure of such investor to obtain required authorizations within stated time
periods. The loss of gateway rights, however, does not diminish an investor's
obligations under Iridium's Limited Liability Company Agreement, including
obligations to fund committed amounts to Iridium. See "-- Gateway Authorization
Agreements" for a description of the terms of the Gateway Authorization
Agreements.
Each investor in Iridium that is allocated a gateway service territory has
been granted under Iridium's Limited Liability Company Agreement the exclusive
right, to the extent permitted by applicable law, to act as, and to designate
others to act as, an IRIDIUM satellite service provider in its allocated
territory, subject to obtaining necessary government authorizations and entering
into documentation that is acceptable to such investor and Iridium.
Obligations Relating to Spectrum Access
Each non-governmental investor that has been allocated a gateway service
territory has agreed: (i) to use its reasonable best efforts to cause the
government and other relevant authorities in jurisdictions in which such
purchaser conducts any material part of its business to ratify and adopt the
spectrum allocation and service definitions for low earth orbiting satellites
adopted at WARC-92; (ii) to use its reasonable best efforts to obtain from such
governments and authorities allocations of the frequencies necessary to operate
and use the IRIDIUM System within the jurisdictions of such governments and
authorities; and (iii) to use its reasonable best efforts to cause such
governments and authorities to facilitate the coordination of the use of such
frequencies within such government's jurisdiction. In addition, each
governmental investor has agreed: (i) to ratify and adopt the spectrum
allocation and service definitions for low earth orbiting satellites adopted at
WARC-92; (ii) to use its reasonable best efforts to facilitate the allocation of
the frequencies necessary to
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operate and use the IRIDIUM System within its country; and (iii) to use its
reasonable best efforts to facilitate the coordination of the use of such
frequencies within such government's jurisdiction.
GATEWAY AUTHORIZATION AGREEMENTS
Iridium has entered into a Gateway Authorization Agreement with each of its
investors that has been allocated a gateway service territory. The Gateway
Authorization Agreements provide that Iridium and each gateway operator will use
their reasonable best efforts to agree upon: (i) the specific location of the
gateway within the gateway operator's allocated territory; (ii) the
communications capacity of each gateway; and (iii) the specific construction and
operational schedule for each gateway (collectively, the "Gateway Master Plan").
At present, most of the gateway operators have committed to country locations
for their gateways in their respective Gateway Authorization Agreements. The
Gateway Authorization Agreements also provide that the each gateway operator
will use its reasonable best efforts to have its gateway operational in advance
of the scheduled Full Operational Capability Date.
The Gateway Authorization Agreements also provide that each gateway
operator will use its reasonable best efforts to undertake and complete on a
schedule consistent with the Gateway Master Plan the following: (i) apply for,
obtain and maintain all governmental authorizations and frequency allocations
necessary to construct and operate its gateway and provide gateway services in
its gateway service territory, (ii) contract with Motorola and/or other
suppliers to design, construct and maintain its gateway in accordance with the
Gateway Master Plan and Iridium's set of guidelines, recommendations, rules,
plans and other instructions relating to technical and operational matters
associated with operation of the IRIDIUM System (the "IRIDIUM System
Practices"), (iii) provide for the staffing, testing and operation of its
gateway in accordance with the IRIDIUM System Practices, (iv) consistent with
the applicable requirements of the IRIDIUM System Practices, establish and
maintain appropriate interconnection, access and settlement arrangements through
and with each PSTN operating within its gateway service territory that are
required to effectively distribute and utilize IRIDIUM Satellite Services within
its gateway service territory, (v) designate service providers, which may
include the gateway operator, within its gateway service territory, provide
gateway services to its service providers and require compliance by its service
providers with established guidelines, and (vi) support Iridium-approved
positions at WRCs of the ITU.
Pursuant to the Gateway Authorization Agreements, Iridium agreed to provide
to each gateway operator, including each gateway operator's designated service
providers, continuous access to the Space Segment, commencing at such time as
the gateway operator's gateway has been constructed, tested and commissioned in
accordance with the Gateway Master Plan and is in full satisfactory compliance
with the IRIDIUM System Practices. The Gateway Authorization Agreements also
provide that each gateway operator will comply with the instructions of Iridium,
when in Iridium's reasonable judgment any action is required, including
cessation of gateway transmissions. In addition, Iridium has the right to
suspend access to the Space Segment if Iridium reasonably determines that such
continued access would harm overall system operation and either (i) the gateway
operator has failed to take previously requested corrective action or (ii) the
need for immediate action by Iridium is required to avoid harm to overall system
operation.
The Gateway Authorization Agreements provide that the Iridium Board will
establish pricing policies and practices, including specific rates and currency
requirements, governing access to the Space Segment upon prior consultation with
each gateway operator, and that each gateway operator will comply with these
pricing policies and practices to the extent permitted by applicable law and
regulation.
The Gateway Authorization Agreements also provide that Iridium will use its
reasonable best efforts to establish and have operational the clearinghouse
facility, which will serve as the central point for the collection of call
detail and billing records produced within the IRIDIUM System, on or before the
Full Operational Capability Date.
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MANAGEMENT
THE COMPANY
Set forth below is information concerning each director, director nominee
and executive officer of the Company, including each individual's principal
occupation and employment. The current members of the Company Board have been
elected by Iridium and will hereafter be elected at the annual general meeting
or at any special meeting of shareholders. The exclusive right to elect members
of the Company Board is vested with the holders of Class A Common Stock. The
next annual meeting of shareholders is scheduled for April 1998. Unless
otherwise indicated, each executive officer holds office until a successor is
duly elected and qualified. There are no family relationships among executive
officers or directors of the Company. See "Risk Factors -- Company Change in
Control."
The following table sets forth information concerning the executive
officers and directors of the Company as of May 9, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Edward F. Staiano....................... 60 Chairman of the Board and Chief Executive Officer
Roy Grant............................... 40 Chief Financial Officer
Wayne Morgan............................ 53 Secretary
F. Thomas Tuttle........................ 54 Assistant Secretary
Alberto Finol........................... 62 Deputy Chairman and Director
Ulf Bohla............................... 53 Director
Robert W. Kinzie........................ 63 Director
Yoshiharu Yasuda........................ 57 Director
Richard L. Lesher(1).................... 63 Director nominee
William A. Schreyer(1).................. 68 Director nominee
</TABLE>
- ---------------
(1) Messrs. Richard L. Lesher and William A. Schreyer have agreed to serve as
Directors of the Company upon consummation of the Offerings.
EDWARD F. STAIANO -- Chairman of the Board and Chief Executive Officer.
Vice Chairman and Chief Executive Officer of Iridium since January 2, 1997 and
Director of Iridium since October 1994. Dr. Staiano served Motorola as Executive
Vice President, President and General Manager of the General Systems Sector
(comprised of the cellular subscriber group, cellular infrastructure group,
network ventures division, personal communications and the computer group) from
1989 to December 1996. Dr. Staiano has served as the Chief Executive Officer and
Director of the Company since March 1997 and as Chairman of the Board since May
1997.
ROY GRANT -- Chief Financial Officer. Vice President and Treasurer of
Iridium since November 1996 and acting Chief Financial Officer since April 30,
1997. Prior to joining Iridium, Mr. Grant served from 1992 to 1996 as Finance
Director for Edison Mission Energy, the largest independent power developer in
the United States. Mr. Grant also worked for Marriott Corporation from 1988 to
1992 in its corporate and project finance areas and at American Airlines from
1980 to 1988, most recently as its Managing Director -- Banking where he was
responsible for all of the airline's banking relationships. Mr. Grant has served
as Chief Financial Officer of the Company since April 1997.
WAYNE MORGAN -- Secretary. Mr. Morgan has been employed as a corporate
manager by Codan Services Ltd. in Bermuda since August 1996. Prior thereto, Mr.
Morgan served Johnson & Higgins (Bermuda) Limited from 1980 to 1996 in a number
of positions including Vice President and Manager of Support Services, Senior
Vice President, Client Account Management and Senior Vice President, Principal
Branch Manager. Prior to joining Johnson & Higgins, Mr. Morgan was the Deputy
Accountant General for the Government of Bermuda from 1975 to 1980. Mr. Morgan
has served as the Secretary of the Company since December 1996.
F. THOMAS TUTTLE -- Assistant Secretary. Vice President, General Counsel
and Secretary of Iridium since April 1996. Mr. Tuttle has been employed by
Iridium as Assistant Secretary since January 1994 and as
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Deputy General Counsel since November 1993. Before joining Iridium, Mr. Tuttle
was in private law practice in Washington, D.C. from 1986 to 1994. Prior
thereto, he served as Vice President, Regulatory and Industry Relations with
Satellite Business Systems and held senior legal positions with Communications
Satellite Corporation ("COMSAT Corporation"). Mr. Tuttle has served as the
Assistant Secretary of the Company since December 1996.
ALBERTO FINOL -- Deputy Chairman and Director. Director of Iridium since
July 1993; member of the Iridium Board Compensation Committee, the Iridium Board
Banking and Financing Committee and the Iridium Board Related Party Contracts
Committee. Mr. Finol has been the President of Ilapeca, a Venezuelan holding
company with interests in dairy products, supermarkets, pharmaceuticals and
communications, since 1990 and has served as a Director since 1966. He is the
Chairman of Iridium SudAmerica and the Chairman and a major shareholder of
Iridium Andes-Caribe Ltd., one of the owners of Iridium SudAmerica. He has also
served as the Director of Group Zuliano, a major Venezuelan petrochemical
holding group. He represented his native region of Zulia on the Venezuelan
Congress from 1969 to 1993. Mr. Finol has served as Deputy Chairman and a
Director of the Company since December 1996.
ULF BOHLA -- Director. Director of Iridium since October 1994; member of
the Iridium Board Banking and Financing Committee and the Iridium Board Related
Party Contracts Committee. Mr. Bohla has been the Chief Executive Officer of
o.tel.o communications GmbH since July 1, 1994 and is currently Chairman of the
Board of Vebacom Holdings, Inc. Prior thereto, he served in various positions
with IBM since 1970 including General Manager of Telecommunications at IBM
Europe from 1993 to June 1994, Vice President of International Marketing
Operations at IBM USA from 1991 to 1993 and Director of the North German region
at IBM Germany from 1989 to 1991. Mr. Bohla has served as a Director of the
Company since December 1996.
ROBERT W. KINZIE -- Director. Chairman of the Iridium Board since October
1991 and Chief Executive Officer of Iridium from October 1991 to January 1,
1997. Prior to joining Iridium, Mr. Kinzie was the Director of Strategic
Planning for Intelsat from 1987 to 1991. Prior to joining Intelsat, Mr. Kinzie
worked from 1966 to 1987 in a number of positions with COMSAT Corporation
including President, Communications Services Division and President of COMSAT
General Corporation. Prior to joining COMSAT Corporation in 1966, Mr. Kinzie was
an economist with the FCC from 1962 to 1965. Mr. Kinzie has served as a Director
of the Company since December 1996.
YOSHIHARU YASUDA -- Director. Director of Iridium since January 1996;
member of the Iridium Board Banking and Financing Committee, the Iridium Board
Compensation Committee and the Iridium Board Related Party Contracts Committee.
Mr. Yasuda has been Vice President of Nippon Iridium (Bermuda) Ltd. since June
1996 and a Director since June 1995. Mr. Yasuda was Director of DDI Corporation
from 1992 to 1995. Prior to joining DDI Corporation, Mr. Yasuda was employed by
the Sanwa Research Institute. Mr. Yasuda has served as a Director of the Company
since December 1996.
RICHARD L. LESHER -- Director Nominee. Mr. Lesher has served as the
President of the Chamber of Commerce of the United States, the world's largest
business organization, since 1975. Mr. Lesher will be appointed Independent
Company Director to Iridium upon consummation of the Offerings. Mr. Lesher has
accepted his appointment to serve as a Director of the Company, effective upon
consummation of the Offerings.
WILLIAM A. SCHREYER -- Director Nominee. Mr. Schreyer is Chairman Emeritus
of Merrill Lynch & Co., Inc. and served as Chairman of the Board from April 1985
through June 1993 and as Chief Executive Officer from July 1984 through April
1992. Mr. Schreyer is currently a Director of Callaway Golf Company, Deere &
Company, True North Communications Inc., Schering-Plough Corporation and Willis
Corroon Group. Mr. Schreyer will be appointed Independent Company Director to
Iridium upon consummation of the Offerings. Mr. Schreyer has accepted his
appointment to serve as a Director of the Company, effective upon consummation
of the Offerings.
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Executive Compensation
Currently, all executive officers of the Company (other than Mr. Morgan)
are executive officers of Iridium, are compensated by Iridium and receive no
compensation from the Company.
Director Compensation
Directors of the Company currently receive no fees for their services as
such. In connection with the appointment of Messrs. Lesher and Schreyer, each
will receive $20,000 per year plus $2,500 for each regular quarterly meeting
attended of the Company Board, or any committee meeting of the Iridium Board
held concurrently therewith, $500 for any extraordinary or telephonic meeting
attended, and reimbursement for ordinary expenses incurred in connection with
such attendance. In addition, upon appointment, Iridium will grant each of
Messrs. Lesher and Schreyer options to purchase 1,000 Class 1 Interests of
Iridium at the initial public offering price.
Indemnification; Limitation of Liability
Bermuda law permits a company to indemnify its directors and officers,
except for any act of fraud or dishonesty. The Company has provided in its
Bye-Laws that the directors and officers of the Company will be indemnified and
secured harmless to the full extent permitted by law out of the assets of the
Company from and against all actions, costs, charges, losses, damages and
expenses incurred by reason of any act done, concurred in or omitted in or about
the execution of their duties or supposed duties, other than in the case of any
fraud or dishonesty. In addition, the Company has provided in its Bye-Laws that
each shareholder of the Company agrees to waive any claim or right of action,
individually or in the right of the Company, against any director or officer of
the Company on account of any action taken by such director or officer, or the
failure of such director or officer to take any action, in the performance of
his duties with or for the Company, other than with respect to any matter
involving any fraud or dishonesty on behalf of such director or officer. The
Bye-Laws of the Company also provide for the advancement of expenses incurred by
any director or officer in defending any action, suit or proceeding prior to the
final disposition of such proceeding; provided such director or officer
undertakes to repay such amount if it shall ultimately be determined that he or
she is not entitled to indemnity by the Company.
Bermuda law also permits the Company to purchase insurance for the benefit
of its directors and officers against any liability incurred by them for the
failure to exercise the requisite care, diligence and skill in the exercise of
their powers and the discharge of their duties, or indemnifying them in respect
of any loss arising or liability incurred by them by reason of negligence,
default, breach of duty or breach of trust. The Company's directors and officers
currently are covered by an insurance policy maintained by Iridium.
At present, there is no pending material litigation or proceeding involving
a director or officer of the Company where indemnification will be required or
permitted. In addition, the Company is not aware of any threatened material
litigation or proceeding that may result in a claim for such indemnification.
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IRIDIUM
The following table sets forth information concerning the executive
officers and directors of Iridium as of May 9, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Robert W. Kinzie(1)............ 63 Chairman of the Board
Edward F. Staiano.............. 60 Vice Chairman of the Board and Chief Executive Officer
Leo Mondale.................... 38 Senior Vice President -- Marketing & Strategic
Planning
O. Bruce Dale.................. 54 Vice President -- Network Operations
Lauri J. Fitz-Pegado........... 42 Vice President -- Global Gateway Relations
Mark Gercenstein............... 45 Vice President -- Business Operations
Roy Grant...................... 40 Vice President -- Treasurer and acting Chief Financial
Officer
Dale F. Hogg................... 54 Vice President -- Human Resources
Francis Latapie................ 55 Vice President -- Government Affairs
Neal F. Meehan................. 55 Vice President -- Aeronautics
Larry G. Rands................. 56 Vice President -- Engineering
F. Thomas Tuttle............... 54 Vice President, General Counsel & Secretary
Robert N. Beury, Jr............ 44 Assistant Secretary and Deputy General Counsel
Hasan M. Binladin(4)........... 49 Director (designated by Iridium Middle East)
Ulf Bohla(1)(4)................ 53 Director (designated by Vebacom Holdings, Inc.)
Gordon J. Comerford(2)......... 60 Director (designated by Motorola)
Atilano de Oms 54 Director (designated by Iridium SudAmerica)
Sobrinho(2)(4)...............
Robert A. Ferchat(4)........... 62 Director (designated by Iridium Canada)
Alberto Finol(1)(3)(4)......... 62 Director (designated by Iridium SudAmerica)
Edward Gams(1)................. 49 Director (designated by Motorola)
Ludwig Hoffman(4).............. 52 Director (designated by Vebacom Holdings, Inc.)
Kazuo Inamori(4)............... 65 Director (designated by Nippon Iridium)
S. H. Khan(4).................. 58 Director (designated by Iridium India)
Anatoli I. Kiselev(4).......... 58 Director (designated by Khrunichev)
George S. Medawar(1)(3)(4)..... 63 Director (designated by Iridium Africa)
John F. Mitchell(3)............ 69 Director (designated by Motorola)
Jung L. Mok(3)(4).............. 48 Director (designated by Korea Mobile
Telecommunications)
Giuseppe Morganti(1)(2)(4)..... 64 Director (designated by Iridium Italia)
J. Michael Norris.............. 50 Director (designated by Motorola)
Yusai Okuyama(2)(4)............ 65 Director (designated by Nippon Iridium)
John M. Scanlon................ 55 Director (designated by Motorola)
Theodore H. Schell(1)(4)....... 53 Director (designated by Sprint)
Sribhumi Sukhanetr(3)(4)....... 64 Director (designated by Thai Satellite)
Tao-Tsun Sun(2)(4)............. 47 Director (designated by Pacific Electric Wire & Cable)
Yoshiharu Yasuda(1)(3)(4)...... 57 Director (designated by Nippon Iridium)
Wang Mei Yue(3)(4)............. 55 Director (designated by Iridium China)
Richard L. Lesher(5)........... 63 Independent Company Director nominee
William A. Schreyer(5)......... 69 Independent Company Director nominee
</TABLE>
- ---------------
(1) Members of the Banking and Financing Committee
(2) Members of the Audit Committee
(3) Members of the Compensation Committee
(4) Members of the Related Party Contracts Committee
(5) Messrs. Richard L. Lesher and William A. Schreyer have agreed to serve as
the Independent Company Directors to the Iridium Board upon consummation of
the Offerings. Mr. Lesher is expected to be appointed Vice Chairman of
Iridium and appointed to the Audit Committee, the Compensation Committee and
the Related Party Contracts Committee. Mr. Schreyer is expected to be
appointed to the Banking and Financing Committee and the Related Party
Contracts Committee.
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<PAGE> 90
Set forth below is information concerning each director, director nominee
and executive officer of Iridium, including each individual's principal
occupation and employment. Unless otherwise indicated, each executive officer
holds office until a successor is duly elected and qualified. The directors of
Iridium are designated by the Members and serve until the Member has designated
a successor. There are no family relationships between any officers and
directors of Iridium.
Executive Officers of Iridium
EDWARD F. STAIANO -- Vice Chairman and Chief Executive Officer of Iridium
since January 2, 1997 and Director since October 1994. Dr. Staiano served
Motorola as Executive Vice President, President and General Manager of the
General Systems Sector (comprised of the cellular subscriber group, cellular
infrastructure group, network ventures division, personal communications and the
computer group) from 1989 to December 1996.
LEO MONDALE -- Senior Vice President -- Marketing and Strategic Planning of
Iridium since January 1995. From July 1993 until January 1995, Mr. Mondale
served as Vice President, Government Affairs and Strategic Planning and from
January 1991 to July 1993 as Vice President -- International Relations of
Iridium. From July 1, 1990 to January 31, 1992, he was Director of International
Relations for the Satellite Communications unit of Motorola. Before joining
Motorola, Mr. Mondale served as Vice President of the Fairchild Space & Defense
Corporation, where he was responsible for the international and commercial
activities of Fairchild Space from 1989 to 1990. Prior to joining Fairchild, Mr.
Mondale was Legal Counsel to the then Space Division of Matra, S.A. (now
Matra-Marconi Space, N.V.), based in Paris, France, following several years of
private legal practice in Washington, D.C.
O. BRUCE DALE -- Vice President -- Network Operations of Iridium since
April 1995. Prior thereto, Mr. Dale served in a number of positions at Bell
Communications Research ("Bellcore") including, General Manager, Service
Assurance Systems and General Manager, Planning & Engineering System from March
1993 to April 1995, Vice President, Customer Service Center from January 1992 to
March 1993, and Assistant Vice President, Provisioning Systems Laboratory from
January 1990 to January 1992. From March 1982 to December 1989, Mr. Dale served
as Director of Data Network Systems Development Laboratory for AT&T Bell
Laboratories.
LAURI J. FITZ-PEGADO -- Vice President -- Global Gateway Relations since
May 1997. Prior to joining Iridium, Ms. Fitz-Pegado served at the U.S.
Department of Commerce as the Director General and Assistant Secretary of the
U.S. & Foreign Commercial Service (US&FCS) International Trade Administration
from June 1994 to June 1997 and as a Special Advisor to the Secretary of
Commerce from June 1993 to June 1994. From June 1982 to June 1993, Ms.
Fitz-Pegado worked at Hill & Knowlton Public Affairs Worldwide, most recently as
Managing Director and Senior Vice President.
MARK GERCENSTEIN -- Vice President -- Business Operations of Iridium since
August 1992. Prior to joining Iridium, Mr. Gercenstein was Director of Marketing
of Motorola Satellite Communications from 1990 to 1992. Prior to assuming that
position, Mr. Gercenstein held various marketing and engineering assignments at
Motorola Government Electronics Group from 1984 to 1990, Spar Aerospace from
1985 to 1987 and Bendix Aerospace from 1975 to 1982.
ROY GRANT -- Vice President -- Treasurer and acting Chief Financial Officer
of Iridium since April 30, 1997 and Vice President -- Treasurer since November
1996. Prior to joining Iridium, Mr. Grant served from 1992 to 1996 as Finance
Director for Edison Mission Energy, the largest independent power developer in
the United States. Mr. Grant also worked for Marriott Corporation from 1988 to
1992 in its corporate and project finance areas and at American Airlines from
1980 to 1988, most recently as its Managing Director -- Banking where he was
responsible for all of the airline's banking relationships.
DALE F. HOGG -- Vice President -- Human Resources of Iridium since August
1996 and Director of Human Resources since August 1994. Before joining Iridium,
Mr. Hogg was Corporate Manager, Compensation and Global Staffing for W.R. Grace
& Co. He previously served from 1985 to 1991 as Regional Director, Human
Resources for the Coca-Cola Company, from 1982 to 1985 as Vice President for
Warner Communi-
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<PAGE> 91
cations and from 1980 to 1982 as Corporate Personnel Manager for the LTV
Corporation. He has also held Human Resources positions at The Williams
Companies and Rockwell International. Additionally, he served as news anchor for
a CBS affiliate from 1972 to 1980.
FRANCIS LATAPIE -- Vice President -- Government Affairs of Iridium since
October 1996. From January 1996 until October 1996, Mr. Latapie served as
Executive Director, Government Affairs of Iridium. Before joining Iridium, Mr.
Latapie worked for Intelsat since 1974 in various management positions. From
1968 to 1974, Mr. Latapie was Scientific Attache in the United States,
representing the French Government in all matters dealing with space and
telecommunications.
NEAL F. MEEHAN -- Vice President -- Aeronautics of Iridium since April
1997. Prior to joining Iridium, Mr. Meehan served as Executive Vice President of
In-Flight Phone Corporation ("IFPC") from April 1995 and as a consultant to IFPC
from March 1992 to April 1995. Mr. Meehan was co-founder and Executive Director
of Worldwide Transportation Group, Inc. from 1991 to 1995. Mr. Meehan worked at
Texas Air Corporation from 1987 to 1990 as Senior Vice President of Customer
Services. Mr. Meehan also served as the founding President and Chief Executive
Officer of Continental Express, the regional airline subsidiary of Continental
Airlines.
LARRY G. RANDS -- Vice President -- Engineering of Iridium since August
1993. Mr. Rands was employed by Motorola Satellite Communications as Assistant
Manager System Engineering from November 1991 through July 1993. Prior thereto,
Mr. Rands spent twelve years with COMSAT Corporation, where he served in several
management positions, most recently, Senior Director of System Engineering. He
has also held positions with CONTEL/ASC, RCA Laboratories, Rockwell
International and Hughes Aircraft.
F. THOMAS TUTTLE -- Vice President, General Counsel and Secretary of
Iridium since April 1996. Mr. Tuttle had been employed by Iridium as Assistant
Secretary since January 1994 and as Deputy General Counsel since November 1993.
Before joining Iridium, Mr. Tuttle was in private law practice in Washington,
D.C. from 1986 to 1994. Prior thereto, he served as Vice President, Regulatory
and Industry Relations with Satellite Business Systems and held senior legal
positions with COMSAT Corporation.
ROBERT N. BEURY JR. -- Assistant Secretary and Deputy General Counsel of
Iridium since April 1996 and Assistant Secretary since January 1995. Mr. Beury
has been employed by Iridium as Counsel -- Corporate Matters since May 1994.
Prior to joining Iridium, he was General Counsel of the Virginia Center for
Innovative Technology from 1987 to 1994.
DIRECTORS OF IRIDIUM
ROBERT W. KINZIE -- Chairman of the Board of Iridium since October 1991 and
Chief Executive Officer from October 1991 to January 1, 1997. Prior to joining
Iridium, Mr. Kinzie was the Director of Strategic Planning for Intelsat from
1987 to 1991. Prior to joining Intelsat, Mr. Kinzie worked from 1966 to 1987 in
a number of positions with COMSAT Corporation including President,
Communications Services Division and President of COMSAT General Corporation.
Prior to joining COMSAT Corporation in 1966, Mr. Kinzie was an economist with
the FCC from 1962 to 1965.
HASAN M. BINLADIN -- Director of Iridium since January 1996. During the
past five years, Mr. Binladin has served as Senior Vice President of the Saudi
Binladin Group.
ULF BOHLA -- Director of Iridium since October 1994; member of the Banking
and Financing Committee and the Related Party Contracts Committee. Mr. Bohla has
been the Chief Executive Officer of o.tel.o communications GmbH since July 1,
1994 and is currently Chairman of the Board of Directors of Vebacom Holdings,
Inc. Prior thereto, he served in various positions with IBM since 1970 including
General Manager of Telecommunications at IBM Europe from 1993 to June 1994, Vice
President of International Marketing Operations at IBM USA from 1991 to 1993 and
Director of the North German region at IBM Germany from 1989 to 1991.
GORDON J. COMERFORD -- Director of Iridium since July 1993; Chairman of the
Audit Committee. Mr. Comerford is a member of the Board of Directors of Iridium
SudAmerica Corporation and Iridium
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<PAGE> 92
Canada, Inc. Mr. Comerford has been a Senior Vice President of Motorola since
1989. He joined Motorola's communications sector in 1974 as a Director of
Business Management and became a Corporate Vice President in 1980.
ATILANO DE OMS SOBRINHO -- Director of Iridium since June 1996; member of
the Audit Committee and the Related Party Contracts Committee. Mr. Oms is
Chairman of the Board, President and CEO of Inepar S.A., a diversified Brazilian
corporation with operations in telecommunications, electrical current control
equipment and services, mass transport, vehicle distribution and financial
markets. Mr. Oms is a member of the Board of Directors of Iridium SudAmerica and
Iridium Brasil. He also serves on the Boards of the National Confederation of
Industries (CNI), ABINEE-National Association of Electro-Electronic Industries
and the Federation of Industries of Parana State.
ROBERT A. FERCHAT -- Director of Iridium since January 1995; member of the
Related Party Contracts Committee. Mr. Ferchat has served as Chairman and
Executive Officer since May 1995 and as Chairman, President and Chief Executive
Officer from November 1994 to May 1995 at BCE Mobile Communications Inc. Prior
thereto he served as Chairman, President and Chief Executive Officer of TMI
Communications, a satellite communications company, from 1992 to 1994. He also
served as President of Northern Telecom Canada Ltd. from 1985 to 1990. Mr.
Ferchat has also served as a director at BCE Mobile Communications Inc. since
1994.
ALBERTO FINOL -- Director of Iridium since July 1993; member of the
Compensation Committee, the Banking and Financing Committee, and the Related
Party Contracts Committee. Mr. Finol has been the President of Ilapeca, a
Venezuelan holding company with interests in dairy products, supermarkets,
pharmaceuticals and communications, since 1990 and has served as a Director
since 1966. He is the Chairman of Iridium SudAmerica and the Chairman and a
major shareholder of Iridium Andes-Caribe Ltd., one of the owners of Iridium
SudAmerica. He has also served as the Director of Group Zuliano, a major
Venezuelan petrochemical holding group. He represented his native region of
Zulia on the Venezuelan Congress from 1969 to 1993.
EDWARD GAMS -- Director of Iridium since July 1993; member of the Banking
and Financing Committee. Mr. Gams has served as Corporate Vice President and
Director of Investor Relations of Motorola since 1996 and Vice President and
Director of Investor Relations of Motorola since 1991. He was first employed by
Motorola in 1979, and has held a variety of positions in operational and
corporate finance, including service as Director of Corporate Financial Planning
from February 1991 to August 1991 and as manager of Corporate Financial Planning
from December 1989 to February 1991.
LUDWIG HOFFMAN -- Director of Iridium since October 1996; member of the
Related Party Contracts Committee. Dr. Hoffman has been the Chief Executive
Officer of VEBA Telecom GmbH since July 1996. From January 1996 to July 1996,
Dr. Hoffman was head of the Telecommunication Division of VEBA AG. From 1992
until joining VEBA, Dr. Hoffman was the founder and head of the network systems
division of Siemens AG. From 1990 to 1992, Dr. Hoffman was the head of marketing
and distribution for debis Systemhaus GmbH, part of Daimler Benz AG.
KAZUO INAMORI -- Director of Iridium since July 1993; member of the Related
Party Contracts Committee. Dr. Inamori has been Chairman of the Board of DDI
Corporation since 1984, of Kansai Cellular Telephone Co., Ltd. since 1988, of
Taitoh Corporation since 1990, of Nippon Iridium Corporation since 1993, of DDI
Tokyo Pocket Telephone Inc. since 1994, of DDI Kansai Pocket Telephone Co., Ltd.
since 1994, Kyocera Multimedia Corporation since 1995 and at Kyocera DDI
Institute of Future Telecommunications Inc. since 1996. Dr. Inamori established
Kyocera Corporation in 1959 and has been Chairman of the Board since 1986.
S. H. KHAN -- Director of Iridium since October 1994, member of the Related
Party Contracts Committee. Mr. Khan has served as Chairman and Managing Director
of the Industrial Development Bank of India since December 1993. Prior thereto,
from 1966, he served in various positions with the Industrial Development Bank
of India, including Managing Director from February 1992 to December 1993 and
Executive Director from 1986 to 1992. He also serves as Chairman of the Small
Industries Development Bank
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<PAGE> 93
of India, Credit Analysis & Research Ltd., National Securities Depository Ltd.
and National Stock Exchange of India Ltd. He is also Director on the Boards of
Export-Import Bank of India, IDBI Bank Ltd., Life Insurance Corporation of
India, General Insurance Corporation of India, Discount and Finance House of
India Ltd., Deposit Insurance and Credit Guarantee Corporation and Securities
Trading Corporation of India Ltd., India Growth Fund Inc., as a Trustee of Unit
Trust of India ("UTI"), and as a Member of the Advisory Board of UTI Mutal Fund
and India Fund.
ANATOLI I. KISELEV -- Director of Iridium since July 1993; member of the
Related Party Contracts Committee. Mr. Kiselev has served as General Director of
the facility that has produced the Salyut, Almaz and Mir space stations, the
Proton rocket, and other spacecraft since 1993. Mr. Kiselev has been employed by
Khrunichev, and its predecessor organizations since 1956, including as
Khrunichev Enterprise Director from 1975 to 1993.
GEORGE S. MEDAWAR -- Director of Iridium since July 1993; member of the
Compensation Committee, the Related Party Contracts Committee and the Banking
and Financing Committee. Dr. Medawar has served as Group Senior Advisor to the
Mawarid Holding Company and Director of Mawarid Services (UK Limited) since
1987. He has also been a board member of ACE (Insurance) Holding Inc. since 1978
and of Orbit Communications Company Limited since 1993. He served as the
Chairman of the Board of Directors at Halston Borghese International from 1991
to 1994.
JOHN F. MITCHELL -- Director of Iridium since July 1993; Chairman of the
Compensation Committee since July 1993. Mr. Mitchell has served as Vice Chairman
of the Board of Motorola since 1988 and served as Officer of the Board from 1988
to 1995. He was employed by Motorola from 1953 to 1995 and served as President
from 1980 to 1986 and as Chief Operating Officer from 1986 to 1988.
JUNG L. MOK -- Director of Iridium since October 1994; member of the
Compensation Committee and the Related Party Contracts Committee. Mr. Mok has
served as a director and as the Senior Executive Vice President of Korea Mobile
Telecommunications since 1994. Prior thereto, Mr. Mok served as Senior Managing
Director and Chief Operating Officer of Taehan Telecom Limited from 1991 to 1994
and as Managing Director at USA, Inc. since 1989.
GIUSEPPE MORGANTI -- Director of Iridium since April 1996; member of the
Banking and Financing Committee, the Audit Committee and the Related Party
Contracts Committee. Since August 1996, Mr. Morganti has served as Chief
Executive Officer and Managing Director of Iridium Italia S.p.A Mr. Morganti has
been with STET since 1984 in various management positions within the Planning
and Strategic Control Department, most recently as the head of the
Telecommunications Services Division.
J. MICHAEL NORRIS -- Director of Iridium since July 1996; Mr. Norris is a
Corporate Vice President of Motorola and has been with Motorola for 24 years. He
is currently the Corporate Vice President and General Manager of the Network
Management Group, responsible for all Motorola cellular joint ventures and
IRIDIUM gateway operations worldwide. He also sits on the boards of Hutchinson
Telephone Company Ltd. (Hong Kong), World Telecom Holding Company, Ltd.
(Thailand) and Pelephone (Israel).
YUSAI OKUYAMA -- Director of Iridium since July 1996; member of the Audit
Committee and Related Party Contracts Committee. Mr. Okuyama has been President
of DDI Corporation since 1993 and President of Nippon Iridium (Bermuda) Ltd.
since 1995. Mr. Okuyama has been Chairman of the Board at seven of the DDI
Pocket Telephone Companies since 1994 and at five of the DDI Cellular Telephone
companies since 1995. Mr. Okuyama retired from MPT in 1989 as a deputy secretary
of MPT and served at MPT related enterprises as President before joining DDI
Corporation in 1993.
JOHN M. SCANLON -- Director of Iridium since January 1997. Mr. Scanlon is
Executive Vice President of Motorola and President of Motorola's Cellular
Networks & Space Sector. Mr. Scanlon joined Motorola in August 1990. Prior to
joining Motorola, Mr. Scanlon spent 24 years with AT&T, rising to the position
of Group Vice President. Mr. Scanlon is also a director of Media.Com.
THEODORE H. SCHELL -- Director of Iridium since July 1993; Chairman of the
Banking and Financing Committee and member of the Related Party Contracts
Committee. Mr. Schell has served as Senior Vice
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<PAGE> 94
President -- Strategic Planning and Corporate Development at Sprint since 1990.
Prior thereto, he served as President and Chief Executive Officer of RealCom
Communications Corporation, an IBM subsidiary.
SRIBHUMI SUKHANETR -- Director of Iridium since July 1993; member of the
Compensation Committee and the Related Party Contracts Committee. Since 1992,
Mr. Sukhanetr has been the Chairman of United Communication Industry Co., Ltd.
("UCOM") and of Thai Satellite Telecommunications Co., Ltd., a subsidiary of
UCOM. Prior thereto, he served as advisor to the Prime Minister's Office in
Thailand from February 1991 to September 1992 and as Permanent Secretary to the
Ministry of Transport and Communications from 1988 to February 1991.
TAO-TSUN SUN -- Director of Iridium since January 1994; member of the Audit
Committee and the Related Party Contracts Committee. Mr. Sun has been Executive
Director and President of Pacific Electric Wire & Cable Co., Ltd. since 1986.
Since 1996, he has served as Executive Director of Taiwan Electric Wire & Cable
Ind. Assoc. and of Chinese National Federation of Industries, and as Honorary
Chairman of the Council for Industry and Commercial Development. He has also
served as Chairman of Taiwan Aerospace Corporation since 1994, Executive
Director of Walsin Lihwa Corp. and Executive Vice Chairman of Charoong Thai Wire
& Cable Co., Ltd. since 1993 and Director of Pacific Construction Co., Ltd.
since 1995.
YOSHIHARU YASUDA -- Director of Iridium since January 1996; member of the
Banking and Financing Committee, the Compensation Committee and the Related
Party Contracts Committee. Mr. Yasuda has been Vice President of Nippon Iridium
Corporation since June 1996 and a Director since June 1995. Mr. Yasuda was
Director of DDI Corporation from 1992 to 1995. Prior to joining DDI Corporation,
Mr. Yasuda was with the Sanwa Research Institute.
WANG MEI YUE -- Director of Iridium since October 1995; member of the
Compensation Committee and the Related Party Contracts Committee. Dr. Wang has
served as Chairman and President of Iridium China (Hong Kong) Ltd. since
September 1995, as Chairman and President of China Aerospace International
Holdings Ltd., Hong Kong since 1993 and as Chairman of China Southern
Telecommunication Co., Ltd. since 1991. From 1988 to 1993 Dr. Wang served as
Vice Chairman of the Board at Conic Investment Co. Ltd.
RICHARD L. LESHER -- Independent Company Director Nominee of Iridium. Mr.
Lesher will be appointed Independent Company Director, effective upon
consummation of the Offerings, and is expected to be appointed Vice Chairman of
Iridium and appointed to the Audit Committee, the Compensation Committee and the
Related Party Contracts Committee. Mr. Lesher has served as the President of the
Chamber of Commerce of the United States, the world's largest association of
business organizations, since 1975.
WILLIAM A. SCHREYER -- Independent Company Director Nominee of Iridium. Mr.
Schreyer will be appointed Independent Company Director, effective upon
consummation of the Offerings, and is expected to be appointed to the Banking
and Financing Committee and the Related Party Contracts Committee. Mr. Schreyer
is Chairman Emeritus of Merrill Lynch & Co., Inc. and has served as Chairman of
the Board from April 1985 through June 1993 and as Chief Executive Officer from
July 1984 through April 1992. Mr. Schreyer is currently a Director of Callaway
Golf Company, Deere & Company, True North Communications Inc., Schering-Plough
Corporation and Willis Corroon Group.
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<PAGE> 95
Executive Compensation
The following table sets forth the compensation paid for the fiscal year
ended December 31, 1996 to those persons who were, at December 31, 1996,
Iridium's Chief Executive Officer and the four next most highly compensated
executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION NUMBER OF
-------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) COMPENSATION OPTIONS/SARS PAYOUT COMPENSATION
- ------------------------------ ---- -------- -------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert W. Kinzie
Chairman & Former Chief
Executive Officer........... 1996 $372,194 $117,669 $1,596(b) 90,000 -- $ 7,819(c)
Jerrold D. Adams
Former President & Chief
Operating Officer........... 1996 301,772 98,010 -- 75,000 -- 4,500(d)
Paul V. Daverio
Former Chief Financial
Officer..................... 1996 234,236 46,580 -- 45,000 -- 4,500(d)
Leo Mondale
Senior Vice President --
Marketing & Strategic
Planning.................... 1996 220,561 100,000 -- 45,000 -- 4,500(d)
Mark Gercenstein
Vice President -- Business
Operations.................. 1996 201,692 62,909 -- 45,000 -- 4,500(d)
</TABLE>
- ---------------
(a) Through the fiscal year ending December 31, 1995 Iridium maintained the
Iridium Long Range Incentive Plan of 1993 (the "Plan"). The Plan was
terminated as of December 31, 1995. Final awards for performance in Fiscal
Year 1995 were determined by the Compensation Committee of the Iridium Board
in April 1996. The Iridium Option Plan (described elsewhere) was at that
time substituted for the Plan. Under the Long Range Incentive Plan amounts
were earned each year and credited to an account established for the
participant. Amounts in each account earn interest at 1% over the prime rate
until the end of the performance cycle which runs from 1993 through 1998.
The amounts in each account will become payable in fiscal year 1999, subject
to forfeiture in the event the participant's employment with Iridium is
terminated for any reason other than death, disability, retirement or a
change from full-time to part-time employment. As of December 31, 1996, the
amount in each participant's account was: Mr. Kinzie -- $715,941, Mr.
Adams -- $566,501, Mr. Daverio -- $258,179, Mr. Mondale -- $337,771, and Mr.
Gercenstein -- $328,945. Mr. Adams received the balance of his account on
February 1, 1997. For all other executive officers these amounts will
continue to earn interest until paid in 1999.
(b) Amount paid representing reimbursement of federal income taxes due to income
imputed by reason of life insurance provided.
(c) Value of term life insurance ($3,319) and Iridium matching contribution to
401(k) plan ($4,500).
(d) Iridium matching contributions to 401(k) plan.
Mr. Adams retired on February 1, 1997. Pursuant to the terms of the
Selected Senior Officer's Supplemental Retirement Plan, Mr. Adams elected to
receive an immediate cash payment in the amount of $2,649,957 (the value of the
annuity to which he was entitled under the plan). The Compensation Committee of
the Iridium Board permitted Mr. Adams to receive the amount in his Iridium Long
Range Incentive Plan account ($569,806) and permitted him to retain his vested
options to purchase 16,275 Class 1 Interests at a price of $13.33 per Class 1
Interest pursuant to the Iridium Option Plan as provided in the plan with
respect to retirement, provided that Mr. Adams entered into a non-competition
agreement.
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<PAGE> 96
Mr. Daverio resigned from the Company and Iridium, effective April 1, 1997.
The Compensation Committee of the Iridium Board permitted Mr. Daverio to receive
the amount in his Iridium Long Range Incentive Plan account ($264,956),
permitted him to retain his vested options to purchase 12,000 Class 1 Interests
at a price of $13.33 per Class 1 Interest pursuant to the Iridium Option Plan as
provided with respect to retirement, and granted him a severance payment equal
to his salary through December 31, 1997 ($164,333), provided that Mr. Daverio
enter into a non-competition agreement.
On January 2, 1997, Edward F. Staiano became Chief Executive Officer and
Vice Chairman of the Iridium Board. Pursuant to the terms of his employment
agreement, Dr. Staiano will receive a base salary of $500,000 per year. In
addition to base salary, Iridium has agreed to provide Dr. Staiano, at its
expense, with a car, a furnished apartment in Washington, D.C. and access to a
corporate jet aircraft. Iridium has agreed to provide reimbursement for any tax
liability created as a result of the use of those items. Dr. Staiano was also
awarded options to purchase 750,000 Class 1 Interests of Iridium at a price of
$13.33 per Interest. The options vest, pro rata, over a period of five years.
Vested options may be exercised at any time after a public offering. Dr.
Staiano's options will continue to vest even if his employment is terminated by
Iridium, other than for cause, so long as he is not retained or employed by a
competitor. Dr. Staiano does not receive an annual bonus or participate in
Iridium's retirement plans.
Option Grants
The following table sets forth the options granted for the fiscal year
ended December 31, 1996 for each named executive officer.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE
TOTAL AT ASSUMED ANNUAL
NUMBER OF OPTIONS/SARS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OF OPTION TERM
OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME GRANTED YEAR (S/SH) DATE 5%($) 10%($)
- ----------------------- ------------ ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Kinzie....... 90,000 12.3 $ 13.33 12/31/05 $754,670 $1,912,490
Jerrold D. Adams....... 75,000 10.3 $ 13.33 12/31/05 628,890 1,593,740
Paul V. Daverio........ 45,000 6.2 $ 13.33 12/31/05 377,335 956,245
Leo Mondale............ 45,000 6.2 $ 13.33 12/31/05 377,335 956,245
Mark Gercenstein....... 45,000 6.2 $ 13.33 12/31/05 377,335 956,245
</TABLE>
Year End Option/SAR Table
The following table shows certain information with respect to stock options
held as of December 31, 1996 by the named executive officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS/SAR
AT FISCAL YEAR-END AT FISCAL YEAR END
SHARE ACQUIRED ----------------------------- ----------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- --------------- --------------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Kinzie..... -- $-- -- 90,000 -- $--
Jerrold D. Adams..... -- -- -- 75,000 -- --
Paul V. Daverio...... -- -- -- 45,000 -- --
Leo Mondale.......... -- -- -- 45,000 -- --
Mark Gercenstein..... -- -- -- 45,000 -- --
</TABLE>
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<PAGE> 97
Compensation Committee Interlocks and Insider Participation
Iridium's Compensation Committee determines the compensation of Iridium's
executive officers consistent with guidelines established by the Iridium Board.
The members of Iridium's Compensation Committee for the fiscal year ending
December 31, 1996 were Alberto Finol, George S. Medawar, John F. Mitchell, Jung
L. Mok, Sribhumi Sukhanetr, Wang Mei Yue and Yoshiharu Yasuda. The Iridium
Compensation Committee was chaired by Mr. Mitchell, formerly an executive
officer of Motorola, who continues to serve as Vice Chairman of the Board of
Directors of Motorola. See "Certain Relationships and Related Transactions of
Iridium." Messrs. Mitchell and Finol serve as the Chairman and Deputy Chairman
of the Company, respectively.
Pension Plan
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
125,000............................. $ 36,964 $ 49,286 $ 61,607 $ 73,929 $ 86,250
150,000............................. 45,000 60,000 75,000 90,000 105,000
175,000............................. 53,036 70,714 88,393 106,071 123,750
200,000............................. 61,071 81,429 101,786 122,143 142,500
225,000............................. 69,107 92,143 115,179 138,214 161,250
250,000............................. 77,143 102,857 128,571 154,286 180,000
300,000............................. 93,214 124,286 155,357 186,429 217,500
400,000............................. 125,357 167,143 208,929 250,714 292,500
450,000............................. 141,429 188,571 235,714 282,857 330,000
500,000............................. 157,500 210,000 262,500 315,000 367,500
</TABLE>
Iridium maintains the Iridium LLC Pension Plan (the "Pension Plan") for the
benefit of its employees. The Pension Plan is a defined benefit plan and is
qualified under the provisions of the U.S. Internal Revenue Code related to such
plans. Benefits payable under the Pension Plan are computed on the basis of a
single life annuity payable at age 65 and are subject to a partial offset by
Social Security payments. Compensation taken into account for purposes of
computing the benefits payable under the Pension Plan generally includes final
average salary, bonuses and qualified salary deferrals. Although the U.S.
Internal Revenue Code of 1986, as amended, limits the amount of covered
compensation under the Pension Plan to $150,000 subject to adjustment (the
"Compensation Cap"), the table above also reflects benefits payable under a
supplemental retirement income plan (the "Supplemental Plan") established by
Iridium for the benefit of employees whose compensation exceeds the Compensation
Cap or whose benefit would be limited by Section 415 of the U.S. Internal
Revenue Code. Benefits under the Supplemental Plan are calculated in the same
manner as the Pension Plan. Under the Supplemental Plan, Iridium will pay the
employee an amount which together with the amounts due under the Pension Plan
will equal what the employee would have received under the Pension Plan if the
Compensation Cap was not in effect. Mr. Kinzie has five years of credited
service; Mr. Adams has retired as of February 1, 1997, and is currently
collecting a pension on the basis of seven years of credited service under the
Pension Plan; Mr. Daverio had three years of credited service at the time of his
resignation; Mr. Mondale has six years of credited service; and Mr. Gercenstein
has 11 years of credited service. Messrs. Kinzie, Adams, Mondale and Gercenstein
participate in the Pension Plan but do not participate in the Supplemental Plan.
Prior to his resignation, Mr. Daverio participated in both the Pension Plan and
the Supplemental Plan.
Iridium maintains a supplementary retirement plan for selected senior
officers. The plan provides for an annual income, normally beginning at age 60,
equal to the larger of (i) 40% of the participant's compensation (salary plus an
adjustment for bonuses) at retirement or (ii) the annual benefit calculated
using the formula under the Supplemental Plan, in either case reduced by any
amount payable under the Pension Plan. Regardless of which formula is used, the
total retirement income cannot exceed 70% of an individual's retiring salary. At
retirement a participant receives an annuity purchased by Iridium from an
insurance company sufficient to make the payments required. Iridium also pays to
the participant or to the proper taxing authorities an amount sufficient to pay
the income taxes arising from the purchase of the annuity for the
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<PAGE> 98
participant. A participant also has the option of receiving a lump sum equal to
the purchase price of the annuity. As with the annuity Iridium pays the income
taxes arising from the payment of the lump sum. Based on salary levels at
January 1, 1997 and average short term incentive plan bonuses for the last five
years, the estimated annual benefit payable if the recipient elected an annuity
would be: Mr. Kinzie $200,339, Mr. Mondale $127,248 and Mr. Gercenstein
$112,462. On February 1, 1997 Mr. Adams retired and received a lump sum payment
in lieu of an annuity.
Employment Arrangements
Motorola had entered into an individual agreement with Robert W. Kinzie
providing him with a right to reemployment with Motorola should he become
unemployed by Iridium because Iridium was no longer a viable business entity or
because his services were no longer desired by Iridium for reasons other than
misconduct (as the term is defined by Motorola policy). This agreement was in
effect until December 31, 1996.
On January 2, 1997, Edward F. Staiano became Chief Executive Officer and
Vice Chairman of the Iridium Board. Pursuant to the terms of his employment
agreement, Dr. Staiano will receive a base salary of $500,000 per year. In
addition to base salary, Iridium has agreed to provide Dr. Staiano, at its
expense, with a car, a furnished apartment in Washington, D.C. and access to a
corporate jet aircraft. Iridium has agreed to provide reimbursement for any tax
liability created as a result of the use of those items. Dr. Staiano was also
awarded options to purchase 750,000 Class 1 Interests of Iridium at a price of
$13.33 per Interest. The options vest, pro rata, over a period of five years.
Vested options may be exercised at any time after a public offering. Generally,
Dr. Staiano's options are subject to all of the provisions of the Iridium Option
Plan (described elsewhere) except that Dr. Staiano's options will continue to
vest even if his employment is terminated by Iridium, other than for cause, so
long as he is not retained or employed by a competitor. Dr. Staiano does not
receive an annual bonus or participate in Iridium's pension plans.
IRIDIUM Option Plan
Iridium has established a plan under which executive officers and managers
of Iridium are awarded options to purchase Class 1 Interests of Iridium (the
"Option Plan"). The Option Plan covers 2,625,000 Class 1 Interests. The Option
Plan also permits the award of stock appreciation rights in connection with any
grant of options. As of April 30, 1997, options covering 1,863,150 Class 1
Interests had been granted at an exercise price of $13.33 per Class 1 Interest.
As of that date no stock appreciation awards had been granted. This amount of
outstanding options includes the options issued to Dr. Staiano when he joined
Iridium and do not include the options issuable to Mr. Lesher and Mr. Schreyer
effective upon their appointment as directors of the Company and Iridium. If an
award under the Option Plan expires, or is terminated, surrendered or canceled,
the Class 1 Interests subject to such award are added to the number of Class 1
Interests available for awards under the Option Plan.
Under the Option Plan, option awards are made from time to time by the
Compensation Committee of the Iridium Board. The exercise price of options under
the Option Plan is the fair market value of a Class 1 Interest on the date the
option is granted.
The right to exercise the options vests, pro rata, over a period of five
years, however, all options and stock appreciation rights become immediately
vested on a Change in Control (as defined in the Option Plan) and in the event
of a Change in Control, Iridium is required to purchase each outstanding option
and stock appreciation right for an immediate lump sum payment equal to the
difference between (i) the higher of (x) the fair market value of a Class 1
Interest immediately prior to payment or (y) the highest price actually paid in
connection with the Change in Control, and (iii) the exercise price. A "Change
in Control" is defined in the Option Plan as a sale by one or more holders of
50% or more of the outstanding Class 1 Interests, other than in connection with
a Public Offering (as defined), to third parties who are not holders of Class 1
Interests or affiliated with holders of Class 1 Interests and following which
the members of the Iridium Board prior to the sale cease to constitute a
majority of the Iridium Board. Once vested an option may be exercised at any
time after a Public Offering. The term "Public Offering" includes a registered
public offering by Iridium or another entity which is a special purpose member
of Iridium. The Offerings will constitute a Public Offering under the Option
Plan.
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<PAGE> 99
The plan was established in April 1996 and all options granted to date have
an exercise price of $13.33 per Class 1 Interest. Except for Dr. Staiano, under
the Option Plan, a participant whose employment is terminated by Iridium
forfeits any unvested options. There are exceptions for death, retirement and
certain other situations. Dr. Staiano's options will continue to vest even if
his employment is terminated by Iridium, other than for cause, so long as he is
not retained or employed by a competitor.
The Option Plan will be amended, effective as of the date of consummation
of the Offerings, to provide that each outstanding option to acquire a Class 1
Interest shall automatically become an option to acquire a share of Class A
Common Stock at the same exercise price then in effect. The Company has agreed
that upon the exercise of any options, it will issue to Iridium, for delivery to
an exercising option holder, the number of shares of Class A Common Stock
covered by the exercised options and Iridium has agreed to simultaneously
deliver to the Company a like number of Class 1 Interests. The exercise price of
the option will be paid to Iridium and will represent payment for the Class A
Common Stock by the exercising option holder and for the Class 1 Interests by
the Company. See "Governance of the Company and Relationship with
Iridium -- Share Issuance Agreement." All options and stock appreciation rights
issued in the future shall relate to shares of Class A Common Stock. The Change
in Control vesting provision will continue to apply to Changes in Control of
Iridium.
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<PAGE> 100
INTEREST OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Iridium's Class 1 Interests as of the date of this Prospectus (i)
by each person known by Iridium to own beneficially more than five percent of
its Class 1 Interests and (ii) by all of Iridium's executive officers and
directors (named in the table under "Management" above) as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(1)
- ------------------------------------------------------ -------------------------- -------------------
<S> <C> <C>
Motorola, Inc. ....................................... 41,025,373 28.25%
1303 East Algonquin Rd.
Schaumburg, IL 60196
Nippon Iridium (Bermuda) Limited(3)................... 15,750,000 11.15
c/o NIPPON IRIDIUM CORPORATION
Ichibancho FS Building 8
Ichibancho Chiyoda-ku
Tokyo 102 Japan
Vebacom Holdings, Inc.(4)............................. 12,427,875 8.80
c/o o.tel.o communications GmbH
Am Bonneshof 35
D-40474 Dusseldorf Germany
All Directors and Executive Officers as a Group(5).... 178,414 *
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to the Class 1 Interests. Class 1 Interests subject to options
or warrants currently exercisable or exercisable within 60 days of the date
of this Prospectus are deemed outstanding for computing the percentage
ownership of the person holding such options or warrants, but are not deemed
outstanding for computing the percentage of any other person. The percent of
class includes Class 1 Interests issued to the Company in connection with
the Offerings.
(2) The Class 1 Interests beneficially owned by Motorola include 26,533,425
Class 1 Interests held directly by Motorola and 3,520,705 Class 1 Interests
issuable under a warrant to purchase Series M Class 2 Interests in Iridium
which would be convertible into Class 1 Interests equal to 2.5% of the fully
diluted number of Class 1 Interests outstanding at the time of exercise. The
remaining Class 1 Interests shown in the table as being beneficially owned
by Motorola consists of 5,250,000 Class 1 Interests held by Iridium Canada
(33.3% of which is owned by a subsidiary of Motorola) and 5,250,000 Class 1
Interests held by Iridium India Telecom (20% of which is owned by a
subsidiary of Motorola). Although Motorola does not have the right to vote
or dispose of the Class 1 Interests held by these companies, it may be
deemed to beneficially own these interests because these companies cannot
dispose of their Class 1 Interests without the consent of the applicable
Motorola subsidiary. The beneficial ownership of Motorola does not include
Class 1 Interests issuable under warrants to which Motorola will become
entitled after the date of this Prospectus as a result of its guarantee of
borrowings by Iridium or Class 1 Interests that may be issued pursuant to
the Reserve Capital Call. See "Dilution."
(3) Nippon Iridium (Bermuda) Limited is a wholly owned subsidiary of Nippon
Iridium Corporation, which is a consortium formed by DDI Corporation.
(4) Vebacom Holdings, Inc. is a wholly owned subsidiary of o.tel.o
communications GmbH, which is owned by VEBA Telecom GmbH and Lehman Brothers
Bankhaus Aktiengesellschaft (as a fiduciary).
(5) Up to 2,625,000 Class 1 Interests may be issued pursuant to the Iridium
Option Plan. As of the date of this Prospectus, options covering an
aggregate of 1,376,400 Class 1 Interests had been granted to Iridium's
executive officers and directors. Such options will become exercisable
following consummation of the Offerings as and to the extent they become
vested. See "Management -- IRIDIUM Option Plan."
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<PAGE> 101
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF IRIDIUM
Motorola is one of the world's leading providers of electronic equipment,
systems, components and services. Its products include two-way radios, pagers,
cellular telephones and systems, semiconductors, defense and aerospace
electronics, automotive and industrial electronics, computers, and data
communications and information processing equipment.
Motorola created and developed the concept of the IRIDIUM System and
Iridium's initial technical and business plans. Motorola is a founding investor,
has been allocated gateway service territories, shares a gateway service
territory and has additional interests in other entities which have been
allocated gateway service territories. Motorola is Iridium's largest member,
owning directly and indirectly approximately 23% of the Class 1 Interests in
Iridium. The Iridium Board and its management include numerous current and
former Motorola employees.
Motorola is also Iridium's principal supplier through the Space System
Contract, the Operations and Maintenance Contract and the Terrestrial Network
Development Contract. In addition, Motorola has guaranteed Iridium's borrowings
under the Guaranteed Bank Facility. In connection with providing its guarantee
of borrowings under the Guaranteed Bank Facility, Motorola was granted a
security interest in substantially all of Iridium's assets, Iridium agreed not
to take specified actions without Motorola's approval, and Motorola also was
granted the right to appoint an additional Director on the Iridium Board and is
being compensated in the form of warrants to purchase Class 1 Interests. See
"Risk Factors -- Dilution Risk" and "Dilution." If the Guaranteed Bank Facility
is increased by $350 million, Motorola will receive additional warrants to
purchase Class 1 Interests and other concessions including increased Iridium
Board representation. If the Guaranteed Bank Facility is extended beyond its
August 1998 maturity date, Motorola will receive additional warrants in respect
of guaranteed borrowings. Motorola holds a warrant to acquire Series M Class 2
Interests in an amount that would be convertible into 2.5% of the outstanding
Class 1 Interests at the time of exercise of the warrant, calculated on a fully
diluted basis, at a price of $13.33 per Interest, subject to antidilution
adjustments.
Motorola has and may have various conflicts of interest with Iridium and
its members. See "Risk Factors -- Conflicts of Interest with Motorola." Motorola
is the principal supplier to Iridium as well as the actual or prospective
supplier and licensor to gateway owners and operators, service providers,
subscriber equipment manufacturers and individual subscribers. See "Risk
Factors -- Reliance on Motorola, Gateway Owners and Other Third Parties."
Motorola has asserted and may assert positions on the Space System Contract,
Operations and Maintenance Contract, the Terrestrial Network Development
Contract and the Guarantee Agreement that are contrary to those asserted by
Iridium. See "Principal Contracts for the Development of the IRIDIUM System" and
"Risk Factors -- Risk of Highly Leveraged Capital Structure; Risk of Default on
Existing Commitments" and "-- Satellite Launch Risks." To help ameliorate these
conflicts under the Space System Contract, the Operations and Maintenance
Contract and the Terrestrial Network Development Contract, Iridium maintains a
Related Party Contracts Committee of the Iridium Board which consists of all
Board members other than any Board members who are directors, officers,
employees or persons nominated to serve on the Board of Directors by Motorola
(so long as Motorola is a party to the Space System Contract, the Operations and
Maintenance Contract or the Terrestrial Network Development Contract), Lockheed
Martin or Raytheon (so long as Lockheed Martin or Raytheon, as the case may be,
are subcontractors to Motorola under the Space System Contract or the Operations
and Maintenance Contract). The Related Party Contracts Committee has authority
to review and monitor the Space System Contract, the Operations and Maintenance
Contract and the Terrestrial Network Development Contract and, as it deems
appropriate, cause Iridium to enforce its rights thereunder and propose
amendments and waivers to these contracts. Iridium's payment obligations under
these contracts are expected to comprise most of Iridium's expenses and the
proceeds of the Offerings will be used primarily to make milestone payments
under the Space System Contract and the Terrestrial Network Development
Contract. See "Risk Factors -- Conflicts of Interest with Motorola."
Motorola has been involved in the manufacture of components for satellites
for over thirty years. Motorola has informed Iridium that it has under
consideration possible future space-based data and communications systems and
ventures. Motorola has also informed Iridium that Motorola may decide to
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<PAGE> 102
undertake further development of one or more such systems or ventures but no
decision has been made as to whether Iridium would be a participant in any such
system or venture. It is possible that any such system could be competitive to
some degree with the IRIDIUM System. Motorola has agreed in the Space System
Contract that, without Iridium's consent, it will not produce for itself or
others a similar satellite-based space system of a global communication system
for commercial use prior to the earlier of July 31, 2003 or the termination date
of the Space System Contract. Subsidiaries of Motorola have applied, and are
expected to apply in the near future, to the FCC for licenses to construct,
launch and operate satellite-based systems designed to provide fixed-broadband,
fixed-data and fixed-voice transmissions.
Iridium Services Deutschland, a wholly owned subsidiary of o.tel.o
communications GmbH, the parent of Vebacom Holdings, Inc., a holder of
approximately 10% of the Class 1 Interests, was allocated a gateway service
territory consisting of several countries in or near Europe. Nippon Iridium
Corporation, an affiliate of Nippon Iridium (Bermuda) Corporation, a holder of
approximately 12% of the Class 1 Interests, was allocated the Japan gateway
service territory. Each of o.tel.o communications GmbH and Nippon Iridium
Corporation have entered into a Gateway Authorization Agreement, pursuant to
which they, or their affiliates, will operate their respective Gateway service
territory and provide gateway services. In addition, o.tel.o communications GmbH
and Nippon Iridium Corporation will serve as service providers to their
respective gateway territory and, as such, will be entitled to payments
associated with sales of IRIDIUM Services.
Kyocera, an affiliate of Nippon Iridium Corporation, a holder of
approximately 12% of the Class 1 Interests, has entered into a license agreement
with Motorola with respect to the development and manufacture of multi-mode
phones for use with the IRIDIUM System. This license agreement does not obligate
Kyocera to develop, manufacture or sell any IRIDIUM subscriber equipment.
Iridium expects that Kyocera will develop, manufacture and sell multi-mode
phones for use with the IRIDIUM System. Iridium intends to enter into a contract
with Motorola to cover the expenses associated with testing the Kyocera
subscriber equipment with the IRIDIUM System, estimated to be $12.2 million.
Certain of the directors of the Company are, or have been within the past
year, executive officers of suppliers of Iridium. In addition, certain of the
directors of Iridium are executive officers of gateway owners and service
providers. See "Management" and "Risk Factors -- Conflict of Interest with
Gateway Owners."
Under a Support Agreement, Motorola provides certain general and
administrative support to Iridium. On a cost reimbursable basis, Motorola has
provided payroll processing and related benefits to Iridium employees, processed
payment to certain contractors providing support to Iridium and has provided
other administrative support. The amount of the services provided by Motorola
has declined as Iridium's internal staff has increased. In 1996, total payments
to Motorola under the Support Agreement were approximately $852,000.
IRIDIUM'S INVESTORS, NUMBER OF CLASS 1 INTERESTS OWNED,
PERCENTAGE OWNERSHIP AND PRINCIPAL GATEWAY SERVICE TERRITORIES
Set forth below is a summary of the investors in Iridium, the number of
Class 1 Interests owned by each investor, their percentage ownership of Class 1
Interests and, if applicable, their principal gateway service territories:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OWNERSHIP(2)
CLASS 1 --------------------
INTERESTS AS PRINCIPAL GATEWAY
INVESTOR OWNED(1) ACTUAL ADJUSTED(3) SERVICE TERRITORY
- ------------------------------ ---------- ------ ----------- -------------------------------
<S> <C> <C> <C> <C>
The Company................. 12,000,000 -- 8.5 Not Applicable
Iridium Africa
Corporation.............. 3,000,000 2.3 2.1 Africa (excluding Morocco and
Egypt) and Turkey
Iridium Andes -- Caribe..... 4,350,000 3.4 3.1 South America and Caribbean(5)
Iridium Brasil Ltda. ....... 2,824,725 2.2 2.0 South America and Caribbean(5)
Iridium Canada, Inc......... 5,250,000(6) 4.1 3.7 North America(4)
Iridium China (Hong Kong)
Ltd. .................... 5,250,000 4.1 3.7 China, Mongolia, Hong Kong and
Macau
Iridium India Telecom
Limited.................. 5,250,000 4.1 3.7 Indian Subcontinent
</TABLE>
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<PAGE> 103
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OWNERSHIP(2)
CLASS 1 --------------------
INTERESTS AS PRINCIPAL GATEWAY
INVESTOR OWNED(1) ACTUAL ADJUSTED(3) SERVICE TERRITORY
- ------------------------------ ---------- ------ ----------- -------------------------------
<S> <C> <C> <C> <C>
Iridium Italia S.p.A. ...... 5,550,000 4.3 3.9 Certain countries in Europe
including Belgium, Denmark,
France, Greece, Italy,
Luxembourg, the Netherlands
and Switzerland(5)
Iridium Middle East
Corporation.............. 6,000,000 4.6 4.3 Middle East, Morocco, Egypt and
Central Asia
Khrunichev State Research
and Production Center.... 6,133,125 4.7 4.3 Russia and eight other
republics of the Commonwealth
of Independent States
Korea Mobile Telecom
Communications
Corporation.............. 5,250,000(6) 4.0 3.7 North Korea and South Korea
Motorola, Inc............... 26,533,425(6) 20.5 18.8 North America(4), Mexico(7) and
Central America, South
America and Caribbean(5)
Nippon Iridium (Bermuda)
Limited.................. 15,750,000 12.2 11.2 Japan
Pacific Electric Wire &
Cable Co., Ltd. ......... 5,250,000 4.1 3.7 Indonesia, Brunei, Papua New
Guinea, the Philippines and
Taiwan
South Pacific Iridium
Holdings Limited......... 7,500,000 5.8 5.3 Certain countries in the South
Pacific region including
Australia and New Zealand
Sprint Iridium, Inc. ....... 5,250,000 4.1 3.7 North America(4)
Thai Satellite
Telecommunications Co.,
Ltd. .................... 5,250,000 4.0 3.7 Southeast Asia
Vebacom Holdings, Inc. ..... 12,427,875 9.6 8.8 Certain countries in or near
Europe including Austria,
Bulgaria, the Czech Republic,
Finland, Germany, Hungary,
Ireland, Israel, Norway,
Poland, Portugal, Romania,
Spain, Sweden, Slovakia,
Ukraine and the United
Kingdom
Lockheed Martin
Corporation.............. 1,500,000 1.2 1.1 Not Applicable
Raytheon Company............ 900,000 0.7 0.7 Not Applicable
</TABLE>
- ---------------
(1) Represents each investor's direct holdings of outstanding Class 1 Interests,
excluding Class 1 Interests issuable upon exercise of outstanding warrants
and conversion of outstanding convertible securities. The amount for the
Company assumes that the Underwriters' over-allotment options are not
exercised.
(2) The percentages do not give effect to any Class 1 Interests that the Company
may have acquired or will acquire as a result of the application of the
proceeds from the sale of shares of the Company's non-voting Class B Common
Stock, par value $.01 per share (the "Class B Common Stock") pursuant to the
Global Ownership Program. See "The Company -- Global Ownership Program."
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<PAGE> 104
(3) As adjusted to reflect the issuance and sale of 12,000,000 shares of Class A
Common Stock in connection with the Offerings and the application of the net
proceeds therefrom to the purchase by the Company of approximately
12,000,000 Class 1 Interests. See "Use of Proceeds" and "Capitalization."
(4) The North American gateway service territory, principally consisting of the
United States and Canada, is shared by Iridium Canada, Motorola and Sprint.
(5) The South America and Caribbean gateway service territory is owned and will
be operated by Iridium SudAmerica. Iridium SudAmerica is owned by Iridium
Brasil, Iridium Andes-Caribe, Motorola International Development
Corporation, a wholly owned subsidiary of Motorola, and Iridium Italia.
(6) As of April 30, 1997, Korea Mobile Telecommunications Corporation and Sprint
Iridium, Inc. each owned 13,550 Series A Class 2 Interests in addition to
the Class 1 Interest set forth above. Similarly, Motorola, Inc. also owns 1
Series B Class 2 Interest and 75 Series C Class 2 Interests. BCE Mobile
Communications, Inc., an affiliate of Iridium Canada, Inc., owns 9,206
Series Class 2 Interests.
(7) It is anticipated that the Mexican gateway service territory initially will
be served by the North American gateway equipment.
IRIDIUM AFRICA CORPORATION was formed by Mawarid Overseas Company Limited
to invest in Iridium. Mawarid Overseas Company Limited is related to the Mawarid
Group, one of the largest industrial groups in Saudi Arabia, with operations in
satellite broadcasting, financial services, trading, manufacturing,
construction, telecommunications, and municipal and health care services.
Iridium Africa Corporation has been allocated a gateway service territory
consisting of over 50 countries located primarily in or near Africa (excluding
Morocco and Egypt) and Turkey.
IRIDIUM CANADA, INC. is a corporation owned one-third by a Motorola
subsidiary and one-third each by two subsidiaries of BCE, Inc. -- BCE Mobile
Communications, Inc. and Bell Canada International, Inc. BCE, Inc. is Canada's
largest telecommunications company. BCE Mobile provides a variety of wireless
telecommunications services to the Canadian market, including cellular, paging,
data and air-to-ground communications services. Iridium Canada, Inc., Motorola
and Sprint Corporation share the North American gateway service territory,
consisting of Canada, St. Pierre and Miquelon, Bermuda, Puerto Rico and the
United States.
IRIDIUM CHINA (HONG KONG) LTD. is a wholly-owned subsidiary of China
Aerospace, a major diversified industrial group based in China which is also the
parent company of China Great Wall Industries Corporation, the previous owner of
all Iridium China equity interests in Iridium. China Great Wall is a
subcontractor to Motorola to launch IRIDIUM satellites on its Long March 2C
rocket. Iridium China has been allocated a gateway service territory consisting
of China, Mongolia, Hong Kong and Macau.
IRIDIUM INDIA TELECOM LIMITED is a consortium of Indian financial
institutions that invested in Iridium initially through Infrastructure Leasing &
Financial Services Limited ("IL&FS"). The consortium includes: The Industrial
Development Bank of India, IL&FS, Exim Bank of India, State Bank of India, The
Industrial Credit and Investment Corporation of India Limited, General Insurance
Corporation of India, Housing Development Finance Corporation Limited, IL&FS
Venture Fund, Life Insurance Corporation of India, SCICI Ltd. and Unit Trust of
India. A wholly-owned subsidiary of Motorola, Inc. is also a member of the
consortium. Iridium India Telecom Ltd. has been allocated a gateway service
territory consisting of India, Bangladesh, Bhutan, Nepal, Sri Lanka and
Maldives.
IRIDIUM ITALIA S.P.A. is an affiliate of STET -- Societa Finanziaria
Telefonica per Azioni ("STET"). STET is the holding company of an integrated
telecommunication group and is one of the largest corporations in Italy. Its
largest subsidiary, Telecom Italia, is the principal provider of voice and data
telecommunications services in Italy and is the world's fifth largest telecom
operator by number of subscribers. STET (or affiliated companies) is providing
engineering support services to Motorola as part of the procurement and
operation of the IRIDIUM System. Motorola has entered into several agreements
with an affiliate of STET, Nuova Telespazio, for work related to the backup
system control facility, gateways and other portions of the IRIDIUM System. See
"Business -- Status of IRIDIUM System Development and Implementation."
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<PAGE> 105
Iridium Italia has been allocated a gateway service territory consisting of
certain countries in Europe including Belgium, Denmark, France, Greece, Italy,
Luxembourg, the Netherlands and Switzerland.
IRIDIUM MIDDLE EAST CORPORATION is owned one-half by Mawarid Overseas
Company Limited and one-half by Trinford Investments S.A. Trinford Investments
is a company affiliated with the Saudi Binladin Group. Binladin is also one of
the largest diversified industrial groups in Saudi Arabia, with operations
covering major construction projects, airport maintenance and operation,
telecommunications and hotels. Both Mawarid and Binladin operate
internationally. Iridium Middle East Corporation has been allocated a gateway
service territory consisting of over 20 countries located in the Middle East and
Central Asia, as well as Morocco and Egypt.
IRIDIUM SUDAMERICA CORPORATION is owned by Iridium Andes-Caribe, Iridium
Brasil Ltda., Iridium Italia and a wholly-owned subsidiary of Motorola. Iridium
Andes-Caribe is a consortium of private Venezuelan investors with experience in
consumer foodstuffs, communications, construction, finance and retailing.
Inepar, the majority owner of Iridium Brasil, is a diversified Brazilian
corporation with operations in telecommunications, electrical current control
equipment and services, mass transport, vehicle distribution and financial
markets. Iridium SudAmerica has been allocated a gateway service territory
consisting of approximately 40 countries located primarily in South America and
the Caribbean.
KHRUNICHEV STATE RESEARCH AND PRODUCTION SPACE CENTER is a state-owned
aerospace engineering and manufacturing company in the Russian Federation.
Khrunichev has been engaged in the manufacture of launch vehicles, orbital
stations and other space equipment for more than 30 years. Khrunichev has
contracted to provide launch services to Motorola with the Proton rocket as part
of the deployment of the space segment. Khrunichev has also been allocated a
gateway service territory consisting of Belarus, Estonia, Georgia, Kazakhstan,
Latvia, Lithuania, Moldova, the Russian Federation and Uzbekistan.
KOREA MOBILE TELECOMMUNICATIONS CORPORATION was formed by Korea
Telecommunications Corporation to provide cellular and paging services in the
Republic of Korea. Management control of Korea Mobile Telecommunications
Corporation is held by Sunkyong Business Group, a large Korean conglomerate.
Korea Mobile Telecommunications Corporation has been allocated the gateway
service territory consisting of North Korea and South Korea.
MOTOROLA, INC. is one of the world's leading providers of wireless
communications and electronic equipment, systems, components and services for
worldwide markets. Motorola products include two-way radios, pagers, personal
communications systems, cellular telephones and systems, discrete semiconductors
and integrated circuits, defense and aerospace electronics, automotive and
industrial electronics, computers, data communications, and information
processing and handling equipment. Motorola is the primary contractor to Iridium
and the IRIDIUM gateway operators for the procurement of components of the
IRIDIUM System. See "Business -- Progress to Date." Motorola has also been
allocated, or otherwise received: (i) a share of the North American gateway
service territory along with Iridium Canada, Inc. and Sprint Corporation; (ii)
the entire Mexican/Central American gateway service territory; (iii) an interest
in Iridium SudAmerica, which has been allocated the gateway service territory
including South America and the Caribbean; and (iv) an interest in Iridium India
Telecom Limited, which has been allocated the gateway service territory for the
Indian subcontinent.
NIPPON IRIDIUM (BERMUDA) LIMITED is a wholly owned subsidiary of Nippon
Iridium Corporation which is a consortium company formed in Bermuda by DDI
Corporation, Japan's leading independent telecommunications company and a
provider of cellular, PHS and long distance telephone service, and Kyocera
Corporation, a supplier of ceramic integrated circuit packages, electronic
components and electronic equipment. Investors in Nippon Iridium Corporation
include Kansai Cellular Telephone Co., Ltd., Ushio Inc., SECOM Co., Ltd., Sony
Corporation, Mitsui & Co., Ltd., Kyushu Cellular Telephone Co., Ltd., Chugoku
Cellular Telephone Co., Ltd., Shikoku Cellular Telephone Co., Ltd., Tohoku
Cellular Telephone Co., Ltd., Hokuriku Cellular Telephone Co., Ltd., Hokkaido
Cellular Telephone Co., Ltd., The Sanwa Bank Limited, Daiwa Securities Co.,
Ltd., The Industrial Bank of Japan, Limited, The Long-Term Credit Bank of Japan,
Ltd., and Mitsubishi Corporation. Nippon Iridium Corporation has been allocated
the Japan gateway service territory.
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PACIFIC ELECTRIC WIRE & CABLE CO., LTD. ("PEWC") is a diversified
international corporation with interests in telecommunications services,
property development, banking and financial services and securities investment.
PEWC is the largest producer of telecommunications and power cable in Taiwan.
PEWC has been allocated a gateway service territory consisting of Taiwan,
Indonesia, Brunei, Papua New Guinea and the Philippines.
SOUTH PACIFIC IRIDIUM HOLDINGS LIMITED is a subsidiary of P.T. Bakrie &
Brothers ("Bakrie"), a major Indonesian conglomerate, with operations in
plantations, rubber trading, infrastructure support and telecommunications.
Through subsidiaries, including P.T. Bakrie Communications Corporation, Bakrie
provides cellular services in Indonesia (Ratelindo), Australia (Link
Communications) and fixed wire services in Vietnam and Uzbekistan. In connection
with its investment in Iridium, South Pacific Iridium Holdings Limited was
allocated the South Pacific gateway service territory.
SPRINT IRIDIUM, INC. is an indirect wholly owned subsidiary of Sprint
Corporation. Sprint Corporation is a diversified telecommunications company with
the only nationwide all-digital fiber-optic network in the United States. Its
divisions provide global voice, data and video conferencing services and related
products. Sprint Corporation has been allocated a share of the North American
gateway service territory along with Iridium Canada, Inc. and Motorola.
THAI SATELLITE TELECOMMUNICATIONS CO., LTD. is a company formed by United
Communications Industry Co., Ltd. of Thailand ("UCOM") to invest in Iridium.
UCOM is one of the largest cellular and paging operators in Thailand and is also
a reseller of communications equipment. Thai Satellite Telecommunications Co.,
Ltd. has been allocated a gateway service territory consisting of Cambodia,
Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam.
VEBACOM HOLDINGS, INC., a wholly owned subsidiary of o.tel.o communications
GmbH, which is owned by VEBA Telecom GmbH and Lehman Brothers Bankhaus
Aktiengesellschaft (as a fiduciary). VEBA AG, the indirect owner of o.tel.o
communications GmbH, together with its subsidiaries, is one of the largest
corporations in Germany. Its telecommunications branch offers a wide variety of
telecommunications services including mobile communications, satellite
communications services, network management, cable television and paging
services. Vebacom has been allocated a gateway service territory consisting of
countries in or near Europe including Austria, Bulgaria, the Czech Republic,
Finland, Germany, Hungary, Ireland, Israel, Norway, Poland, Portugal, Romania,
Spain, Sweden, Slovakia, Ukraine and the United Kingdom.
The following investors have not been allocated a gateway service
territory:
LOCKHEED MARTIN CORPORATION is a world leader in defense and space systems
technology, designing and producing military aircraft, missiles, electronic
systems and satellites, as well as providing a wide range of government and
commercial aeronautical, space, environmental and engineering services. Lockheed
Martin is a principal subcontractor to Motorola in the construction of IRIDIUM
satellites.
RAYTHEON COMPANY is engaged in the conception, development, manufacture and
sale of electronic systems, equipment and components for government and
commercial use. Raytheon also has operations in aircraft products and energy and
environmental services. Raytheon is a principal subcontractor to Motorola in the
construction of the IRIDIUM System and is primarily responsible for providing
the main mission antennas for the satellites.
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GOVERNANCE OF THE COMPANY AND RELATIONSHIP WITH IRIDIUM
The power and authority to conduct and manage the business of the Company
is vested in the Company Board. Upon consummation of the Offerings, the Company
Board will be comprised of seven members, a majority of whom also will be
executive officers of Iridium or one of Iridium's other members. At least two
members of the Company Board will at all times be persons not currently employed
by or affiliated with Iridium or Motorola or any other member of Iridium owning
more than five percent of the outstanding Class 1 Interests (the "Independent
Company Directors"). See "Description of Capital Stock" and "Management."
PARTICIPATION IN THE GOVERNANCE OF IRIDIUM
Iridium is governed by the Iridium Board. The members of Iridium may manage
Iridium only through their election of Directors, and have no authority, in
their capacity as members, to act on behalf of Iridium. The Company has waived
the limitation on liability provided by the Delaware Limited Liability Company
Act. The other members of Iridium have not waived this limitation and do not
have liability with respect to the debts or obligations of Iridium in excess of
their investment in their interests in Iridium. Notwithstanding the Company's
unlimited liability with respect to Iridium, the holders of Class A Common Stock
will not have liability under Bermuda law with respect to their shares of Class
A Common Stock other than the possible loss in the value of those shares. See
"Description of Iridium LLC Limited Liability Company Agreement -- Limitations
on Liability."
The Company was formed to act as a special-purpose member of Iridium. The
LLC Agreement provides that the Company will have certain special membership
rights during the period (the "Company Special Rights Period") commencing on the
first date that the Company's Class 1 Interests represent five percent or more
of the total outstanding Class 1 Interests (which will occur on the consummation
of the Offerings) and ending on the date of delivery by Iridium of notice of the
termination of the Company's special rights following (i) the sale or other
disposition by the Company of Class 1 Interests, if, as a result of such sale or
other disposition, the Company's Class 1 Interests represent less than five
percent of the total outstanding Class 1 Interests or (ii) following the
occurrence of a Company Change in Control. "Company Change of Control" means an
event or series of events not approved either by members of Iridium owning a
majority of the Class 1 Interests or by a majority of the Iridium Board, at a
time when the Company owns Class 1 Interests representing less than 50% of the
outstanding Class 1 Interests, as a result of which (a) any "person" or "group"
(as such terms are defined in Section 12(d) and 14(d) of the Securities Exchange
Act of 1934 (the "Exchange Act")) other than Iridium becomes the beneficial
owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of more than 30% of the Company's outstanding common stock (or
equivalent securities), (b) the Company consolidates with or merges into another
corporation or conveys, transfers or leases all or substantially all of its
assets to any person, or any corporation consolidates with or merges into the
Company, in either event pursuant to a transaction in which the Company's
outstanding common stock is changed into or exchanged for cash, securities or
other property, other than any transaction (i) between the Company and either
Iridium, an affiliate of Iridium or a wholly-owned subsidiary of Iridium, or
(ii) after which the shareholders who beneficially owned the Company's common
stock immediately before such transaction beneficially own at least 50% of the
outstanding voting stock of the surviving entity and no person beneficially owns
more than 30% of the outstanding voting stock of the surviving entity, or (c)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Company Board (together with any new directors whose
election by the Company Board or whose nomination for election was approved by a
vote of 66 2/3% of the members of the Company Board then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Company Board then in office.
During the Company Special Rights Period (i) the Company shall be entitled
to designate two Independent Company Directors as Directors of Iridium, (ii) one
Director of Iridium designated by the Company shall be elected Vice Chairman of
the Iridium Board and (iii) one Director of Iridium designated by the Company
shall be a member of each committee of the Iridium Board. Pursuant to the LLC
Agreement, the Company will not be entitled to appoint more than two Directors
to the Iridium Board even if its
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ownership interest increases and it would otherwise have been entitled to
additional appointment rights. In addition to any other voting rights which the
Company may have under the LLC Agreement, under the Delaware Limited Liability
Company Act or otherwise, during the Company Special Rights Period, Iridium may
not take any of the following actions, or permit any of the following actions or
events to occur, without the consent of one of the Directors of Iridium
designated by the Company (the "Company's Special Rights Consent"): (i) make any
material amendments or modifications to the LLC Agreement; (ii) approve any
business plan of Iridium that would result in any material change in the purpose
of Iridium as set forth in the LLC Agreement or otherwise change Iridium's
business so that it varies materially from the business purpose contemplated by
the LLC Agreement; (iii) acquire, other than in the ordinary course of business
of Iridium, (a) a controlling interest or a majority of the voting stock or
equity of, any corporation or other entity that would be a Significant
Subsidiary (as such term is defined in the rules under the Securities Act of
1933) or (b) any other assets if the aggregate fair market value thereof is
greater than $50 million; (iv) sell, lease (as lessor), exchange or otherwise
dispose of all or substantially all of the assets of Iridium (other than to a
person controlled by Iridium); (v) cause the dissolution and/or liquidation of
Iridium; or (vi) take certain bankruptcy or insolvency related actions with
respect to Iridium.
EXCHANGE RIGHTS OF IRIDIUM MEMBERS
Pursuant to an Interest Exchange Agreement (the "Interest Exchange
Agreement"), the Company has agreed that after the Exchange Date (defined below)
and subject to the restrictions on transfer in the LLC Agreement it will permit
holders of Class 1 Interests of Iridium to exchange those interests for shares
of Class A Common Stock at a ratio of one share of Class A Common Stock for each
Class 1 Interest (subject to anti-dilution adjustments). See "Description of
Iridium LLC Limited Liability Company Agreement -- Issuance of Additional
Interests; Restrictions on Transfer; Rights of First Refusal" for a description
of certain restrictions on transfer of the Class 1 Interests contained in the
LLC Agreement. If a holder of Class 1 Interests (a "Class 1 Holder") desires to
effect an exchange of all or a portion of its Class 1 Interests it must provide
written notice to the Company and Iridium. No exchange shall take place unless
approved by Iridium, pursuant to authorization of Directors representing at
least 66 2/3% of the Iridium Board. The Exchange Date is the 90th day following
the first fiscal quarter in which Iridium has achieved positive earnings before
interest, taxes, depreciation and amortization. In order to exercise its rights
under the Interest Exchange Agreement, a holder of Class 1 Interests and its
affiliates must be in full compliance with the LLC Agreement and any Gateway
Authorization Agreement to which it is a party. Iridium and the Company have the
right to defer exchanges under the Interest Exchange Agreement if doing so is in
the best interests of Iridium or the Company in light of possible or pending
financing transactions.
Under the Interest Exchange Agreement, the Company has agreed that at any
time after the Exchange Date, the Company will, at the request of Class 1
Holders and holders of Class A Common Stock acquired under the Interest Exchange
Agreement, representing not less than 2% of the Fully Diluted Class A Shares
(defined below), file with the United States Securities and Exchange Commission
a registration statement and use its reasonable best efforts to have that
registration statement remain effective for a period of up to six months,
permitting such holders to sell shares of Class A Common Stock in the manner
specified by those holders. The Company has certain rights to defer the filing
of a registration statement or to cause holders to stop distributing securities
under an effective registration statement. Registering holders are required to
pay their pro rata portion of the costs of registration. "Fully Diluted Class A
Shares" means all shares of Class A Common Stock actually outstanding and the
aggregate number of shares of Class A Common Stock issuable under the Interest
Exchange Agreement in exchange for Class 1 Interests at the then applicable
exchange rate, whether or not the Class 1 Interests are then exchangeable. At
the request of Iridium, acting pursuant to authorization of Directors
representing at least 66 2/3% of the Iridium Board, the Company will take all
reasonable steps to register pursuant to these provisions any other shares of
Class A Common Stock acquired under the Interest Exchange Agreement specified by
Iridium.
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1997 SUBSCRIPTION AGREEMENT
The Company and Iridium have entered into a 1997 Subscription Agreement
pursuant to which the Company is making the Offerings. The 1997 Subscription
Agreement provides that the Company will use the net proceeds from the Offerings
to acquire 12,000,000 (13,800,000 if the Underwriters' over-allotment options
are exercised in full) Class 1 Interests from Iridium at an aggregate purchase
price equal to the net proceeds of the Offerings. Iridium has agreed to
reimburse the Company for all costs and expenses it incurs in the Offerings.
Iridium has also agreed to indemnify the Company and each of its officers,
directors and employees against any losses, claims, damages or liabilities to
which the Company or such officer, director or employee may become subject
except to the extent that any such loss, damage or liability arises out of or is
based upon an intentional act or omission of an indemnified party which was
contrary to any written instruction or request of Iridium or which amounted to
willful misconduct on the part of the indemnified party.
SHARE ISSUANCE AGREEMENT
The Company and Iridium have entered into a Share Issuance Agreement
governing primary offerings of securities by the Company in the future. The
Share Issuance Agreement provides that all net proceeds from the sale of
securities by the Company will be invested by the Company in membership
interests in Iridium. Following the Offerings, the Company will not issue any
securities except pursuant to the Share Issuance Agreement, the Interest
Exchange Agreement and the Global Ownership Program described below. The Company
has agreed that if requested by Iridium it will use its best efforts to sell
securities of the Company in compliance with all applicable laws and will cease
to do so, if requested by Iridium.
If the Company sells Class A Common Stock pursuant to the Share Issuance
Agreement, Iridium will issue to the Company, in exchange for the net proceeds
of such offering, one Class 1 Interest for each share of Class A Common Stock
sold by the Company (subject to anti-dilution adjustments). If Iridium directs
the Company to issue securities other than Class A Common Stock, Iridium will
issue to the Company interests in or securities of Iridium, in exchange for the
net proceeds of such offering, which replicate as nearly as possible, the
economic attributes of the securities sold by the Company. Iridium has agreed to
pay all expenses incurred by the Company in connection with any issuance of
securities under the Share Issuance Agreement and to indemnify the Company and
its officers, directors and employees against certain losses, claims, damages or
liabilities. The Company also has agreed to issue Class A Common Stock pursuant
to the Share Issuance Agreement in connection with the Option Plan. Iridium will
issue to the Company one Class 1 Interest for each share of Class A Common Stock
issued by the Company in connection with the IRIDIUM Option Plan (subject to
anti-dilution adjustments).
GLOBAL OWNERSHIP PROGRAM
The Company and Iridium will commence a Global Ownership Program which is
designed to offer an equity investment opportunity in the Company to certain
governmental telecommunication administrations and related entities (the
"Telecom Administrations") as part of a comprehensive program to enhance market
access, improve the competitive standing of the IRIDIUM System and achieve
appropriate regulatory approvals. Under the Global Ownership Program, the
Company will sell shares of its Class B Common Stock to Telecom Administrations
designated from time to time by Iridium. The Company has authorized the issuance
of up to 2,500,000 shares of Class B Common Stock under the Global Ownership
Program. No shares of Class B Common Stock are outstanding. The Class B Common
Stock will be sold to Telecom Administrations at a price per share equal to
$13.33. At the time of issuance, the purchasers in the Global Ownership Program
will only be required to pay an amount equal to the par value per share of the
Class B Common Stock -- $.01 per share. The balance of the purchase price will
be payable through the withholding of dividends, if any, which would otherwise
be payable on the shares of Class B Common Stock. A purchaser will have the
right but not the obligation to pay the purchase price in cash at any time,
except as otherwise required under Bermuda law (e.g., on winding up). The Class
B Common Stock will be nontransferable until the latest of (i) the date on which
the full purchase price for the shares has been paid (through withheld dividends
or otherwise), (ii) the date on which certain specified regulatory approvals
have been obtained to the satisfaction of Iridium and (iii) the date that is one
year after the date of issuance of the Class B Common
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Stock (the "Transferability Date"). The Class B Common Stock is also subject to
restrictions on transfer under applicable securities laws and the purchasers
will agree not to transfer the Class B Common Stock to a U.S. Person (as
defined). The Company will have the right to repurchase the Class B Common Stock
from any holder at a price equal to the portion of the purchase price paid
through the date of repurchase, if the specified regulatory approvals applicable
to that holder have not been obtained by a specified date. The Company and the
holder have the right to cause the Class B Common Stock to be exchanged for
Class A Common Stock at any time after the Transferability Date. The initial
exchange rate will be one share of Class A Common Stock for each share of Class
B Common Stock exchanged and such rate is subject to anti-dilution adjustments.
At the time of issuance of any shares of Class B Common Stock, the Company will
acquire from Iridium Class 1 Membership Interests at a rate of one Class 1
Interest for each share of Class B Common Stock issued (subject to anti-dilution
adjustments). The purchase price for the Class 1 Interests will be identical to
the proceeds to the Company from the issuance of the Class B Common Stock, with
all but a nominal amount deferred and paid through an offset against
distributions that would otherwise be payable on the Class 1 Interests acquired.
The LLC Agreement provides that if any portion of the purchase price for an
interest in Iridium is payable after the issuance of the interest, the Iridium
Board may restrict the rights otherwise incident to the holding of such
interest. The Company may require Iridium to repurchase Class 1 Interests in an
amount corresponding to any Class B Common Stock repurchased by the Company.
Iridium has agreed to pay or reimburse the Company for the payment of all
expenses incurred by the Company in connection with the Global Ownership Program
and to indemnify the Company and its officers, directors and employees against
certain losses, claims, damages or liabilities.
MANAGEMENT SERVICES AGREEMENT
The Company and Iridium have entered into a Management Services Agreement
pursuant to which Iridium has agreed to supervise and manage the day-to-day
operations of the Company and the Company has agreed to allow Iridium to do so.
Iridium will implement or cause to be implemented all policy decisions relating
to the operations of the Company approved by the Company Board and to conduct or
cause to be conducted the ordinary and usual business and affairs of the
Company. The Company Board has the right to give Iridium written instructions,
not inconsistent with the terms of the Management Services Agreement, with
respect to matters arising under the agreement and Iridium is required to follow
such instructions. Among other things, Iridium will be responsible for
administering the following functions of the Company: treasury, accounting,
legal, tax, insurance, licenses and permits, investor relations, public
relations and securities law compliance and stock listing compliance. Iridium
has no authority under the Management Services Agreement to give any notice or
to approve any matter under the LLC Agreement on behalf of the Company,
including, but not limited to the Company's Special Rights Consent. Iridium also
will advance funds to the Company, under certain conditions, to enable the
Company to pay any income tax liability that cannot be satisfied by
distributions to the Company on its Class 1 Interests. See "Description of
Iridium LLC Limited Liability Company Agreement." Iridium will receive no fees
or expense reimbursement for its services under the Management Services
Agreement. The Management Services Agreement is only terminable with the consent
of both Iridium and the Company, except that Iridium has the right to terminate
the agreement after the occurrence of a Company Change of Control. See
"-- Participation in the Governance of Iridium."
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DESCRIPTION OF CAPITAL STOCK
The following discussion is based upon the advice of Conyers, Dill &
Pearman, Bermuda counsel for the Company.
The Company was incorporated as an exempted company under the Companies Act
1981 of Bermuda, as amended from time to time (the "Bermuda Act"), and the
rights of its shareholders, including those persons who will become shareholders
of the Company in connection with the Offerings, are governed by Bermuda law and
the Company's Memorandum of Association and Bye-Laws. The following is a summary
of certain provisions of Bermuda law and the Company's organizational documents.
This summary is not a comprehensive description of such laws and documents and
is qualified in its entirety by appropriate reference to Bermuda law and to the
organizational documents of the Company. Reference is made to the Company's
Memorandum of Association and Bye-Laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part and
prospective investors are urged to read the exhibits for a complete
understanding of the terms of the Memorandum of Association and Bye-Laws.
The authorized capital of the Company consists of 50,000,000 shares of
Class A Common Stock and 2,500,000 shares of Class B Common Stock. Prior to the
consummation of the Offerings there will be 1,200,000 shares of Class A Common
Stock outstanding, all of which are held by Iridium, and no shares of Class B
Common Stock outstanding. In connection with the Offerings, the Company will
repurchase and cancel the shares of Class A Common Stock held by Iridium at par
value ($.01 per share). Upon consummation of the Offerings the only shares of
Class A Common Stock outstanding will be the shares of Class A Common Stock
issued in the Offerings. See "Shares Eligible for Future Sale."
COMMON STOCK
Voting Rights
Under Bermuda law, questions brought before a general meeting of
shareholders are decided by a majority vote of shareholders present at the
meeting and entitled to vote (or by such majority as the Bermuda Act or the
Bye-Laws of the Company prescribe), each shareholder owning shares entitled to
vote having one vote, irrespective of the number of shares held, unless a poll
is requested. The Company's Bye-Laws provide that, subject to the provisions of
the Bermuda Act, any questions proposed for the consideration of the
shareholders will be decided by a simple majority of the votes cast, with each
shareholder that is entitled to vote and present, in person or by proxy,
entitled to one vote. If a poll is requested, each shareholder that is entitled
to vote and present in person or by proxy has one vote for each share of stock
entitled to vote on such question. A poll may only be requested under the
Company's Bye-Laws by (i) the chairman of the meeting, (ii) at least three
shareholders present in person and entitled to vote or represented by proxy,
(iii) any shareholder or shareholders, present in person or by proxy, holding
between them not less that 10% of the total voting rights of all shareholders
having the right to vote at such meeting or (iv) a shareholder or shareholders
present in person or by proxy holding voting shares in the Company on which an
aggregate sum has been paid-up equal to not less than 10% of the total sum
paid-up on all such voting shares. The holders of Class A Common Stock are
entitled to one vote per share. The holders of Class B Common Stock have no
voting rights, except as required by Bermuda law in connection with matters
involving a variation in terms of the Class B Common Stock.
Dividend Rights
Under Bermuda law, a company may pay such dividends as are declared from
time to time by its board of directors unless there are reasonable grounds for
believing that the company is or would, after the payment, be unable to pay its
liabilities as they become due or that the realizable value of its assets would
thereby be less than the aggregate of its liabilities and issued share capital
and share premium accounts. See "Dividend Policy." Each share of Class A Common
Stock and Class B Common Stock is entitled to dividends if, as and when
dividends are declared by the Company Board. Any dividend declared and payable
in cash, capital stock or other property must be paid equally on a
share-for-share basis on the Class A Common Stock and the Class B Common Stock,
except as described below. Dividends and distributions payable in shares of
Class A
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Common Stock may only be paid on Class A Common Stock, and dividends and
distributions payable in shares of Class B Common Stock may only be paid on
Class B Common Stock. If a dividend or distribution payable in shares of Class A
Common Stock is made on the Class A Common Stock, a simultaneous and equivalent
dividend or distribution in shares of Class B Common Stock must be made on the
Class B Common Stock. If a dividend or distribution payable in shares of Class B
Common Stock is made on Class B Common Stock, a simultaneous and equivalent
dividend or distribution in shares of Class A Common Stock must be made on the
Class A Common Stock.
Conversion Rights
The Class A Common Stock is not convertible. Each share of Class B Common
Stock is exchangeable into one share of Class A Common Stock on the terms set by
the Company Board. The shares of Class B Common Stock to be issued in connection
with the Company's Global Ownership Program are the only shares of Class B
Common Stock authorized. The exchange rights set by the Company Board for such
shares of Class B Common Stock are described under "Governance of the Company
and Relationship with Iridium -- Global Ownership Program."
Preemptive Rights
Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have preemptive rights to purchase any shares of the Company's
capital stock.
Transfer Restrictions
Shares of Class A Common Stock are not subject to restrictions on transfer
under the Company's Memorandum of Association and Bye-Laws. Shares of Class B
Common Stock are subject to any transfer restrictions set by the Company Board.
The shares of Class B Common Stock issued in connection with the Company's
Global Ownership Program are the only shares of Class B Common Stock authorized.
The transfer restrictions set by the Company Board on such shares of Class B
Common Stock are described under "Governance of the Company and Relationship
with Iridium -- Global Ownership Program."
Rights in Liquidation
Under Bermuda law, in the event of liquidation, dissolution or winding-up
of a company, after satisfaction in full of all claims of creditors and subject
to the preferential rights accorded to any series of preferred stock, the
proceeds of such liquidation, dissolution or winding-up are distributed pro rata
among the holders of common stock in accordance with the Company's Bye-Laws. The
holders of the Class A Common Stock and the holders of the Class B Common Stock
are entitled to participate equally on a share-for-share basis in all
distributions to holders of common stock in any liquidation, dissolution or
winding-up of the Company.
Meetings of Shareholders
Under Bermuda law, a company is required to convene at least one general
shareholders' meeting per calendar year. Bermuda law provides that a special
general meeting may be called by the board of directors of a company and must be
called upon the request of shareholders holding not less than 10% of the paid-up
capital of the company carrying the right to vote. Bermuda law also requires
that shareholders be given at least five days' advance notice of a general
meeting but the accidental omission of notice to any person does not invalidate
the proceedings at a meeting. The Bye-Laws of the Company provide that the
president or the chairman or any two directors or any director and the secretary
may convene a special general meeting of the Company whenever in their judgment
such a meeting is necessary. Under the Bye-Laws of the Company, at least ten
days' notice of the annual general meeting and at least five days' notice of any
special general meeting must be given to each shareholder entitled to vote
thereat, unless it is agreed that the meeting has been properly called by (i) in
the case of an annual general meeting, all of the shareholders entitled to
attend and vote at such meeting or (ii) in the case of a special general
meeting, shareholders holding at least 95% of the shares given the right to
attend and vote at such meeting.
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Under Bermuda law, the number of shareholders constituting a quorum at any
general meeting of shareholders is determined by the Bye-laws of a company. The
Company's Bye-Laws provide that the presence of at least two persons present in
person and representing in person or by proxy in excess of 50% of the total
issued voting shares in the Company throughout the meeting shall constitute a
quorum.
Access to Books and Records and Dissemination of Information
Members of the general public have the right to inspect the public
documents of a company available at the office of the Registrar of Companies in
Bermuda. These documents include the Company's Memorandum of Association
(including its objects and powers) and any alteration to the Company's
Memorandum of Association. The shareholders have the additional right to inspect
the Bye-Laws of the Company, minutes of general meetings and the Company's
audited financial statements, which must be presented at the annual general
meeting. The register of shareholders of a company is also open to inspection by
shareholders without charge and to members of the general public on the payment
of a fee. A company is required to maintain its share register in Bermuda but
may, subject to the provisions of the Bermuda Act, establish a branch register
outside Bermuda. A company is required to keep at its registered office a
register of its directors and officers which is open for inspection for not less
than two hours in each day by members of the public without charge. Bermuda law
does not, however, provide a general right for shareholders to inspect or obtain
copies of any other corporate records.
Election or Removal of Directors
Under Bermuda law and the Company's Bye-Laws, directors are elected at the
annual general meeting or at any special general meeting called for the purpose
and shall hold office for such term as the shareholders may determine, or in the
absence of such determination, until the next annual general meeting or until
their successors are elected or appointed, unless they are earlier removed or
resign.
Under Bermuda law and the Bye-Laws of the Company, a director may be
removed at a special general meeting of shareholders specifically called for
that purpose, provided that the director was served with at least 14 days'
notice. The director has a right to be heard at the meeting. Any vacancy created
by the removal of a director at a special general meeting may be filled at such
meeting by the election of another director in his or her place or, in the
absence of any such election, by the Company Board.
Amendment of Memorandum of Association and Bye-Laws
Bermuda law provides that the Memorandum of Association of a company may be
amended by a resolution passed at a general meeting of shareholders of which due
notice has been given. An amendment to the Memorandum of Association other than
an amendment which alters or reduces a company's share capital as provided in
the Bermuda Act, also requires the approval of the Bermuda Minister of Finance,
who may grant or withhold approval at his discretion. The Bye-Laws of the
Company provide that no Bye-Law shall be rescinded, altered or amended and no
new Bye-Law shall be made unless it has been approved by a resolution of the
Company Board and by a resolution of the shareholders.
Under Bermuda law, the holders of an aggregate or not less than 20% in par
value of a company's issued share capital have the right to apply to a court of
appropriate jurisdiction in Bermuda (a "Bermuda Court") for an annulment of any
amendment of the Memorandum of Association adopted by shareholders at any
general meeting, other than an amendment which alters or reduces a company's
share capital as provided in the Bermuda Act. Where such an application is made,
the amendment becomes effective only to the extent that it is confirmed by the
Bermuda Court. An application for amendment of the Memorandum of Association
must be made within 21 days after the date on which the resolution altering the
Company's Memorandum of Association is passed and may be made on behalf of the
persons entitled to make the application by one or more of their number as they
may appoint in writing for the purpose. No such application may be made by
persons voting in favor of the amendment.
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Appraisal Rights and Shareholder Suits
Under Bermuda law, in the event of an amalgamation of two Bermuda
companies, a shareholder who is not satisfied that fair value has been paid for
his shares may apply to a Bermuda Court to appraise the fair value of his
shares. The amalgamation of a company with another company requires the
amalgamation agreement to be approved by the board of directors and by a meeting
of the holders of shares of the amalgamating company of which they are directors
and of the holders of each class of such shares. Under Bermuda law, an
amalgamation also requires the consent of the Bermuda Minister of Finance, who
may grant or withhold consent at his discretion.
Class actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda Courts, however, would ordinarily be
expected to permit a shareholder to commence an action in the name of a company
to remedy a wrong done to the company where the act complained of is alleged to
be beyond the corporate power of the company or is illegal or would result in
the violation of the company's Memorandum of Association or Bye-Laws.
Furthermore, consideration would be given by a Bermuda Court to acts that are
alleged to constitute a fraud against the minority shareholders or, for
instance, where an act requires the approval of a greater percentage of the
company's shareholders than those who actually approved it.
When the affairs of a company are being conducted in a manner oppressive or
prejudicial to the interests of some part of the shareholders, one or more
shareholders may apply to a Bermuda Court for an order regulating the company's
conduct of affairs in the future or ordering the purchase of the shares by any
shareholder, by other shareholders or by the company.
Registrar and Transfer Agent
A register of holders of the Class A Common Stock will be maintained by
Codan Limited in Bermuda and by The Bank of New York in the United States. The
Bank of New York will act as transfer agent with respect to the Class A Common
Stock.
CERTAIN PROVISIONS OF BERMUDA LAW
The Company has been designated as a non-resident under the Exchange
Control Act of 1972 (the "Control Act") by the Bermuda Monetary Authority (the
"Authority") whose permission for the issue of shares of Class A Common Stock of
the Company has been obtained. This designation allows the Company to engage in
transactions in currencies other than the Bermuda dollar. Approvals or
permissions received from the Authority do not constitute a guarantee by the
Authority as to the performance or creditworthiness of the Company.
Prior to the Offering, this Offering Memorandum will be filed with the
Registrar of Companies in Bermuda in accordance with Bermuda law.
In granting such permission and in accepting this Prospectus for filing,
neither the Authority nor the Registrar of Companies in Bermuda accepts any
responsibility for the financial soundness of the Company or the correctness of
any of the statements made or opinions expressed in this Offering Memorandum.
The transfer of shares between persons regarded as resident outside Bermuda
for exchange control purposes and the issue of shares after the completion of
the Offering to or by such persons may be effected without specific consent
under the Control Act and regulations thereunder. Issues and transfers of shares
involving any person regarded as resident in Bermuda for exchange control
purposes require specific prior approval under the Control Act.
Non-Bermuda owners of the Company's shares of Class A Common Stock are not
restricted in the exercise of the rights to hold or vote their shares. Because
the Company has been designated as a non-resident for Bermuda exchange control
purposes, the Company is permitted to engage in transactions in all currencies
other than the Bermuda dollar and there are no restrictions on its ability to
transfer funds (other than funds
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denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to
United States residents who are holders of the Company's Class A Common Stock.
In accordance with Bermuda law, share certificates are only issued in the
names of corporations, partnerships or individuals. In the case of an applicant
acting in a special capacity (for example as a trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such trust.
The Company will take no notice of any trust applicable to any of its
shares whether or not it had notice of such trust.
As an "exempted company," the Company is exempt from Bermuda laws which
restrict the percentage of share capital that may be held by non-Bermudians, but
as an exempted company the Company may not participate in certain business
transactions including: (i) the acquisition or holding of land in Bermuda
(except that required for its business and held by way of lease or tenancy for
terms of not more than 21 years); (ii) the taking of mortgages on land in
Bermuda to secure an amount in excess of $50,000 without the consent of the
Minister of Finance of Bermuda; (iii) the acquisition of securities created or
issued by, or any interest in any local company or business, other than certain
types of Bermuda government securities of another "exempted" company,
partnership or other corporation resident in Bermuda but incorporated abroad; or
(iv) the carrying on of business of any kind in Bermuda, except in furtherance
of the business of the Company carried on outside Bermuda or under a license
granted by the Minister of Finance of Bermuda.
DESCRIPTION OF IRIDIUM LLC LIMITED LIABILITY COMPANY AGREEMENT
The following is a summary of certain provisions of the Limited Liability
Company Agreement of Iridium LLC, dated as of July 29, 1996, as amended (the
"LLC Agreement"). This summary does not purport to be a complete description of
the LLC Agreement, and is qualified in its entirety by reference to the LLC
Agreement which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part and prospective investors are urged to read
the exhibit for a complete understanding of the terms of the LLC Agreement.
Terms used herein and not otherwise defined shall have the meanings ascribed to
them in the LLC Agreement.
ESTABLISHMENT; PURPOSE
Iridium was formed as a limited liability company pursuant to the
provisions of the Delaware Limited Liability Company Act (the "Delaware Act") on
July 16, 1996. Iridium, Inc., a Delaware corporation and the predecessor of
Iridium, was formed on June 14, 1991. On July 29, 1996, Iridium, Inc. was merged
with and into Iridium, with Iridium as the surviving entity. Iridium's purpose
is to acquire, own and manage the IRIDIUM System.
THE IRIDIUM BOARD; COMMITTEE STRUCTURE AND MANAGEMENT
Iridium is governed by the Iridium Board. The Members may manage Iridium
only through their designated directors and have no authority, in their capacity
as members, to act on behalf of Iridium. The day-to-day activities of Iridium
are managed by its officers, subject to the supervision of the Iridium Board.
The Officers are nominated and elected by the Iridium Board. The LLC Agreement
requires that the Chairman of the Iridium Board be a Director and that the Vice
Chairman and Chief Executive Officer be a Director.
Each Member, other than the Company, is entitled to appoint one director to
the Iridium Board for each 5,250,000 Class 1 Interests owned. Class 1 Members,
other than the Company, may aggregate their Class 1 Interests and appoint one
director for each 5,250,000 Class 1 Interests owned in the aggregate.
The Iridium Board may act through one or more committees established by the
LLC Agreement or by resolution, with each committee having the powers of the
Iridium Board to the extent provided in the LLC
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Agreement or the relevant resolution. The LLC Agreement establishes the
following four committees, which are the only existing committees of the Iridium
Board:
Banking and Financing Committee. This committee is authorized
generally to supervise matters relating to the financing of Iridium. The
committee must consist of not fewer than eight directors.
Related Party Contracts Committee. This committee shall consist of all
directors of Iridium not designated by Motorola, Lockheed Martin and
Raytheon. Motorola, Lockheed Martin and Raytheon are the contracting and
principal subcontracting Members, respectively, under the Space System
Contract, the Operations and Maintenance Contract and the Terrestrial
Network Development Contract. The committee has the authority to review,
monitor and enforce Iridium's rights with respect to the Space System
Contract, the Operations and Maintenance Contract and the Terrestrial
Network Development Contract. Directors appointed by Lockheed Martin and
Raytheon will be appointed to the committee when they cease to be
subcontractors under the contracts. Directors appointed by Motorola will be
appointed to the committee when Motorola ceases to be a party to the
contracts.
Compensation Committee. This committee must consist of not fewer than
three directors, appointed by the Iridium Board, who are not officers or
employees of Iridium. The committee has the authority to review, and
provide recommendations relating to the compensation and benefits of
managerial employees and has authority to administer the Iridium Option
Plan (unless the Iridium Board appoints a substitute committee).
Audit Committee. This committee is required to review, and make
recommendations regarding, Iridium's internal accounting and financial
controls, including the preparation of financial statements and the
engagement of independent public accountants. The committee must consist of
two or more directors, appointed by the Iridium Board, who are not officers
or employees of Iridium.
See "-- Classes of Membership Interests -- Series B and Series C Class 2
Interests" for certain special rights with respect to the Iridium Board and its
committees that have been granted to Motorola in connection with its guarantee
of the borrowings under the Guaranteed Bank Facility.
SPECIAL RIGHTS OF THE COMPANY IN THE GOVERNANCE OF IRIDIUM
The LLC Agreement provides that the Company will have certain special
membership rights during the Company Special Rights Period. See "The
Company -- The Company's Participation in the Governance of Iridium." During the
Company Special Rights Period (i) the Company shall be entitled to designate two
Independent Company Directors as Directors of Iridium, (ii) one Director of
Iridium designated by the Company shall be elected Vice Chairman of the Iridium
Board and (iii) one Director of Iridium designated by the Company shall be a
member of each committee of the Iridium Board. Pursuant to the LLC Agreement,
the Company will not be entitled to appoint more than two directors to the
Iridium Board even if its ownership interest increases and it would otherwise
have been entitled to additional appointment rights. In addition to any other
voting rights which the Company may have under the LLC Agreement, under the
Delaware Limited Liability Company Act or otherwise, during the Company Special
Rights Period, Iridium may not take any of the following actions, or permit any
of the following actions or events to occur, without the consent of one of the
Directors of Iridium designated by the Company: (i) make any material amendments
or modifications to the LLC Agreement; (ii) approve any business plan of Iridium
that would result in any material change in the purpose of Iridium as set forth
in the LLC Agreement or otherwise change Iridium's business so that it varies
materially from the business purpose contemplated by the LLC Agreement; (iii)
acquire, other than in the ordinary course of business of Iridium, (a) a
controlling interest or a majority of the voting stock or equity of, any
corporation or other entity that would be a Significant Subsidiary (as such term
is defined in the rules and regulations under the Securities Act of 1933) or (b)
any other assets if the aggregate fair market value thereof is greater than $50
million; (iv) sell, lease (as lessor), exchange or otherwise dispose of all or
substantially all of the assets of Iridium (other than to a person controlled by
Iridium); (v) cause the dissolution and/or liquidation of Iridium; or (vi) take
certain bankruptcy or insolvency related actions with respect to Iridium.
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CLASSES OF MEMBERSHIP INTERESTS
The Members' interests in Iridium are divided into two classes: "Class 1
Interests" which represent the common equity of Iridium and "Class 2 Interests"
which represent the preferred equity of Iridium. The LLC Agreement authorizes
Iridium to issue 225,000,000 Class 1 Interests, 50,000 Series M Class 2
Interests and 300,000 additional Class 2 Interests. At April 30, 1997 there were
121,719,150 Class 1 Interests and 36,305 Class 2 Interests issued and
outstanding. There are three series of Class 2 Interests outstanding.
Class 1 Interests. Upon consummation of the Offerings and application
of the net proceeds therefrom to the purchase of Class 1 Interests, there
will be 141,219,150 Class 1 Interests outstanding. Subject to the rights of
holders of any series of Class 2 Interests, all voting rights of the
Members are vested in the Class 1 Interests. See "Dilution."
Series A Class 2 Interests. The Series A Class 2 Interests are
convertible preferred interests that are entitled to dividends at a rate of
14 1/2% per annum from the Original Issue Date to, but not including, the
relevant Series A Redemption Date. The dividends on the Series A Class 2
Interests are payable, either in-kind or in cash, at the option of Iridium,
through February 28, 2001. Commencing March 1, 2001, dividends on the
Series A Class 2 Interests are payable only in cash. Dividends on the
Series A Class 2 Interests accrue whether or not they have been declared
and whether or not there are profits or other funds of Iridium legally
available for the payment of such dividends. No dividend may be declared
and paid on the Class 1 Interests unless all accrued dividends on the
Series A Class 2 Interests have been paid in full. The Series A Class 2
Interests are convertible to Class 1 Interests at any time, at the option
of the holder, at the Series A Conversion Price then in effect, initially
$54.03. The Series A Conversion Price is adjusted from time to time to
reflect, among other things, distributions or reclassification of the Class
1 Interests. At April 30, 1997, each Series A Class 2 Interest was
convertible into 18.51 Class 1 Interests. The Series A Class 2 Interests
are redeemable, at the option of Iridium, at any time after March 1, 2001
at redemption prices that adjust downward each March 1 for four years at a
proportionate rate from 107.5% of the Series A Liquidation Preference
($1,000 plus accrued and unpaid dividends) on March 1, 2001 to 100% of the
Series A Liquidation Preference on March 1, 2005. After March 1, 2005 the
Series A Class 2 Interests are redeemable at 100% of the Series A
Liquidation Preference. At April 30, 1997 there are 36,305 Series A Class 2
Interests outstanding.
Series B and Series C Class 2 Interests. In connection with Motorola's
guarantee of the Guaranteed Bank Facility, Iridium issued to Motorola one
Series B Class 2 Interest and 75 Series C Class 2 Interests. These are the
only issued and outstanding Series B and Series C Class 2 Interests. The
Series B Class 2 Interests and Series C Class 2 Interests do not pay any
dividends. The Series B Class 2 Interest entitles Motorola to one seat on
the Iridium Board in addition to Directors it may otherwise appoint as the
owner of Class 1 Interests and Series M Class 2 Interests. The Series C
Class 2 Interests entitle Motorola to appoint a majority of the Board of
Directors (and of all committees other than the Related Party Contracts
Committee) in the event of certain events of default relating to the
Guaranteed Bank Facility. The Series B and Series C Class 2 Interests are
redeemable by Iridium at $.01 per Interest upon the later of (i) the
termination or expiration of the Guarantee Agreement of Motorola and (ii)
the reimbursement of any payments made by Motorola pursuant to the
Guarantee Agreement.
Series M Class 2 Interests. Motorola owns a warrant (the "Series M
Warrant") to purchase Series M Class 2 Interests in an amount that would be
convertible into 2.5% of the outstanding Class 1 Interests at the time of
exercise of the Series M Warrant, calculated on a fully diluted basis, at a
price of $1,000 per Series M Class 2 Interest, subject to antidilution
adjustments. No Series M Class 2 Interests are currently outstanding.
Dividends on each Series M Class 2 Interest will accrue at the rate of
8.00% per annum of the sum of the Liquidation Value thereof plus all
accumulated and unpaid dividends thereon, from and including the date of
issuance of such Interest to and including the date on which the
Liquidation Value of such Interests is paid or the date on which such
Interest is converted into Class 1 Interests. Dividends accrue whether or
not they have been declared and whether or not there are profits or other
funds of Iridium legally available for the payment of dividends.
Additionally, when dividends are declared or paid on the Class 1 Interests,
the holders of Series M Class 2 Interests will be entitled to
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participate in such dividends ratably. The Series M Class 2 Interests are
convertible into Class 1 Interests at any time at the option of the holder.
The number of Class 1 Interests into which the Series M Class 2 Interests
are convertible is computed by multiplying the number of Series M Class 2
Interests to be converted by $1,000 and dividing the result by the Series M
Conversion Price then in effect. The initial Series M Conversion Price is
$13.33, but is subject to antidilution adjustments from time to time, and
at the current Series M Conversion Price each Series M Class 2 Interest
would be convertible into 75 Class 1 Interests. Upon the occurrence of an
Event of Noncompliance, defined as a failure by Iridium to pay when due the
full amount of dividends due to holders of Series M Class 2 Interests or
the occurrence of certain enumerated acts by Iridium related to bankruptcy
or insolvency, the holders can demand the immediate redemption of all
interests at Liquidation Value plus accumulated and unpaid interest and the
number of seats on the Iridium Board will be increased by one at the
request of the holders of a majority of the Series M Class 2 Interests then
outstanding and the holders of Series M Class 2 Interests will be entitled
to elect an individual to fill such newly created Director position. There
are no Series M Class 2 Interests issued or outstanding.
MERGER
The LLC Agreement provides that Iridium may merge or consolidate with one
or more limited liability companies, corporations, or similar entities provided
that the transaction is approved by the Iridium Board and Class 1 Members
holding not less than 66 2/3% of the outstanding Class 1 Interests. In the event
of a merger, Members who hold Interests and do not vote in favor of, or consent
in writing to, the merger are entitled to appraisal rights subject to certain
exceptions.
DIVIDEND AND LIQUIDATION RIGHTS
Class 1 Members are entitled to receive dividends, as and when declared by
the Iridium Board, in its discretion. Class 2 Members are entitled to receive
dividends, if any, in accordance with the terms of the relevant series of Class
2 Interests, as and when declared by the Iridium Board. The Class 2 Interests
rank senior to the Class 1 Interests as to dividends and distributions upon the
liquidation, dissolution and winding-up of Iridium.
The LLC Agreement requires the Iridium Board, to the extent of legally
available funds, to declare and pay a pro rata dividend in an amount which, when
added to any prior dividends paid with respect to the profits of the same year,
is sufficient to assure that each non-U.S. Class 1 Member receives an amount at
least equal to the amount of such Member's U.S. federal, state and local income
tax liability resulting from allocations of Iridium's income to such Member.
ISSUANCE OF ADDITIONAL INTERESTS; RESTRICTIONS ON TRANSFER; RIGHTS OF FIRST
REFUSAL
With the consent of Class 1 Members holding a majority of the Class 1
Interests, the Iridium Board may, at any time, cause Iridium to admit additional
Members upon conditions determined by the Iridium Board. Subject to certain
exceptions, if Iridium authorizes the issuance or sale of any Class 1 Interests,
Iridium must first offer to sell to each Class 1 Member a portion of such Class
1 Interests that would prevent any dilution in such Class 1 Member's holdings of
Class 1 Interests, provided that upon exercise of such purchase rights, the
number of Class 1 Interests of any holder of Class 1 Interests may not exceed
45% of the Class 1 Interests deemed outstanding on such date.
The LLC Agreement contains significant restrictions on the ability of a
Member to transfer any Interests in Iridium. Prior to making any transfer of
Interests in Iridium (other than certain transfers to affiliates), the person
seeking to make such transfer must notify Iridium and all holders of Class 1 and
Class 2 Interests of the terms and conditions of the proposed transfer. In order
for the proposed transfer to be permitted, a number of conditions must be
satisfied, including but not limited to the conditions that (i) a majority of
the Iridium Board approve the transfer and (ii) the transfer not result in any
person (other then the Company) beneficially owning, or having the right to
beneficially own, more than 45% of the outstanding Class 1 Interests. In
addition, Iridium may elect to purchase all (but not less than all) of the
Interests to be transferred upon the terms and conditions of the proposed
transfer and, if Iridium elects not to make such
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purchase, any of the holders of Class 1 and Class 2 Interests may purchase all
(but not less than all) of the Interests to be transferred on a pro rata basis.
The LLC Agreement provides that as long as Motorola is the principal
supplier to Iridium and/or Motorola or one of its subsidiaries is the holder for
the benefit of Iridium of any FCC license to construct, operate or launch the
IRIDIUM System, Motorola will not transfer (other than certain exempt transfers)
any of its Class 1 Interests issued in respect of common stock of Iridium, Inc.
purchased under the 1993 Stock Purchase Agreement. This restriction does not
apply to any Class 1 Interests purchased pursuant to the Reserve Capital Call.
In addition, in the event that Motorola no longer is the principal supplier to
Iridium and neither Motorola nor one of its subsidiaries is the holder for the
benefit of Iridium of any FCC license to construct, operate or launch the
IRIDIUM System, and Motorola desires to transfer any Class 1 Interests prior to
July 19, 2003, Motorola is required to offer all other holders of Class 1
Interests the opportunity to participate ratably in such sale at the same price
and on the same terms as Motorola.
CAPITAL CONTRIBUTIONS; RESERVE CAPITAL CALL
Contributions to the capital of Iridium, with respect to each Member who
purchases an Interest, are made in an amount equal to the net purchase price to
Iridium for such Interest (such amount being such Member's capital contribution
to Iridium). The LLC Agreement requires that the Class 1 Members cause their
Class 1 Interests in the aggregate to be entitled to at least 21% of each item
of the capital, income, gain, loss, deduction or credit distributions of Iridium
at all times. Members generally are not required to make additional capital
contributions to Iridium other than in connection with the Reserve Capital Call.
Seventeen Members of Iridium have made varying Reserve Capital Call
commitments to purchase an aggregate of 18,206,550 additional Class 1 Interests
at a purchase price of $13.33 per Class 1 Interest, upon a date thirty days
after the date of the receipt of a funding notice from the treasurer of Iridium.
The treasurer of Iridium is required to provide such a notice on the date on
which the treasurer has first determined that Iridium will not have available to
it sufficient funds to meet its contractual obligations and other funding
requirements on the forty-fifth day thereafter absent exercise of the Reserve
Capital Call. The LLC Agreement provides Iridium several non-exclusive remedies
in the event a Member fails to pay any of the amounts required by a Reserve
Capital Call, including redeeming the defaulting Member's Class 1 Interests for
an amount equal to $1.33 per Interest.
The Class 1 Interests acquired by the Company will not be subject to a
Reserve Capital Call.
LIMITATIONS ON LIABILITY
In accordance with the Delaware Act, Members are generally not liable for
the debts, obligations or liabilities of Iridium. Pursuant to the LLC Agreement,
and in accordance with the Delaware Act, the Company has waived the limitation
on liability contained in the Delaware Act, provided that the Company has no
liability to any person, including Iridium, for any debt, obligation or
liability of Iridium until all of the assets and capital of Iridium have first
been exhausted in satisfaction thereof. No Member or Director has any liability
for any debts, obligations or liabilities, whether arising in contract, tort or
otherwise, of any other Member or Director.
Members, Directors and officers of Iridium have only the duties set forth
in the LLC Agreement. The LLC Agreement provides that the duties and obligations
owed to Iridium and to the Members by the directors and officers of Iridium, and
any duties and obligations that may be owed by any Member or by any affiliates
of any Member, are the same as the respective duties and obligations owed to a
corporation organized under the Delaware General Corporation Law by its
directors and officers and any such duties that may be owed to a corporation by
any similarly situated stockholder or affiliate thereof, respectively. The LLC
Agreement also provides that, to the fullest extent permitted by the Delaware
General Corporation Law, a Director shall not be liable to Iridium or the
Members for monetary damages for a breach of fiduciary duty as a Director. Such
limitation does not, however, limit liability of directors (i) for any breach of
the Director's duty of loyalty to Iridium, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
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violation of law; (iii) for acts relating to certain unlawful dividend payments
or stock redemptions or repurchases and (iv) for any transaction from which the
Director derived an improper personal benefit.
The LLC Agreement provides that Iridium will indemnify the Directors,
officers and other persons serving in similar capacities at the request of
Iridium for another entity against all expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with any action, suit, or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of Iridium) by reason of the fact that such person was serving in such
capacity, provided that such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of
Iridium, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe such person's conduct was unlawful. The LLC
Agreement further provides that Iridium will indemnify the Directors, officers
and other persons serving in similar capacities at the request of Iridium for
another entity against expenses (including attorney's fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit by or in the right of Iridium by reason of the fact that
such person was serving in such capacity, provided that such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of Iridium, and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to Iridium unless awarded pursuant to a
court order.
ALLOCATIONS OF PROFITS AND LOSSES; TAX MATTERS PARTNER
The profits and losses of Iridium generally are, subject to certain tax
considerations, the Delaware Act and the rights of the Class 2 Members, to be
allocated entirely to the Class 1 Members pro rata in proportion to their
percentage of ownership of all outstanding Class 1 Interests. The LLC Agreement
provides:
Profits. Items of income and gain shall be allocated (i) first to the
Class 2 Members in amounts that match the distributions made to such
Members in accordance with the terms of the Class 2 Interest and (ii)
second to the Class 1 Members pro rata in proportion to their percentage of
ownership of all Class 1 Interests.
Losses. All items of loss, deduction, expense or credit shall be
allocated to the Class 1 Members pro rata in proportion to their percentage
ownership of all Class 1 Interests.
Motorola is the Tax Matters Partner of Iridium. The Tax Matters Partner
acts as the liaison between Iridium and the Members, on the one hand, and the
United States Internal Revenue Service (the "IRS"), on the other, in connection
with all administrative and judicial proceedings involving tax controversies
regarding Iridium.
AMENDMENTS TO THE LLC AGREEMENT; MEETINGS
The LLC Agreement may not be changed or amended, nor may the observance of
any provision of the LLC Agreement be waived, without the consent of Class 1
Members holding not less than 66 2/3% of the outstanding Class 1 Interests. This
general approval requirement for amendments to the LLC Agreement is subject to
certain exceptions including, among others:
Iridium Board. The provision of the LLC Agreement granting to the
Members the right to elect members of the Iridium Board may not be amended
without the consent of Class 1 Members holding not less than 95% of the
outstanding Class 1 Interests.
Related Party Contracts Committee. The provisions of the LLC Agreement
relating to the Related Party Contracts Committee (which reviews and
monitors the principal contracts between Iridium and certain of its
Members) may not be amended without the consent of (i) 66 2/3% of the
Directors serving on the Related Party Contracts Committee and (ii) 66 2/3%
of the non-interested Members.
Capital Contributions. Certain provisions of the LLC Agreement
relating to the circumstances in which a Reserve Capital Call is
automatically triggered may only be amended by the affirmative vote of
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not less than 85% of the entire Iridium Board, and other provisions of the
LLC Agreement covering Members' capital contributions may be amended only
with the consent of Iridium and each Member whose rights and obligations
thereunder are directly affected by such amendment.
Appraisal Rights. The provisions relating to the Member's appraisal
rights may not be amended without the unanimous consent of the Members.
An annual meeting for the Class 1 Members shall be held each year within
120 days after the close of the immediately preceding fiscal year of Iridium. At
such annual meeting each Member shall provide notice to Iridium and the other
Members of the names of any Director or Directors such Member is entitled to
appoint. Special meetings of Members may be called for any purpose stated in the
notice of such special meeting at any time by the Iridium Board, the chairman of
the Board of Directors, the vice chairman and chief executive officer, the
president or the holders of not less than a majority of the Class 1 Interests
outstanding. Notice of any meeting shall be given to all Members entitled to
vote at such meeting and to each Director not less than 10 nor more than 60 days
prior to the date of such meeting. The holders of a majority of the Interests
entitled to vote on a particular item of business, present in person or by
proxy, shall constitute a quorum for purposes of the transaction of such item of
business. Each Member entitled to vote at a meeting of Members or to express
consent or dissent to any action in writing without a meeting may authorize any
person to act for it in such matters by proxy.
Unless otherwise provided by law, any action to be taken by the Members may
be taken without a meeting, without prior notice and without a vote, if consents
in writing, setting forth the action so taken, shall be signed by the Members
having not less than the minimum Interests that would be necessary to authorize
or take such action at a meeting at which all Members entitled to vote thereon
were present and voted and are delivered to Iridium.
GATEWAY RIGHTS AND SPECTRUM ACCESS OBLIGATIONS
The exclusive right to own and operate the various gateway service
territories is assigned to Members pursuant to the LLC Agreement. See "Iridium's
Investors, Present Percentage Ownership and Principal Gateway Service
Territories" for the present allocation of Gateway Service Territories. As a
condition of the exclusive right to operate in their assigned territories
(including the exclusive right to act as, or select, the service provider for
such territory), each Member that has been assigned a service territory has
agreed (i) to use its best efforts to obtain the necessary authorizations to
provide gateway services in each of the jurisdictions included in its service
territory (the "Gateway Authorizations") and to construct and operate such
gateway on a timely basis consistent with the terms of such Member's Gateway
Authorization Agreement, (ii) to require any service provider within its service
territory to use its best efforts to obtain the necessary authorizations to act
as a service provider and (iii) use its best efforts to cause the relevant
authorities in their respective territories to ratify and adopt the spectrum
allocation and service definitions for LEO's adopted by the WARC. See
"Business -- Marketing and Distribution -- Gateway Owners and Operators,"
"Principal Contracts for Development of the IRIDIUM System -- Gateway
Authorization Agreements" and "Regulation of Iridium."
The gateway and service provider rights of Class 1 Members may be
terminated without compensation if such a member fails to (i) comply with its
obligations regarding Gateway construction and spectrum allocation or (ii)
obtain the necessary Gateway Authorizations within the time periods set forth in
the LLC Agreement. In the event that such rights are terminated as a result of
the Member's failure to obtain the relevant Gateway Authorizations, and the
Member used its best efforts to obtain the Gateway Authorizations, such member
is entitled to compensation for the loss of the gateway service territory on the
terms specified in the LLC Agreement.
DISSOLUTION; WINDING-UP
The LLC Agreement provides that Iridium shall be dissolved and its affairs
wound-up upon: (i) the adoption of a resolution by not less than 66 2/3% of the
entire Iridium Board that Iridium be dissolved and the
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approval of such resolution by the affirmative vote of Class 1 Members holding
not less than 66 2/3% of the Class 1 Interests present at a meeting duly called
for such purpose; (ii) the death, retirement, resignation, bankruptcy or similar
occurrence which terminates the continued membership of any Member unless the
remaining Members exercise their right under the LLC Agreement to continue the
business of Iridium (such right to be exercised by the affirmative consent of
both (a) a majority of the Iridium Board and (b) a "majority in interest" (as
defined in IRS Revenue Procedure 94-46) of the remaining Members); and (iii)
December 31, 2095, subject to amendment by an affirmative vote of Class 1
Members holding not less than 66 2/3% of the Class 1 Interests.
TAX CONSIDERATIONS
The following discussion is a summary of certain anticipated tax
consequences of the operations of the Company and of an investment in the Class
A Common Stock under United States federal income tax laws and Bermuda laws. The
discussion does not deal with all possible tax consequences relating to the
Company's operations or to an investment in the Class A Common Stock. In
particular, the discussion does not address the tax consequences under state,
local and other (e.g., non-United States federal and non-Bermuda) tax laws.
Accordingly, each prospective investor should consult his or her tax advisor
regarding the tax consequences of an investment in the Class A Common Stock. The
discussion is based upon laws and relevant interpretations thereof in effect as
of the date of this Prospectus, all of which are subject to change.
BERMUDA LAW
In the opinion of Conyers, Dill & Pearman, Bermuda counsel to the Company,
the following discussion correctly describes certain tax consequences to the
Company with respect to the Offerings and with respect to ownership of shares of
Class A Common Stock under Bermuda law.
At the date hereof, there is no Bermuda income, corporation or profits tax,
withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax payable by the Company or its shareholders other than
shareholders ordinarily resident in Bermuda. The Company is not subject to stamp
or other similar duty on the issue, transfer or redemption of its shares of
Class A Common Stock.
The Company has obtained an assurance from the Minister of Finance of
Bermuda under the Exempted Undertaking Tax Protection Act 1966 that, in the
event there is enacted in Bermuda any legislation imposing tax computed on
profits or income or computed on any capital assets, gain or appreciation or any
tax in the nature of estate duty or inheritance tax, such tax shall not be
applicable to the Company or to its operations, or to the shares, debentures or
other obligations of the Company until March 28, 2016 except insofar as such tax
applies to persons ordinarily resident in Bermuda and holding such shares,
debentures or other obligations of the Company or any real property or leasehold
interests in Bermuda owned by the Company. No reciprocal tax treaty affecting
the Company exists between Bermuda and the United States.
As an exempted company, the Company is liable to pay in Bermuda a
registration fee based upon its authorized share capital and the premium on its
issued shares at a rate not exceeding $25,000 per annum.
UNITED STATES FEDERAL INCOME TAXATION
GENERAL
The following is a general summary of the U.S. federal income tax
consequences of the ownership and disposition of shares of Class A Common Stock
by a "U.S. Holder," as defined below. The summary is limited to holders who hold
shares of Class A Common Stock as "capital assets" and whose "functional
currency" is the U.S. dollar and does not cover holders subject to special
rules, including insurance companies, tax-exempt organizations, financial
institutions, persons subject to the alternative minimum tax, broker-dealers, an
owner of 10% or more of the voting power or value of the shares of the Company,
or holders who hold shares of Class A Common Stock in a hedging transaction or
as part of a straddle or conversion transaction. The summary does not address
state or local taxes.
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As used herein, the term "U.S. Holder" means any holder of shares of Class
A Common Stock that is either (i) an individual who is a citizen or a resident
of the United States, (ii) a partnership or corporation organized under the laws
of the United States or any state thereof, or (iii) an estate or trust that is
subject to United States federal income taxation without regard to the source of
its income. A "Non-U.S. Holder" is any beneficial owner of shares of the Class A
Common Stock that is not a U.S. Holder. All terms used and not defined herein
have the meaning ascribed to them under the Internal Revenue Code of 1986, as
amended (the "Code").
This summary is for general informational purposes only, and is based upon
the tax laws of the United States as in effect on the date of this Prospectus,
which are subject to change. The tax treatment of a holder may vary depending
upon the particular situation of the holder. Each holder should consult its own
tax advisor as to the United States, Bermuda or other tax consequences of the
ownership and disposition of shares of Class A Common Stock.
TAXATION OF THE COMPANY
Iridium is intended to be treated as a partnership for United States
federal income tax purposes. As a Class 1 Member of Iridium, the Company will be
subject to United States federal income tax on its distributive share of the
income of Iridium that is effectively connected with the conduct of a trade or
business in the United States, without regard to whether any distribution has
been received from Iridium. The Company's share of Iridium's effectively
connected income may also under certain circumstances be subject to "branch
profits tax" at a 30% rate. The Company's ability to use its distributive share
of Iridium's net operating losses may be limited under Section 382 of the Code
as a result of subsequent issuances of Company stock. However, the Company
believes that it would not be materially affected by such a limitation.
OWNERSHIP AND DISPOSITION OF SHARES
Taxation of Dividends and Stock Distributions
U.S. Holders. Distributions by the Company with respect to its Class A
Common Stock will be includible in the gross income of a U.S. Holder as ordinary
dividend income to the extent paid out of current or accumulated earnings and
profits of the Company, as determined for United States federal income tax
purposes. Dividends will not be eligible for the dividends received deduction
generally allowed to U.S. Holders who are corporations.
Any dividends paid in foreign currency will be includible in the income of
a U.S. Holder in a U.S. dollar amount calculated by reference to the prevailing
market exchange rate in effect on the date the dividends become includible in
the U.S. Holder's income. Generally, any gain or loss resulting from currency
exchange fluctuations during the period from the date that the dividend becomes
includible in the U.S. Holder's income to the date that the foreign currency is
converted into U.S. dollars will be treated as ordinary income or loss.
If less than 25% of the Company's gross income for the three years
preceding the year in which a dividend is declared (or for the portion of the
three-year period during which the Company has been in existence, if shorter)
was effectively connected with the conduct of a U.S. trade or business, the
dividend generally will constitute foreign source "passive income" (or in the
case of certain holders, "financial services income") for U.S. foreign tax
credit purposes. If 25% or more of the Company's gross income for such period
was "effectively connected" income, the dividend will be United States source in
the same proportion that the Company's "effectively connected" income for such
period bears to the Company's total gross income for the period, and the
remainder will constitute foreign source "passive income" (or in the case of
certain holders, "financial services income") for U.S. foreign tax credit
purposes.
Distributions of additional shares of Class A Common Stock to U.S. Holders
with respect to shares of Class A Common Stock that are part of a pro rata
distribution to all shareholders of the Company generally will not be subject to
U.S. federal income tax.
Non-U.S. Holders. Dividends paid to a Non-U.S. Holder in respect of the
Class A Common Stock will not be subject to United States federal income tax
unless such dividends are effectively connected with the
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conduct of a trade or business within the United States by such Non-U.S. Holder
(and are attributable to a permanent establishment maintained in the United
States by such Non-U.S. Holder, if an applicable income tax treaty so requires
as a condition for such Non-U.S. Holder to be subject to United States taxation
on a net income basis in respect of income from the Class A Common Stock), in
which case the Non-U.S. Holder generally will be subject to tax in respect of
such dividends in the same manner as a U.S. Holder. Any such effectively
connected dividends received by a non-United States corporation may also, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
If such dividends are not subject to U.S. federal income tax as described
above, that portion of the dividends received by a Non-U.S. Holder that is
attributable to the conduct by the Company of a trade or business within the
United States will be subject to a 30% withholding tax if, for the three-year
period ending with the close of the Company's taxable year preceding the
declaration of such dividends, or for such part of that period as the Company
was in existence, 25% or more of the company's gross income was effectively
connected with the conduct of a trade or business within the United States. The
Company believes that dividends paid to Non-U.S. Holders will not be subject to
the withholding tax described above.
Taxation of Capital Gains
U.S. Holders. Except as discussed below under "Passive Foreign Investment
Company Rules," gain or loss (in an amount equal to the difference between such
U.S. Holder's adjusted tax basis in the shares of Class A Common Stock
(determined in U.S. dollars) and the U.S. dollar amount realized) will be
recognized by a U.S. Holder on the sale or other disposition of shares of Class
A Common Stock and will be subject to U.S. federal income tax as capital gain or
loss. Capital gain or loss will be treated as long-term capital gain or loss if
the U.S. Holder's holding period for the shares of Class A Common Stock is more
than one year. U.S. Holders who are individuals are currently taxed on long-term
capital gains at a maximum rate of 28%, while ordinary income may be subject to
U.S. federal income tax at a rate as high as 39.6%. Capital losses may be used
to offset long-term capital gains, and up to $3,000 of any net capital loss may
be used to offset ordinary income. U.S. Holders which are corporations are taxed
on capital gains at the same rate as ordinary income, which can be as high as
35%, and may not offset ordinary income by any net capital losses. Capital gain
recognized by a U.S. Holder on a sale or other disposition of shares of Class A
Common Stock generally will be treated as U.S. source income.
Non-U.S. Holders. A Non-U.S. Holder of shares of Class A Common Stock will
not be subject to U.S. federal income tax (including taxes imposed by
withholding) on gains realized on the sale or other disposition of shares of
Class A Common Stock, unless (i) such gain is effectively connected with the
conduct by the holder of a trade or business in the United States (and is
attributable to a permanent establishment maintained in the United States by
such Non-U.S. Holder, if an applicable income tax treaty so requires as a
condition for such Non-U.S. Holder to be subject to U.S. taxation on a net
income basis in respect of gain from the sale of the Class A Common Stock) or
(ii) in the case of gain realized by an individual holder, the holder is present
in the United States for 183 days or more during the taxable year of the sale
and certain other conditions are met. Effectively connected gains realized by a
corporate Non-U.S. Holder may also, under certain circumstances, be subject to
an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Passive Foreign Investment Company Rules
Under the passive foreign investment company ("PFIC") rules, a foreign
corporation will generally be a PFIC in any taxable year of the foreign
corporation in which either at least 75 percent of its gross income is "passive
income" or at least 50 percent of its assets are "passive assets." For purposes
of the PFIC tests, passive income generally includes interest, dividends, rents
and royalties (other than rents and royalties derived in the active conduct of a
trade or business and not derived from a related person), annuities and gains
from the sale or disposition of assets that produce passive income, and passive
assets generally include assets producing or held for the production of such
income. The following discussion assumes that the Company should, under current
law, be treated for the purposes of the PFIC tests as owning its share of
Iridium's gross
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assets and as earning directly its share of Iridium gross income. The Internal
Revenue Service may, however, issue regulations that would address this issue.
The Company would be a PFIC if such regulations did not permit the Company to
treat itself as owning its share of Iridium's assets and earning directly its
share of Iridium's gross income for the purposes of the PFIC tests.
Because Iridium has substantial temporary investments in securities, it is
likely that at least 75 percent of the Company's gross income for 1997 will be
passive income for purposes of the PFIC income test. Under the PFIC rules,
however, a foreign corporation will not be considered a PFIC in the first year
in which it has gross income (the start-up year) if (i) no predecessor of such
corporation was a PFIC, (ii) it is established to the satisfaction of the
Internal Revenue Service that such corporation will not be a PFIC for either of
the first two years following the start-up year and (iii) such corporation is
not in fact a PFIC for either of the first two years following the start-up
year. Under this exception to PFIC classification, the Company does not expect
that it will be a PFIC for 1997.
Moreover, based on the manner in which Iridium currently intends to operate
its business in future years, the Company does not expect to be a PFIC for any
future year. However, since the determination of whether the shares of Class A
Common Stock constitute shares of a PFIC must be made annually based upon the
composition of the income and assets of the Company, Iridium and any corporation
in which the Company or Iridium holds a 25-percent-or-more interest, there can
be no assurance that the shares of Class A Common Stock will not be considered
shares of a PFIC for any taxable year. Furthermore, if the Company were
determined to be a PFIC in 1998, the start-up exception outlined in the previous
paragraph would be inapplicable and the Company would be considered a PFIC for
1997 as well.
Generally, if a share of Class A Common Stock were treated as stock of a
PFIC for any taxable year during which a U.S. Holder held such share, the entire
gain recognized by such U.S. Holder on a sale or other disposition of the share
would be allocated ratably over the U.S. Holder's holding period for the share.
The amounts allocated to the taxable year of the sale or other disposition and
to any year before the Company became a PFIC would be taxed as ordinary income.
The amount allocated to each other taxable year would be subject to tax at the
highest applicable ordinary income rate in effect for such taxable year, and an
interest charge would be imposed on the amount allocated to such taxable year.
All such tax and interest would be included in the U.S. Holder's U.S. federal
income tax liability for the taxable year in which the sale or other disposition
took place. Further, any distribution in respect of shares of Class A Common
Stock in excess of 125 percent of the average of the annual distributions on
shares of Class A Common Stock received by the U.S. Holder during the preceding
three years or the U.S. Holder's holding period, whichever is shorter, would be
subject to taxation as described above.
The special PFIC tax rules described above will not apply to a U.S. Holder
if (i) the U.S. Holder elects to have the Company treated as a "qualified
electing fund" (a "QEF election") for each taxable year during the U.S. Holder's
holding period in which the Company is a PFIC and (ii) the Company provides
certain information necessary to enable the U.S. Holder to make a QEF election.
The Company currently intends to provide upon the request of any U.S. Holder the
information necessary to make a QEF election.
A U.S. Holder that makes a QEF election generally will be currently taxable
on its pro rata share of the Company's ordinary earnings and net capital gain
(at ordinary and capital gain rates, respectively) for each taxable year of the
Company, regardless of whether or not distributions were received. However, a
U.S. Holder that makes a QEF election covering each taxable year of the Company
during the U.S. Holder's holding period in which the Company is a PFIC will not
be currently taxable on its pro rata share of the Company's undistributed
ordinary earnings and net capital gain in any year in which the Company is not a
PFIC.
If a U.S. Holder is taxed on its pro rata share of the Company's ordinary
earnings and net capital gain, the U.S. Holder's basis in shares of Class A
Common Stock will be increased to reflect taxed but undistributed income.
Distributions that have been taxed previously will result in a corresponding
reduction of basis in shares of Class A Common Stock and will not be taxed again
as a distribution to the U.S. Holder.
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A U.S. Holder who owns shares of Class A Common Stock during any year in
which the Company is a PFIC must file Internal Revenue Service Form 8621.
Backup Withholding
In general, information reporting requirements will apply to dividend
payments (or other taxable distributions) in respect of shares of Class A Common
Stock made within the United States to a non-corporate United States person, and
"backup withholding" at the rate of 31% will apply to such payments if the
holder or beneficial owner fails to provide an accurate taxpayer identification
number in the manner required by United States law and applicable regulations,
if there has been notification from the Internal Revenue Service of a failure by
the holder or beneficial owner to report all interest or dividends required to
be shown on its federal income tax returns or, in certain circumstances, if the
holder or beneficial owner fails to comply with applicable certification
requirements. Certain corporations and persons that are not United States
persons may be required to establish their exemption from information reporting
and backup withholding by certifying their status on Internal Revenue Service
Forms W-8 or W-9.
In general, payment of the proceeds from the sale of shares of Class A
Common Stock to or through a United States office of a broker is subject to both
United States backup withholding and information reporting unless the holder or
beneficial owner certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. United States information
reporting and backup withholding generally will not apply to a payment made
outside the United States of the proceeds of a sale of shares of Class A Common
Stock through an office outside the United States of a non-United States broker.
However, United States information reporting requirements (but not backup
withholding) will apply to a payment made outside the United States of the
proceeds of a sale of shares of Class A Common Stock through an office outside
the United States of a broker that is a United States person, that derives 50%
or more of its gross income for a specified three-year period from the conduct
of a trade or business in the United States, or that is a "controlled foreign
corporation" as to the United States, unless the broker has documentary evidence
in its files that the holder or beneficial owner is a non-United States person
or the holder or beneficial owner otherwise establishes an exemption.
Amounts withheld under the backup withholding rules may be credited against
a holder's tax liability, and a holder may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the United States Internal Revenue Service.
SHARES ELIGIBLE FOR FUTURE SALE
Following completion of the Offerings, the only shares of Class A Common
Stock of the Company that will be outstanding will be the 12,000,000 shares
issued in the Offerings (13,800,000 shares if the Underwriters' over-allotment
options are exercised in full). These shares may be freely transferred if held
by persons who are not affiliates of the Company.
Subject to certain limitations, the Company has agreed in the Interest
Exchange Agreement that it will exchange shares of Class A Common Stock for
Class 1 Interests at the rate of one share of Class A Common Stock for each
Class 1 Interest. Based upon the number of Class 1 Interests expected to be
outstanding at the time of completion of the Offerings, 129,219,150 shares of
Class A Common Stock would be issuable upon such exchange. Including all Class 1
Interests which will be issuable in the future based upon warrants, options
(excluding the Underwriters' over-allotment options) and convertible securities
outstanding immediately following completion of the Offerings and the Reserve
Capital Call, 171,163,530 shares of Class A Common Stock would be issuable upon
such exchange. Pursuant to the Interest Exchange Agreement, the holders of Class
1 Interests may not exchange their Interests for shares of Class A Common Stock
prior to 90 days after the first fiscal quarter in which Iridium achieves
positive earnings before interest, taxes, depreciation and amortization (the
"Exchange Date"). No exchanges shall take place unless approved by Iridium,
pursuant to authorization of directors representing at least 66 2/3% of the
Iridium Board. Thus, these Class 1 Interests are not expected to be exchangeable
for Class A Common Stock until some time in 1999, at the earliest.
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Under the Interest Exchange Agreement, the Company has agreed that at any
time after the Exchange Date, the Company will, at the request of Class 1
Holders and holders of Class A Common Stock acquired under the Interest Exchange
Agreement, representing not less than two percent of the Fully Diluted Class A
Shares, file with the United States Securities and Exchange Commission a
registration statement and use its reasonable best efforts to have that
registration statement remain effective for a period of up to six months,
permitting such holders to sell shares of Class A Common Stock in the manner
specified by those holders. If the shares of Class A Common Stock issuable upon
exchange are so registered, the shares will be freely transferable. See
"Governance of the Company and Relationship with Iridium -- Exchange Rights of
Iridium Members."
Following completion of the Offerings, the Company will issue shares of
Class B Common Stock in the Global Ownership Program. These shares of Class B
Common Stock will be exchangeable for Class A Common Stock after the
satisfaction of certain conditions, but in no event earlier than one year after
issuance. Following such exchanges, and if registered for resale with the
Securities and Exchange Commission, the Class A Common Stock issuable on
exchange will be freely transferable. See "Governance of the Company and
Relationship with Iridium -- Global Ownership Program."
The Class A Common Stock acquired upon exchange of Class 1 Interests and
upon exchange of Class B Common Stock will constitute "restricted securities"
within the meaning of Rule 144 and unless registered under the Securities Act
may only be sold if an exemption from registration is available. Pursuant to
Rule 144 under the Securities Act, a person, including an "affiliate" (as that
term is defined in Rule 144) of the issuer, may sell restricted securities if a
minimum of one year has elapsed between the later of the date of acquisition of
the restricted securities from the issuer or from an affiliate of the issuer.
Such a person will be entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of (i) the average weekly trading
volume of the class of stock being sold during the four calendar weeks preceding
the filing of a notice of sale with the Securities and Exchange Commission or,
if no such notice is required, the sale date or (ii) one percent of the then
outstanding shares of the class of stock being sold. Sales pursuant to Rule 144
are also subject to certain requirements as to the manner of sale, notice filing
and availability of current public information about the Company. A person who
is deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale by such person and who has beneficially owned the
restricted securities for at least two years is entitled to sell those shares
under Rule 144 without regard to the volume limitation, manner of sale
restrictions or notice filing requirements of Rule 144. In certain
circumstances, a holder may "tack" the holding period for the restricted
securities converted into or exchanged for the restricted securities for
purposes of computing the one year and two year holding periods. A proposed
amendment to Rule 144 would, if adopted, eliminate the manner of sale
requirements under Rule 144. Shares of Class A Common Stock may also be sold
pursuant to any exemption from registration which might be available without
compliance with the requirements of Rule 144.
Eligible employees of the Company and Iridium and persons having business
relationships with Iridium who are purchasing reserved shares of Class A Common
Stock in the Offerings have agreed, with certain exceptions, not to sell, offer
to sell or otherwise dispose of any shares of Class A Common Stock without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for
a period of 180 days after the date of this Prospectus.
Issuances of substantial amounts of Class A Common Stock, or the
expectation of such issuances, could adversely affect the market price of the
Class A Common Stock. See "Risk Factors -- Shares Eligible for Future Sale."
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UNDERWRITING
Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement") among the Company, Iridium and each of the
Underwriters named below (the "U.S. Underwriters"), and concurrently with the
sale of 2,400,000 shares of Class A Common Stock to the International Managers
(as defined below), the Company has agreed to sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters severally has agreed to purchase
from the Company, the number of shares of Class A Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................. 2,506,668
Donaldson, Lufkin & Jenrette Securities Corporation....................... 2,506,666
Goldman, Sachs & Co....................................................... 2,506,666
ABN AMRO Chicago Corporation.............................................. 80,000
Bear, Stearns & Co. Inc. ................................................. 80,000
Alex. Brown & Sons Incorporated........................................... 80,000
Chase Securities Inc. .................................................... 80,000
Credit Suisse First Boston Corporation.................................... 80,000
Dillon, Read & Co. Inc. .................................................. 80,000
Lazard Freres & Co. LLC................................................... 80,000
Lehman Brothers Inc. ..................................................... 80,000
J.P. Morgan Securities Inc. .............................................. 80,000
Oppenheimer & Co., Inc. .................................................. 80,000
PaineWebber Incorporated.................................................. 80,000
Salomon Brothers Inc...................................................... 80,000
Smith Barney Inc. ........................................................ 80,000
Societe Generale Securities Corporation................................... 80,000
Unterberg Harris.......................................................... 80,000
Wasserstein Perella Securities, Inc. ..................................... 80,000
Brad Peery Inc. .......................................................... 40,000
Cowen & Company........................................................... 40,000
Ferris, Baker Watts, Incorporated......................................... 40,000
Furman Selz LLC........................................................... 40,000
Gabelli & Company, Inc. .................................................. 40,000
Gerard Klauer Mattison & Co., Inc. ....................................... 40,000
Edward D. Jones & Co., L.P. .............................................. 40,000
J.J.B. Hilliard, W. L. Lyons, Inc. ....................................... 40,000
Janney Montgomery Scott Inc. ............................................. 40,000
Legg Mason Wood Walker, Incorporated ..................................... 40,000
Ormes Capital Markets, Inc. .............................................. 40,000
Parker/Hunter Incorporated................................................ 40,000
Pennsylvania Merchant Group Ltd........................................... 40,000
Ragen MacKenzie Incorporated.............................................. 40,000
Rauscher Pierce Refsnes, Inc. ............................................ 40,000
Wm. Smith Securities Inc. ................................................ 40,000
SoundView Financial Group, Inc. .......................................... 40,000
Southcoast Capital Corporation............................................ 40,000
Wessels, Arnold & Henderson, L.L.C. ...................................... 40,000
Wheat, First Securities, Inc. ............................................ 40,000
---------
Total........................................................... 9,600,000
=========
</TABLE>
127
<PAGE> 129
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. are
acting as representatives (the "U.S. Representatives") of the U.S. Underwriters.
The Company and Iridium have also entered into a purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with certain underwriters outside the
United States and Canada (collectively, the "International Managers" and,
together with the U.S. Underwriters, the "Underwriters"), for whom Merrill Lynch
International, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman
Sachs International are acting as representatives (the "International
Representatives" and, together with the U.S. Representatives, the
"Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of 9,600,000
shares of Class A Common Stock to the U.S. Underwriters pursuant to the U.S.
Purchase Agreement, the Company has agreed to sell to the International
Managers, and the International Managers have severally agreed to purchase from
the Company, an aggregate of 2,400,000 shares of Class A Common Stock. The
initial public offering price per share of Class A Common Stock and the
underwriting discount per share of Class A Common Stock are identical under the
U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Class A Common Stock being sold
pursuant to each such Agreement if any of the shares of Class A Common Stock
being sold pursuant to such Agreement are purchased. Under certain
circumstances, the commitments of non-defaulting U.S. Underwriters or
International Managers (as the case may be) may be increased. The purchase of
shares of Class A Common Stock by the U.S. Underwriters is conditioned upon the
purchase of shares of Class A Common Stock by the International Managers, and
vice versa.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. The Underwriters are permitted to sell shares
of Class A Common Stock to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell shares of Class A Common Stock will not, other than in
connection with the sale of certain reserved shares, as described below, offer
to sell or sell shares of Class A Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and the International Managers and any
dealer to whom they sell shares of Class A Common Stock will not offer to sell
or sell shares of Class A Common Stock to U.S. persons or to Canadian persons or
to persons they believe intend to resell to U.S. persons or Canadian persons,
except in the case of transactions pursuant to the Intersyndicate Agreement.
The U.S. Representatives have advised the Company and Iridium that the U.S.
Underwriters propose initially to offer the shares of Class A Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $.72 per share of Class A Common Stock. The U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of $.10 per share
of Class A Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
At the request of the Company, the U.S. Underwriters have initially
reserved up to 1,200,000 shares of Class A Common Stock for sale at the initial
public offering price set forth on the cover page of this Prospectus to eligible
employees of the Company and Iridium and persons having business relationships
with Iridium. The number of shares of Class A Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be offered
by the Underwriters to the general public on the same basis as other shares
offered hereby. Individuals purchasing reserved shares have agreed, with certain
exceptions, not to sell, offer to sell or otherwise dispose of any shares of
Class A Common Stock, without the prior written consent of Merrill Lynch,
128
<PAGE> 130
for a period of 180 days after the date of this Prospectus. If in connection
with the sale of the reserved shares the Underwriters are prohibited by law from
selling the reserved shares of Class A Common Stock in any jurisdiction outside
the United States where the Company is permitted by law to sell Class A Common
Stock, the Company may directly sell reserved shares. Such shares would be
included in the 12,000,000 shares being sold pursuant to this Prospectus. If the
Company makes any such sales, no underwriting discount or commission will be
paid to the Underwriters with respect to such shares. The Underwriters have
agreed to reimburse Iridium for certain expenses associated with the Offerings.
The Company has agreed not to, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of the Class A Common Stock or any
securities convertible into or exchangeable or exercisable for Class A Common
Stock or file any registration statement under the Securities Act, with respect
to any of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Class A Common Stock, whether any such
swap or transaction is to be settled by delivery of Class A Common Stock or
other securities, in cash or otherwise, without the prior written consent of
Merrill Lynch, for a period of 180 days after the date of this Prospectus. The
foregoing restriction does not apply to the shares of common stock of the
Company to be sold in the Offerings or under the Company's Global Ownership
Program or the Option Plan. See "Governance of the Company and Relationship with
Iridium -- Exchange Rights of Iridium Members" and "Shares Eligible for Future
Sale" for a discussion of certain limitations on the rights of holders of
Interests in Iridium to exchange such Interests for shares of Class A Common
Stock. In addition, the foregoing restriction does not apply to the issuance of
warrants to purchase shares of Class A Common Stock in connection with any
offering of debt securities of Iridium or its subsidiaries; provided that (i)
such warrants have a per share exercise price not lower than the market price of
a share of Class A Common Stock on the date such warrants are issued and (ii)
such warrants are not exercisable earlier than 180 days from the date of their
issuance.
The Company has granted an option to the U.S. Underwriters, exercisable
within 30 days after the date of this Prospectus, to purchase up to 1,440,000
additional shares of Class A Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting discount.
The U.S. Underwriters may exercise this option only to cover over-allotments, if
any, made on the sale of the Class A Common Stock offered hereby. To the extent
that the U.S. Underwriters exercise this option, each U.S. Underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares of Class A Common Stock proportionate to such Underwriter's initial
amount reflected in the foregoing table. The Company also has granted an option
to the International Managers, exercisable within 30 days after the date of this
Prospectus, to purchase up to an aggregate of 360,000 additional shares of Class
A Common Stock to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.
Until the distribution of the Class A Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Class A Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of the Class A Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A Common Stock.
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offerings, i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class A Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Class A Common Stock, they may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those shares as part of the Offerings.
129
<PAGE> 131
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company, Iridium nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Class A Common
Stock. In addition, neither the Company, Iridium nor any of the Underwriters
makes any representation that the Representatives will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
Prior to the Offerings, there has been no public market for the shares of
Class A Common Stock of the Company. The initial public offering price was
determined through negotiations among the Company, Iridium and the
Representatives. Among the factors that were considered in determining the
initial public offering price, in addition to prevailing market conditions, are
the current market valuations of publicly traded companies that the
Representatives believe to be reasonably comparable to the Company and Iridium,
certain financial information of the Company and Iridium, the history of, and
the prospects for, the Company and Iridium and the industry in which Iridium
will compete, an assessment of the Company and Iridium management, the past and
present operations of Iridium, the prospects for, and timing of, future revenues
of the Company and Iridium, the present state of Iridium's development, and the
above factors in relation to market values and various valuation measures of
other companies engaged in activities similar to the Company and Iridium. There
can be no assurance given as to the liquidity of the trading market for the
Class A Common Stock or that an active public market will develop for the Class
A Common Stock or that the Class A Common Stock will trade in the public market
subsequent to the Offerings at or above the initial public offering price. If an
active public market for the Class A Common Stock does not develop, the market
price and liquidity of the Class A Common Stock may be adversely affected.
The Class A Common Stock has been approved for quotation on the Nasdaq
National Market System under the symbol "IRIDF," subject to official notice of
issuance.
The U.S. Underwriters and the International Managers have informed the
Company that they do not intend to confirm sales of the Class A Common Stock
offered hereby to any accounts over which they exercise discretionary authority.
The Company and Iridium have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and may provide in the future, commercial and investment banking services
to the Company and its affiliates, including Iridium and Motorola, for which
such Underwriters or their affiliates have received or will receive fees and
commissions.
VALIDITY OF THE CLASS A COMMON STOCK
The validity of the Class A Common Stock offered hereby and certain other
matters will be passed on for the Company by Conyers, Dill & Pearman, Hamilton,
Bermuda, special Bermuda Counsel to the Company. The Company and Iridium are
also being represented by Sullivan & Cromwell, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Fried, Frank, Harris,
Shriver & Jacobson, a partnership including professional corporations, New York,
New York.
130
<PAGE> 132
EXPERTS
The balance sheet of Iridium World Communications Ltd. as of December 31,
1996 and the consolidated financial statements of Iridium LLC as of December 31,
1996 and 1995, and for each of the years in the three-year period ended December
31, 1996, and for the period from June 14, 1991 (inception) through December 31,
1996 have been included herein and in the Registration Statement of which this
Prospectus forms a part in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company and Iridium have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement under the Securities Act
with respect to the Class A Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. For further information with respect to the Company,
Iridium and the Class A Common Stock offered hereby, reference is hereby made to
such Registration Statement and the exhibits thereto. Statements contained in
this Prospectus regarding the contents of any contract or other documents are
not necessarily complete; with respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. A copy of the
Registration Statement, including the exhibits thereto, may be inspected without
charge at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549; at its Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and its New York Regional Office, 7 World
Trade Center, New York, New York, 10048. Copies of such material may be obtained
from the public reference section of the Commission, Washington, D.C. 20549,
upon payment of the fees prescribed by the Commission. Additionally, the Company
will be subject to the public reporting requirements of the Securities Exchange
Act, as amended (the "Exchange Act"), and thus will file with the Commission
periodic reports pursuant to Section 13(d) and proxy statements pursuant to
Section 14 of the Exchange Act. These filings may also be inspected at or
obtained from the Commission. In addition, the Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission through the Electronic Data Gathering,
Analysis and Retrieval System.
The Company intends to furnish its stockholders annual reports containing
audited financial statements of the Company and Iridium and quarterly reports
containing unaudited interim financial information for the Company and Iridium
for the first three fiscal quarters of each fiscal year.
131
<PAGE> 133
ANNEX A
GLOSSARY
Aeronautical
Mobile-Satellite Route
Service ("AMS(R)S")...... aviation communications services for safety and
non-safety purposes
"AMPS"..................... Advanced Mobile Phone Service -- a transmission
protocol used by some cellular operators primarily
in the Americas
"antenna beams"............ tightly focused radio beams transmitted by the
IRIDIUM satellites
"Big LEO".................. LEO MSS systems operating in the bands 1610-1626.5
MHz/2483.5-2500 MHz
"bps"...................... bytes per second
"CDMA"..................... Code Division Multiple Access -- a transmission
protocol used by some cellular networks that is
derived from spread spectrum techniques of the
military
"clearinghouse
functions"................. expected to be performed by Iridium, clearinghouse
functions will include preparation of master
billing tapes, administration of the subscriber
numbering plan and settlement activities
"coordination"............. the process of negotiation and agreement between
ITU member nations by which cases of potential
harmful interference by services duly authorized by
ITU member nations are resolved
"co-rotating orbital
planes".................... immediately adjacent orbital paths
"cross-link antennas"...... antennas used by the satellites to communicate with
one another
"dB"....................... decibel -- a unit used to express relative
difference in power
"earth terminals".......... land based units which communicate with the IRIDIUM
satellite constellation
"excusable delay".......... has the meaning assigned thereto in the Space
System Contract
"ELVs"..................... expendable launch vehicles
"FCC"...................... the United States Federal Communications Commission
"feeder links"............. communications links between gateways and
satellites used to relay message data; these links
use the K-Band on the IRIDIUM System; sometimes
referred to as "gateway links"
FDMA/TDMA.................. Frequency Division Multiple Access/Time Division
Multiple Access -- a transmission protocol used by
some cellular networks
"gateways"................. terrestrial interconnection points between the
IRIDIUM satellite constellation and PSTNs
"gateway links"............ communications links between gateways and
satellites used to relay message data; these links
use the K-Band on the IRIDIUM System; sometimes
referred to as "feeder links"
"GEO"...................... geostationary earth orbit
"GHz"...................... gigahertz -- one billion cycles per second
A-1
<PAGE> 134
"global roaming"........... the ability to travel worldwide, subject to certain
limitations, and receive and make telephone calls
from a handheld mobile phone
"GMPCS".................... Global Mobile Personal Communication Services
"GMSS"..................... Global Mobile Satellite Services
"GSM"...................... Global System for Mobile Communications -- a
transmission protocol used by cellular networks
including most of Europe and parts of Asia
"ICRS"..................... Iridium Cellular Roaming Service
"IIU"...................... Iridium Interoperability Unit being developed under
the direction of Motorola to permit system
management information, including customer
authentication and location, to be relayed between
systems using different protocols
"Inmarsat"................. the International Maritime Satellite Organization
"Intelsat"................. the International Telecommunications Satellite
Organization
"intersatellite links"..... communications links among the satellites in the
IRIDIUM satellite constellation
"IRIDIUM Satellite
Services".................. the satellite-based voice, data and facsimile
services to be offered by Iridium
"IRIDIUM Services"......... the voice, data, facsimile and paging services to
be offered by Iridium
"IS-41".................... International Standard-41 -- a transmission
protocol used by cellular networks including most
of North America and South America
"ITU"...................... International Telecommunication Union
"landline"................. terrestrially-based telephone line
"LEO" (low earth orbit).... earth orbit at a relatively low (e.g., 780
kilometers) altitude
"link margin".............. the amount (usually expressed in dB) by which a
received signal exceeds a predetermined lower limit
for desired message quality
"LLC Agreement"............ the agreement, dated as of July 29, 1996, entered
into by the investors in Iridium, and pursuant to
which Iridium is organized
"main mission antennas".... the antennas used by IRIDIUM satellites to
communicate with subscriber equipment (phased array
antennas)
"master control
facility".................. the primary facility from which the IRIDIUM
constellation of satellites and the IRIDIUM System
are managed
"MEO"...................... medium earth orbit
"MHz"...................... megahertz -- one million cycles per second
"MSS"...................... mobile satellite services
"multi-mode phone"......... a phone designed to operate both with a terrestrial
wireless system and with the IRIDIUM System;
Motorola is designing a multi-mode phone which,
through the use of interchangeable TRCs will work
with various different terrestrial wireless
networks
"MXU"...................... multiplex units which contain numerous channels to
be used for communications between a terrestrial
telephone system and the IRIDIUM satellite
constellation
A-2
<PAGE> 135
"near polar orbit"......... a flight path which generally follows the earth's
longitudinal lines and crosses both poles during
each orbit
"Operations and Maintenance
Contract"................ the Communications System Operations and
Maintenance Contract, effective July 1993, between
Iridium and Motorola, as amended from time to time
"orbital plane"............ generally, the flight path of a satellite
"phone".................... a handset that can be used to provide IRIDIUM voice
services
"primary".................. in the context of spectrum allocation, an
allocation to a service that is granted protection
from harmful interference from stations of a
secondary service
"protocol"................. technical standard used by a wireless
communications system permitting communications,
user authentication and billing
"PSTN"..................... public switched telephone network
"Reserve Capital Call"..... the contractual commitment by 17 of Iridium's
investors to purchase up to 18,206,550 Class 1
Interests at $13.33 per Class 1 Interest
"secondary"................ in the context of spectrum allocation, an
allocation to a service that (i) cannot cause
harmful interference to stations of primary or
permitted services to which frequencies are already
assigned or to which frequencies may be assigned at
a later date and (ii) cannot claim protection from
harmful interference from stations of a primary or
permitted service to which frequencies are already
assigned or may be assigned at a later date
"service provider"......... the retail link in the IRIDIUM System distribution
chain -- IRIDIUM service providers are expected to
market IRIDIUM Services to, provide services for,
and ultimately bill the consumers of, IRIDIUM
Services. Gateway operators may or may not act as
service providers
"SIM Card"................. a subscriber identity module which, when inserted
into a phone, will permit the phone to identify a
subscriber to the IRIDIUM System
"space segment"............ the space-related portion of the IRIDIUM System
which will consist of a constellation of 66
operational low earth orbit satellites and related
ground infrastructure
"Space System Contract".... the Space System Contract, effective as of July 29,
1993, between Iridium and Motorola, as amended from
time to time
"spectrum"................. the radio frequency spectrum
"system control
facilities"................ facilities for controlling the operation of the
IRIDIUM System
"tail charge".............. the cost charged by local telephone systems for
connecting a telephone call
"TDMA"..................... Time Division Multiple Access -- a transmission
protocol used by some terrestrial wireless networks
"telemetry"................ the science of automatic measurement and
transmission of data from remote sources for
recording and analysis
A-3
<PAGE> 136
"Terrestrial Network
Development Contract".... the Terrestrial Network Development Contract,
entered into in June 1995, between Iridium and
Motorola, as amended from time to time
"TRCs"..................... Terrestrial Radio Cassettes being designed by
Motorola for use with multi-mode phones to permit
those phones to operate with one or more
terrestrial wireless protocols
"TT&C"..................... tracking, telemetry and command
"user links"............... communications links between subscriber equipment
and the IRIDIUM satellite constellation
"WRC-92/WRC-95"............ the 1992/1995 World Administrative Radio Conference
"WRCs"..................... World Radiocommunication Conferences (formerly
known as World Administrative Radio
Conferences -- WARCs)
"$"........................ United States Dollars
A-4
<PAGE> 137
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
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<S> <C>
IRIDIUM WORLD COMMUNICATIONS LTD.
Independent Auditors' Report.......................................................... F-2
Balance Sheet as of December 31, 1996................................................. F-3
Notes to Financial Statement.......................................................... F-4
Unaudited Condensed Balance Sheet as of March 31, 1997................................ F-5
Unaudited Condensed Statement of Cash Flows for the three months ended March 31,
1997................................................................................ F-6
Notes to Unaudited Condensed Financial Statements..................................... F-7
IRIDIUM LLC
Independent Auditors' Report.......................................................... F-8
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-9
Consolidated Statements of Loss for the years ended December 31, 1994, 1995 and 1996
and for the period from June 14, 1991 (Inception) through December 31, 1996......... F-10
Consolidated Statements of Members' Equity (Deficit) for the period from June 14, 1991
(Inception) through December 31, 1991, the year ended December 31, 1992, the seven
months ended July 29, 1993, the five months ended December 31, 1993, and the years
ended December 31, 1994, 1995 and 1996.............................................. F-11
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996, and the period from June 14, 1991 (Inception) through December 31, 1996....... F-12
Notes to Consolidated Financial Statements............................................ F-13
Unaudited Condensed Consolidated Balance Sheet as of March 31, 1997................... F-26
Unaudited Condensed Consolidated Statements of Loss for the three months ended March
31, 1996 and 1997 and for the period from June 14, 1991 (Inception) through March
31, 1997............................................................................ F-27
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1997 and for the period from June 14, 1991 (Inception) through
March 31, 1997...................................................................... F-28
Notes to Unaudited Condensed Consolidated Financial Statements........................ F-29
</TABLE>
F-1
<PAGE> 138
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Iridium World Communications Ltd.:
We have audited the accompanying balance sheet of Iridium World
Communications Ltd. (a development stage company) as of December 31, 1996. This
balance sheet 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 Iridium World Communications Ltd.
(a development stage company) as of December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG PEAT MARWICK LLP
Washington, D.C.
March 10, 1997
F-2
<PAGE> 139
IRIDIUM WORLD COMMUNICATIONS LTD.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE DATA)
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Total assets.......................................................................... $ --
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities........................................................................... $ --
Stockholder's equity:
Class A Common Stock, voting, par value $0.01; 20,000,000 shares authorized;
1,200,000 shares subscribed; none issued or outstanding.......................... 12
Class B Common Stock, non-voting, par value $0.01; 2,500,000 shares authorized; none
issued or outstanding............................................................ --
Subscription receivable............................................................. (12)
Retained earnings................................................................... --
----
Total stockholder's equity.................................................. --
----
Total liabilities and stockholder's equity.................................. $ --
====
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 140
IRIDIUM WORLD COMMUNICATIONS LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENT
1. ORGANIZATION AND BUSINESS
Iridium World Communications Ltd. (the "Company") was incorporated under
the laws of Bermuda on December 12, 1996. The Company is wholly owned by Iridium
LLC ("Iridium"), a limited liability company, which has subscribed to purchase
1,200,000 shares of $0.01 par value Class A Common Stock for an aggregate
purchase price of $12,000. The Company plans to file a registration statement
with the Securities and Exchange Commission in order to register its Class A
Common Stock for sale in an initial public offering (the "Offering"). Pursuant
to the 1997 Subscription Agreement between the Company and Iridium, the net
proceeds from the Offering will be invested in Class 1 Membership Interests of
Iridium (the "Class 1 Interests"). Upon consummation of the Offering, the
outstanding shares of Class A Common Stock subscribed to by Iridium will be
retired and the Company will become a member of Iridium.
Iridium is devoting substantially all of its present efforts to
constructing, developing and marketing the IRIDIUM communications system (the
"IRIDIUM System"). Iridium's planned principal operations, to manage the
operation of the IRIDIUM System, have not commenced and, accordingly, Iridium is
considered a development stage limited liability company. As the Company's
planned investment in Iridium will constitute its only asset, the Company is
also considered a development stage company.
Since its inception on December 12, 1996 through December 31, 1996, the
Company has not entered into any transactions or incurred any expenses.
2. COMMON STOCK
Concurrent with the Offering, the Company and Iridium intend to execute an
Interest Exchange Agreement that will allow holders of Class 1 Interests in
Iridium to exchange those interests, subject to the restrictions on transfer in
the Iridium Limited Liability Company Agreement, for shares of Class A Common
Stock in the Company at a ratio of one share of Class A Common Stock for each
Class 1 Interest, subject to anti-dilution adjustments. The Interest Exchange
Agreement will permit exchanges of Class 1 Interests commencing 90 days after
Iridium has achieved one full quarter of positive earnings before interest,
taxes, depreciation and amortization. No exchange shall take place unless
approved by Iridium pursuant to authorization of Directors representing at least
66 2/3% of the Iridium Board of Directors.
The Company and Iridium intend to commence a Global Ownership Program which
is designed to offer up to an aggregate of 2,500,000 shares of the Company's
Class B Common Stock at a purchase price of $13.33 per share to certain
governmental telecommunication administrations and related entities as part of a
comprehensive program to enhance market access, improve the competitive standing
of the IRIDIUM System and achieve appropriate regulatory approvals. At the time
of issuance, purchasers of Class B Common Stock will be required to pay only an
amount equal to the par value -- $.01 per share. The balance of the purchase
price will be payable through the withholding of dividends, if any, which would
otherwise be payable on the shares of Class B Common Stock. A holder of Class B
Common Stock may elect to pay the purchase price in cash at any time. Class B
Common Stock is convertible to Class A Common Stock on a one-for-one basis,
subject to anti-dilution adjustments, once certain conditions are met, including
full payment for the shares. The proceeds generated from each sale of Class B
Common Stock will be used to purchase Class 1 Interests in Iridium. The payment
terms with respect to such Class 1 Interests will mirror the payment terms on
the Class B Common Stock.
The Company and Iridium also intend to execute a Share Issuance Agreement
which provides that all net proceeds from future primary offerings of securities
by the Company will be invested in Class 1 Interests in Iridium.
F-4
<PAGE> 141
IRIDIUM WORLD COMMUNICATIONS LTD.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE DATA)
AS OF MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash................................................................................... $12
---
Total assets................................................................. $12
===
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities............................................................................ $--
Stockholder's equity:
Class A Common Stock, voting, par value $0.01; 20,000,000 shares authorized;
1,200,000 shares issued and outstanding........................................... 12
Class B Common Stock, non-voting, par value $0.01; 2,500,000 shares authorized; none
issued or outstanding............................................................. --
Retained earnings.................................................................... --
---
Total stockholder's equity................................................... 12
---
Total liabilities and stockholder's equity................................... $12
===
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-5
<PAGE> 142
IRIDIUM WORLD COMMUNICATIONS LTD.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities................................................... $--
Cash Flows from Investing Activities................................................... --
Cash Flows from Financing Activities:
Proceeds from Class A Common Stock subscribed........................................ 12
---
Increase in cash....................................................................... 12
Cash, beginning of period.............................................................. --
---
Cash, end of period.................................................................... $12
===
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-6
<PAGE> 143
IRIDIUM WORLD COMMUNICATIONS LTD.
(A DEVELOPMENT STAGE COMPANY)
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. (the "Company")
as of March 31, 1997 and its results of operations and cash flows for the three
months then ended. These condensed financial statements are unaudited and do not
include all related footnote disclosures.
Since its inception on December 12, 1996 through March 31, 1997, the
Company has not entered into any operating transactions or incurred any
expenses. The results of operations for the three months ended March 31, 1997
are not necessarily indicative of the results of operations expected in the
future.
The Company is a wholly owned subsidiary of Iridium LLC ("Iridium"). During
June 1997, the Company filed registration statements with the Securities and
Exchange Commission in order to register 13,800,000 shares of its Class A Common
Stock for sale in an initial public offering (the "Offering"). Pursuant to the
1997 Subscription Agreement between the Company and Iridium, the net proceeds
from the Offering will be invested in Iridium Class 1 Membership Interests (the
"Class 1 Interests"), at which time the outstanding shares of Class A Common
Stock held by Iridium will be retired, and the Company will become 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. The
Company is required to adopt the provisions of Statement 128 for the year ending
December 31, 1997. Earlier application is not permitted; however, upon adoption
the Company will be required to restate previously reported annual and interim
earnings (loss) per share data in accordance with the provisions of Statement
128. The Company 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 May 9, 1997, the Company's Board of Directors adopted a resolution to
increase the authorized shares of Class A Common Stock to 50,000,000 shares.
F-7
<PAGE> 144
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Members
Iridium LLC:
We have audited the accompanying consolidated balance sheets of Iridium LLC
and subsidiary (a development stage limited liability company) as of December
31, 1996 and 1995, and the related consolidated statements of loss, members'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1996, and for the period from June 14, 1991 (inception)
through December 31, 1996. 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 Iridium LLC
and subsidiary (a development stage limited liability company) as of December
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, and for the
period from June 14, 1991 (inception) through December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG PEAT MARWICK LLP
Washington, D.C.
February 28, 1997, except as to Note 12
which is as of May 9, 1997
F-8
<PAGE> 145
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT INTEREST DATA)
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 51,332 $ 1,889
Due from affiliates............................................. -- 3,476
Prepaid expenses and other current assets....................... 873 7,154
---------- ----------
Total current assets.................................... 52,205 12,519
Property and equipment -- net (Note 4)............................ 1,264 2,065
System under construction (Note 8)................................ 1,448,000 2,376,884
Other assets...................................................... 3,914 42,613
---------- ----------
Total assets............................................ $1,505,383 $2,434,081
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................... $ 4,969 $ 17,937
Accounts payable to Member (Note 8)............................. 90,186 100,563
---------- ----------
Total current liabilities............................... 95,155 118,500
Guaranteed bank facility (Note 5)................................. -- 505,000
Long-term debt due to Members (Note 6)............................ -- 230,904
Other liabilities (Note 9)........................................ 5,618 7,648
---------- ----------
Total liabilities....................................... 100,773 862,052
---------- ----------
Commitments and Contingencies (Notes 1, 3, 5, 8, 9 and 11)
Members' equity (Notes 1, 3, 5, 6, 8, 9 and 12):
Class 2 Interests, 50,000 interests authorized for Series M; an
aggregate of 300,000 interests authorized for Series A,
Series B and Series C
Series M, Convertible, no interests issued or outstanding.... -- --
Series A, Redeemable, Convertible, no and 46,977 interests
issued and outstanding; liquidation value of $46,977 as of
December 31, 1996........................................... -- 46,977
Series B, Redeemable, no and 1 interest issued and
outstanding................................................. -- --
Series C, Redeemable, no and 75 interests issued and
outstanding................................................. -- --
Class 1 Interests, 225,000,000 interests authorized; 110,326,200
and 120,836,025 interests issued and outstanding; 9,132,150
and no interests subscribed but unissued..................... 1,465,917 1,659,625
Deficit accumulated during the development stage................ (60,242) (133,840)
Adjustment for minimum pension liability (Note 9)............... (1,065) (733)
---------- ----------
Total Members' equity................................... 1,404,610 1,572,029
---------- ----------
Total liabilities and Members' equity................... $1,505,383 $2,434,081
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 146
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS EXCEPT INTEREST DATA)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JUNE 14, 1991
---------------------------------------- (INCEPTION) THROUGH
1994 1995 1996 DECEMBER 31, 1996
----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Operating expenses
Sales, general and administrative
(Notes 5, 8, 9 and 11)............ $ 17,561 $ 27,187 $ 71,404 $ 138,132
Other income
Interest income...................... 4,252 5,226 2,395 12,263
----------- ----------- ------------ ---------
Loss before provision for income
taxes................................ 13,309 21,961 69,009 125,869
Provision for income taxes (Note 7).... 1,525 1,684 4,589 7,971
----------- ----------- ------------ ---------
Net loss............................... $ 14,834 $ 23,645 $ 73,598 bow$ 133,840
========== ========== =========== =========
Preferred dividend requirement (Note
3)................................... -- -- 3,652
----------- ----------- ------------
Net loss applicable to Class 1
Interests............................ $ 14,834 $ 23,645 $ 77,250
========== ========== ===========
Net loss per Class 1 Interest.......... $ 0.38 $ 0.27 $ 0.64
========== ========== ===========
Weighted average interests used in
computing net loss per Class 1
Interest............................. 39,040,275 88,162,875 120,115,575
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 147
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT INTEREST DATA)
<TABLE>
<CAPTION>
ALL SERIES, CLASS 2 DEFICIT ADJUSTMENT
INTERESTS CLASS 1 INTERESTS ACCUMULATED FOR
------------------- ------------------------ DURING THE MINIMUM
NUMBER OF NUMBER OF DEVELOPMENT PENSION
INTERESTS AMOUNT INTERESTS AMOUNT STAGE LIABILITY TOTAL
--------- ------- ----------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception June 14, 1991.............. -- $ -- -- $ -- $ -- $ -- $ --
Net loss............................. -- -- -- -- (757) -- (757)
--------- ------- ----------- ---------- ------------ ---------- ----------
BALANCE, December 31, 1991........... -- -- -- -- (757) -- (757)
Net loss............................. -- -- -- -- (8,773) -- (8,773)
--------- ------- ----------- ---------- ------------ ---------- ----------
BALANCE, December 31, 1992........... -- -- -- -- (9,530) -- (9,530)
Net loss............................. -- -- -- -- (5,309) -- (5,309)
--------- ------- ----------- ---------- ------------ ---------- ----------
BALANCE, July 29, 1993............... -- -- -- -- (14,839) -- (14,839)
Class 1 Interests subscribed, July
29, 1993........................... -- -- 60,000,000 -- -- -- --
Subscribed Class 1 Interests issued
for cash at $13.33 per interest.... -- -- -- 324,167 -- -- 324,167
Costs of raising equity.............. -- -- -- (8,096) -- -- (8,096)
Net loss............................. -- -- -- -- (6,924) -- (6,924)
--------- ------- ----------- ---------- ------------ ---------- ----------
BALANCE, December 31, 1993........... -- -- 60,000,000 316,071 (21,763) -- 294,308
Class 1 Interests subscribed......... -- -- 59,458,350 -- -- -- --
Subscribed Class 1 Interests issued
for cash at $13.33 per interest.... -- -- -- 518,202 -- -- 518,202
Costs of raising equity.............. -- -- -- (1,863) -- -- (1,863)
Net loss............................. -- -- -- -- (14,834) -- (14,834)
--------- ------- ----------- ---------- ------------ ---------- ----------
BALANCE, December 31, 1994........... -- -- 119,458,350 832,410 (36,597) -- 795,813
Subscribed Class 1 Interests issued
for cash at $13.33 per interest.... -- -- -- 633,514 -- -- 633,514
Costs of raising equity.............. -- -- -- (7) -- -- (7)
Net loss............................. -- -- -- -- (23,645) -- (23,645)
Adjustment for minimum pension
liability.......................... -- -- -- -- -- (1,065) (1,065)
--------- ------- ----------- ---------- ------------ ---------- ----------
BALANCE, December 31, 1995........... -- -- 119,458,350 1,465,917 (60,242) (1,065) 1,404,610
Class 1 Interests subscribed......... -- -- 1,377,675 -- -- -- --
Subscribed Class 1 Interests issued
for cash at $13.33 per interest.... -- -- -- 140,131 -- -- 140,131
Class 2 Interests issued for cash at
$1,000 per interest................ 43,401 43,325 -- -- -- -- 43,325
Series A, Class 2 Interests issued in
dividends.......................... 3,652 3,652 -- (3,652) -- -- --
Costs of raising equity.............. -- -- -- (251) -- -- (251)
Warrants to purchase Class 1
Interests issued in connection with
14.5% Senior Subordinated Notes.... -- -- -- 31,761 -- -- 31,761
Warrants to purchase Class 1
Interests issued in connection with
debt guarantee..................... -- -- -- 25,719 -- -- 25,719
Net loss............................. -- -- -- -- (73,598) -- (73,598)
Adjustment for minimum pension
liability.......................... -- -- -- -- -- 332 332
--------- ------- ----------- ---------- ------------ ---------- ----------
BALANCE, December 31, 1996........... 47,053 $46,977 120,836,025 $1,659,625 $ (133,840) $ (733) $1,572,029
========== ======== ============ ========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 148
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 14, 1991
YEAR ENDED DECEMBER 31, (INCEPTION)
--------------------------------- THROUGH
1994 1995 1996 DECEMBER 31, 1996
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................... $ (14,834) $ (23,645) $ (73,598) $ (133,840)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation and amortization........... 832 751 674 2,305
Expense recognized from warrants issued
in connection with debt guarantee..... -- -- 25,719 25,719
Changes in assets and liabilities:
Increase in prepaid expenses and other
current assets..................... (105) (171) (6,281) (7,154)
Increase in due from affiliates....... -- -- (3,476) (3,476)
Increase in other assets.............. (188) (1,633) (14,079) (16,373)
Increase in accounts payable and
accrued expenses................... 1,549 1,586 12,968 17,937
Increase (decrease) in accounts
payable to member.................. (2,998) 186 377 563
Increase in other liabilities......... 1,867 1,940 2,362 6,915
--------- --------- --------- -----------
Net cash used in operating
activities....................... (13,877) (20,986) (55,334) (107,404)
--------- --------- --------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment........ (2,034) (493) (1,475) (4,370)
Additions to system under construction..... (321,000) (762,000) (890,757) (2,248,757)
--------- --------- --------- -----------
Net cash used in investing
activities....................... (323,034) (762,493) (892,232) (2,253,127)
--------- --------- --------- -----------
Cash Flows From Financing Activities:
Net proceeds from issuance of Class 1 and
Class 2 Interests....................... 516,339 633,514 183,205 1,649,128
Gross proceeds from issuance of senior
subordinated notes and warrants......... -- -- 238,453 238,453
Borrowings under bank line of credit....... -- -- 505,000 505,000
Deferred financing costs................... (533) (1,094) (28,535) (30,161)
--------- --------- --------- -----------
Net cash provided by financing
activities....................... 515,806 632,420 898,123 2,362,420
--------- --------- --------- -----------
Increase (decrease) in cash and cash
equivalents................................ 178,895 (151,059) (49,443) 1,889
Cash and Cash Equivalents, beginning of
period..................................... 23,496 202,391 51,332 --
--------- --------- --------- -----------
Cash and Cash Equivalents, end of period..... $ 202,391 $ 51,332 $ 1,889 $ 1,889
========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 149
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Iridium LLC ("Iridium") is devoting its present efforts to developing and
commercializing a global wireless 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.
Iridium, Inc. was incorporated on June 14, 1991. Iridium, Inc. operated as
a wholly-owned subsidiary of Motorola, Inc. ("Motorola") until July 29, 1993. On
July 29, 1993, Iridium, Inc. closed on, and had its first capital draw under, a
private placement of shares of Common Stock, subscribed to by U. S. and foreign
investors. A second private placement of shares of Common Stock was closed in
August 1994. A third private placement was closed in March 1996. Pursuant to
these private placements and four supplemental placements with certain
additional investors, the investors have invested approximately $1.62 billion in
common equity of Iridium (and could invest up to approximately $1.86 billion in
common equity if a reserve capital call is exercised in full by Iridium). All
Common Stock was sold pursuant to stock purchase agreements, some of which
provided, among other things, for the allocation of gateway service territories
to certain investors.
Iridium was formed as a limited liability company, under the terms and
conditions of the limited liability agreement ("LLC Agreement"), pursuant to the
provisions of the Delaware Limited Liability Company Act on July 29, 1996. Also
on July 29, 1996, Iridium, Inc. was merged with and into Iridium, with Iridium
as the surviving entity. Concurrent with the merger, all shares of Common Stock
of Iridium, Inc. were exchanged for Class 1 Membership Interests (the "Class 1
Interests") in Iridium.
Iridium has contracted with Motorola to design, develop, produce and
deliver into orbit the space segment component of the IRIDIUM System. The
scheduled date for delivery of the $3.45 billion space segment is in 1998.
Iridium plans to begin its commercial operations in the second half of 1998.
The IRIDIUM System is subject to regulation by the Federal Communications
Commission ("FCC") and by foreign administrations and regulatory bodies. On
January 31, 1995, Motorola obtained a license from the FCC to construct, launch
and operate the IRIDIUM System, subject to certain conditions.
The successful completion of the IRIDIUM System is subject, in part, to
raising additional funds. Iridium currently anticipates total capital
requirements of approximately $4.4 billion through September 1998, the expected
date of commencement of commercial operations. Iridium has raised equity
totaling $1.659 billion, and long-term and guaranteed bank facility commitments
totaling $0.988 billion. Iridium has commenced negotiations for an expanded
guaranteed bank facility for an additional $350 million. In addition, Iridium
has the right to exercise a reserve capital call up to $243 million in
additional Class 1 Interests from its members (see Note 3). The remaining funds,
approximately $1.5 billion, are expected to be raised through additional
financings of debt and/or equity as Iridium will have no source of revenues,
other than insignificant amounts of interest income, until 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Iridium LLC
and its wholly-owned subsidiary, Iridium World Communications Ltd. ("IWCL"). All
significant intercompany transactions have been eliminated.
Prior to July 29, 1993, Iridium was a wholly-owned subsidiary of Motorola.
As a result of three private placements of equity and four supplemental private
placements with certain additional equity investors, Motorola's direct and
indirect Class 1 Interest in Iridium has been reduced to approximately 24% as of
December 31, 1996 before considering unexercised warrants held by Motorola.
F-13
<PAGE> 150
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEVELOPMENT STAGE ENTERPRISE
Iridium is devoting substantially all of its present efforts to
constructing, developing and marketing the IRIDIUM System. Its planned principal
operations, to manage the operation of the IRIDIUM System, have not commenced.
ACCOUNTING 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 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 reported periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Iridium considers short-term, highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
Cash and cash equivalents include cash in banks and investments in reverse
repurchase agreements maturing overnight with Citibank, N.A. and Crestar Bank.
Such investments are recorded at cost, which approximates the market value.
PROPERTY AND EQUIPMENT
Property and equipment is carried at historical cost less accumulated
depreciation and amortization. Depreciation and amortization is calculated using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Office equipment and furniture.............................................. 5 years
Computer equipment.......................................................... 5 years
Software.................................................................... 3 years
Company vehicles............................................................ 5 years
</TABLE>
SYSTEM UNDER CONSTRUCTION
System under construction includes all costs incurred related to the
construction of the space and ground components of the IRIDIUM System.
Depreciation expense will be recognized on a satellite-by-satellite basis
commencing with the date of delivery in orbit of each satellite.
Interest costs incurred during the construction of the IRIDIUM System are
capitalized. Total interest cost incurred and capitalized for the year ended
December 31, 1996 was approximately $28,127,000. Interest paid for the year
ended December 31, 1996 was approximately $1,485,000. No interest was incurred,
paid or capitalized for the years ended December 31, 1994 and 1995.
During 1996, Iridium adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of" ("Statement 121"). Statement 121 requires that
long-lived assets to be held and used be reviewed by Iridium for impairment
whenever events of changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss is recognized when the
undiscounted net cash flows associated with the asset are less than the asset's
carrying amount. Impairment losses, if any, are measured as the excess of the
carrying amount of the asset over its estimated fair market value. The adoption
of Statement 121 did not have a material impact on Iridium's results of
operations for the year ended December 31, 1996.
F-14
<PAGE> 151
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MEMBER INTEREST-BASED COMPENSATION
During 1996, Iridium adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation" ("Statement 123"), which
encourages, but does not require, the recognition of member interest-based
employee compensation at fair value. Iridium has elected to continue to account
for member interest-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Accordingly, compensation cost
for options to purchase Class 1 Interests granted to employees is measured as
the excess, if any, of the fair value of Class 1 Interests at the date of the
grant over the exercise price an employee must pay to acquire the interest.
Warrants or options to purchase member interests granted to other than
employees as consideration for goods or services rendered are recognized at fair
market value.
EQUITY ISSUANCE COSTS
Iridium classifies all costs incurred in connection with the issuance of
equity as a reduction of members' equity. These costs include fees paid to
investment bankers, attorneys and others in connection with the issuance of
equity.
DEFERRED FINANCING COSTS
All costs incurred in connection with securing debt financing have been
deferred and are amortized over the terms of the related debt. Costs for future
debt financing are also deferred and are included in other non-current assets in
the accompanying consolidated balance sheets. Total deferred financing costs are
approximately $1,628,000 and $30,200,000 at December 31, 1995 and 1996,
respectively.
During October 1995, Iridium withdrew an intended public offering of
certain subordinated debt financing. Accordingly, Iridium wrote off
approximately $3,200,000 of deferred costs associated with the intended
financing. Such costs are included in operating expenses in the accompanying
consolidated statement of loss for the year ended December 31, 1995.
INCOME TAXES
Iridium, Inc. was subject to federal, state and local income taxes
directly. As a result of the merger of Iridium, Inc. with and into Iridium,
Iridium became a limited liability company. As a limited liability company,
Iridium is no longer subject to U. S. federal income tax directly. Rather, each
Class 1 member is subject to U.S. federal income taxation based on its ratable
portion of Iridium's income or loss. However, Iridium's primary operations are
in the District of Columbia, which does not recognize the limited liability
status for tax purposes. Accordingly, Iridium is subject to District of Columbia
franchise taxes directly. Iridium recognizes its provision for income taxes
under the asset and liability method. Under the asset and liability method,
deferred tax assets and deferred tax 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 tax rates expected
to apply to taxable income in the years in which these 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.
NET INCOME (LOSS) PER CLASS 1 INTEREST
Net income (loss) per Class 1 and Class 1 equivalent interest is calculated
by dividing net income (loss), after considering required dividends on Class 2
Interests, by the weighted average number of Class 1 and
F-15
<PAGE> 152
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Class 1 equivalent interests, to the extent dilutive, during the period. Class 1
equivalent interests are comprised of options and warrants and convertible Class
2 Interests. Due to the losses incurred during the years ended December 31,
1994, 1995 and 1996, the impact of the Class 1 equivalent interests is
anti-dilutive and is not presented.
RECLASSIFICATIONS
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
3. MEMBERS' EQUITY
CLASSES OF MEMBERSHIP INTERESTS
The members' interests in Iridium are divided into two classes: Class 1
Interests, which represent the common equity, and Class 2 Interests, which
represent the preferred equity. The LLC Agreement authorizes Iridium to issue
225,000,000 Class 1 Interests, 50,000 Series M Class 2 Interests, and 300,000
additional Class 2 Interests. A description of each of the classes of membership
interests follows:
Class 1 Interests. Subject to the rights of holders of any series of
Class 2 Interests, all voting rights of the members are vested in the Class
1 Interests. Each member is entitled to appoint one Director for each
5,250,000 Class 1 Interests owned. Class 1 members may aggregate any or all
of their Class 1 Interests with other Class 1 members and appoint one
Director for each 5,250,000 Class 1 Interests owned in the aggregate. The
members may manage Iridium only through their designated Directors and have
no authority, in their capacity as members, to act on behalf of or bind
Iridium.
The LLC Agreement contains a reserve capital call provision under
which certain members have agreed to purchase additional Class 1 Interests.
If the Board elects to exercise this option, Iridium could raise up to an
additional $243 million for 18,206,550 Class 1 Interests.
Series M Class 2 Interests. Motorola owns a warrant to purchase
Series M Class 2 Interests in an amount that is convertible into 2.5% of
the outstanding Class 1 Interests at the time of exercise of the warrant
(calculated on a fully diluted basis) at a price of $1,000 per Series M
Class 2 Interest. Each Series M Class 2 Interest is currently convertible
into 75 Class 1 Interests. The initial Series M Conversion Price is $13.33,
but is subject to anti-dilution adjustments from time to time. Dividends on
Series M Class 2 Interests are cumulative and accrue at the rate of 8% per
annum. No Series M Class 2 Interests are outstanding.
Series A Class 2 Interests. The Series A Class 2 Interests are
convertible preferred interests that pay dividends at a rate of 14 1/2% per
annum. Dividends on the Series A Class 2 Interests are payable, either in
kind or in cash, at the option of Iridium, through February 28, 2001.
Commencing March 1, 2001, dividends on the Series A Class 2 Interests are
payable only in cash. Dividends on the Series A Class 2 Interests accrue
whether or not they have been declared and whether or not there are profits
or other funds of Iridium legally available for the payment of such
dividends. No dividend may be declared and paid on the Class 1 Interests
unless all accrued dividends on the Series A Class 2 Interests have been
paid in full. The Series A Class 2 Interests are convertible to Class 1
Interests at any time at the option of the holder. Currently each Series A
Class 2 Interest may be converted into 18.51 Class 1 Interests. The Series
A Class 2 Interests are redeemable, at the option of Iridium at anytime
after March 1, 2001, subject to a premium if redeemed prior to March 1,
2005.
Series B and Series C Class 2 Interests. In connection with
Motorola's guarantee of Iridium's $750 million credit facility (the
"Guarantee Agreement") (See Note 5), Iridium issued to Motorola one Series
B Class 2 Interest and 75 Series C Class 2 Interests. The Series B Class 2
Interest and Series C
F-16
<PAGE> 153
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Class 2 Interests do not pay any dividends. The Series B Class 2 Interest
entitles Motorola to one seat on the Board of Directors in addition to
Directors it may appoint as the owner of Class 1 Interests and Series M
Class 2 Interests. The Series C Class 2 Interests entitle Motorola to
appoint a majority of the Board of Directors in the event of certain events
of default by Iridium. The Series B and Series C Class 2 Interests are
redeemable at the option of Iridium at $.01 per interest upon the later of
(i) the termination or expiration of the Guarantee Agreement and (ii) the
reimbursement of any payments made by Motorola pursuant to the Guarantee
Agreement.
The LLC Agreement provides that Iridium may merge or consolidate with one
or more limited liability companies, corporations, or similar entities, provided
that the transaction is approved by the Board of Directors and Class 1 members
holding not less than 66 2/3% of the outstanding Class 1 Interests. In the event
of a merger, members who hold interests and do not vote in favor of, or consent
in writing to, the merger are entitled to appraisal and repurchase rights of
their interests as specified in the LLC Agreement.
DIVIDEND AND LIQUIDATION RIGHTS
Class 1 members are entitled to receive dividends, as and when declared by
the Board of Directors, in its discretion. Class 2 members are entitled to
receive dividends, if any, in accordance with the terms of the relevant series
of Class 2 Interests, as and when declared by the Board of Directors. The Class
2 Interests rank senior to the Class 1 Interests as to dividends and
distributions upon the liquidation, dissolution and winding-up of Iridium.
The LLC Agreement requires the Iridium Board of Directors, to the extent of
legally available funds, to declare and pay a dividend sufficient to assure that
each non-U.S. Class 1 Member receives an amount at least equal to the amount of
such member's U.S. federal, state and local income tax liability resulting from
allocations of Iridium's taxable income to such member.
The LLC Agreement contains significant restrictions on the ability of a
member to transfer any interests in Iridium, including but not limited to the
conditions that: (i) a majority of the Directors approve the transfer, and (ii)
the transfer not result in any member beneficially owning, or having the right
to beneficially own, more than 45% of the outstanding Class 1 Interests.
LIMITATIONS ON LIABILITY
Members are generally not liable for the debts, obligations or liabilities
of Iridium. IWCL, which will become a member of Iridium upon the consummation of
a pending public equity offering, has waived this limitation on liability.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996, consists of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Office equipment and furniture..................................... $ 1,977 $ 3,113
Trade show booth................................................... 722 826
Company vehicles................................................... 30 --
Leasehold improvements............................................. 168 405
------- -------
2,897 4,344
Less accumulated depreciation and amortization..................... (1,633) (2,279)
------- -------
Property and equipment, net........................................ $ 1,264 $ 2,065
======= =======
</TABLE>
F-17
<PAGE> 154
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. GUARANTEED BANK FACILITY
On August 21, 1996, Iridium entered into a $750 million credit agreement
with a group of banks led by Chase Manhattan Bank, NA and Barclays Bank, PLC. On
the same date Iridium entered into the Guarantee Agreement whereby Motorola
agreed to guarantee the entire $750 million commitment amount. The credit
agreement provides that Iridium may elect to borrow amounts at the then current
short-term Eurodollar rate plus 1/4% or at the then current Prime Rate of Chase
Manhattan Bank. Iridium also pays a commitment fee of 1/10 of 1% on any unused
portion of the $750 million credit facility. Interest rates on the guaranteed
bank facility ranged from 5.75% to 5.94% during 1996. The credit agreement
expires on August 20, 1998.
Under the Guarantee Agreement, Iridium is required to issue up to 150,000
warrants to Motorola to purchase up to 11,250,000 Class 1 Interests in Iridium.
As consideration for its guarantee, Motorola earns up to 82,500 warrants to
purchase up to 6,187,500 Class 1 Interests for each year the $750 million
guarantee is outstanding, but in no event warrants to purchase more than
11,250,000 Class 1 Interests over the term of the guarantee. Warrants earned are
issued to Motorola on a quarterly basis. Each warrant entitles Motorola to
purchase 75 Class 1 Interests at an exercise price of $.01 per warrant, subject
to anti-dilution adjustments. The warrants may be exercised five years from date
of issuance and expire ten years from date of issuance. As of December 31, 1996,
Motorola has earned 29,836 warrants to purchase 2,237,700 Class 1 Interests in
accordance with the Guarantee Agreement. For the year ended December 31, 1996,
Iridium recognized $25,719,000 as an expense to reflect the fair market value of
the warrants earned by Motorola. Motorola has also been granted a security
interest in all of Iridium's assets.
Subsequent to December 31, 1996, Iridium, Motorola and a group of banks
commenced negotiations for an expansion of the guaranteed bank facility by $350
million under similar terms and conditions for borrowings and the guarantee by
Motorola as the existing $750 million facility.
6. LONG-TERM DEBT DUE TO MEMBERS
During 1996, Iridium sold units to certain of its members and their
affiliates; each unit consisting of $1,000 principal amount at maturity 14 1/2%
Senior Subordinated Discount Notes due 2006 (the "Notes") and one warrant to
purchase 10.40775 Class 1 Interests, for aggregate proceeds to Iridium of
approximately $238,453,000. The Notes are unsecured and are subordinate to all
senior debt of Iridium. The Notes fully accrete to an aggregate face value of
$480,150,000 on March 1, 2001 and mature on March 1, 2006. Each Note accrues
cash interest at a rate of 14 1/2% per annum, payable semi-annually commencing
on September 1, 2001. The Notes will be subject to redemption, at the option of
Iridium, at any time on or after March 1, 2001. The warrants entitle the holder
to purchase Class 1 Interests at an exercise price of $.01 per warrant, are
exercisable on March 1, 2001 and expire on March 1, 2006. Iridium recognized the
estimated fair market value of these warrants of $31,761,000 as an addition to
members' equity.
7. INCOME TAXES
From inception through July 29, 1996, Iridium, Inc. was subject to U. S.
federal and state and local income taxes directly, and accordingly, recognized
provisions for income taxes for U. S. federal and for all state and local
jurisdictions. Subsequent to the merger of Iridium, Inc. into a limited
liability company, Iridium is no longer subject to U.S. federal income tax
directly; however, Iridium is subject to District of Columbia franchise taxes.
F-18
<PAGE> 155
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Iridium's provision for income taxes for the years ended December 31, 1994,
1995, and 1996 consists of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C> <C>
Current -- Federal........................................ $1,142 $1,258 $3,435
-- State and Local................................ 383 426 1,154
Deferred -- Federal........................................ -- -- --
-- State and Local................................ -- -- --
------ ------ ------
$1,525 $1,684 $4,589
====== ====== ======
</TABLE>
The primary reconciling differences between income tax expense and the
amount of tax benefit that would be expected to result by applying the Federal
statutory rate of 35% to the loss before income taxes for the years ended
December 31, 1994 and 1995 and the period from January 1, 1996 to July 29, 1996
(the date of the merger of Iridium, Inc. into Iridium) relate primarily to the
capitalization for tax purposes of certain start-up expenditures, and state and
local taxes. The capitalization of start-up expenditures resulted in Iridium's
only significant deferred tax asset of $19,944,000 at December 31, 1995, for
which a 100% valuation allowance was established. Subsequent to the date of the
merger of Iridium, Inc. into Iridium, Iridium recognizes deferred taxes for
those jurisdictions for which Iridium is taxed directly, resulting in a deferred
tax asset for capitalized start-up expenditures of $4,774,000 at December 31,
1996, for which a 100% valuation allowance has been established.
During the years ended December 31, 1994, 1995, and 1996, Iridium made
income tax payments of approximately $1,430,000, $849,000 and $5,746,000,
respectively.
8. TRANSACTIONS WITH MEMBERS
SUPPORT AGREEMENT
Under a Support Agreement, Motorola provides certain general and
administrative support to Iridium. On a cost reimbursable basis, Motorola has
provided payroll processing and related benefits to Iridium employees, processed
payments to certain contractors providing support to Iridium, and provided other
administrative support. The amounts and nature of such costs for the years ended
December 31, 1994, 1995 and 1996 consist of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ---- ----
<S> <C> <C> <C>
Stock issuance costs................................ $2,612 $ -- $ --
Fixed assets, net................................... 35 -- --
------ ---- ----
Total capitalized......................... 2,647 -- --
------ ---- ----
Payroll and related costs........................... 428 -- --
Travel.............................................. 35 -- 8
Consulting.......................................... 493 603 826
Other............................................... 229 1 18
------ ---- ----
Total expense............................. 1,185 604 852
------ ---- ----
Total..................................... $3,832 $604 $852
====== ==== ====
</TABLE>
As of December 31, 1995, and 1996, Iridium's balance payable to Motorola
under the Support Agreement was approximately $186,000 and $563,000,
respectively.
F-19
<PAGE> 156
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPACE SYSTEM CONTRACT
Iridium has a Space System Contract with Motorola to design, develop,
produce and deliver the Space Segment component of the Iridium Communications
System. Under this fixed priced contract, Motorola will construct the space
vehicles and place them into low-earth orbits for a contract price of $3.45
billion (subject to certain adjustments). The scheduled date of commencement of
commercial operations is September 1998. For the years ended December 31, 1994,
1995, and 1996, Iridium incurred $371 million, $802 million, and $836 million,
respectively, under the Space System Contract. Such costs are capitalized as
system under construction in the accompanying consolidated balance sheets. As of
December 31, 1995 and 1996, Iridium's balance payable to Motorola under the
Space System Contract was $90 million and $100 million, respectively.
The aggregate fixed and determinable portion of all remaining obligations
under the Space System Contract is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
1997................................................................ $ 652,000
1998................................................................ 514,000
----------
$1,166,000
=========
</TABLE>
TERRESTRIAL NETWORK DEVELOPMENT CONTRACT
During 1995, Iridium entered into a Terrestrial Network Development
Contract ("TNDC") with Motorola for an original amount of $160 million. Under
the TNDC, Motorola is designing and developing the terrestrial gateway hardware
and software. The payments under the original contract are tied to the
completion of milestones specified in the contract. During 1996, Iridium and
Motorola amended the TNDC. Under the amendment, Motorola will provide additional
services and support under the TNDC in exchange for an additional $18.9 million.
In lieu of a cash payment for the $18.9 million, Iridium may, at its election,
issue 5,545 warrants to purchase an aggregate of 415,875 Class 1 Interests to
Motorola. The warrants, if issued, have an exercise price of $.01 per warrant
and may be exercised beginning March 1, 2001 and expire on March 1, 2006.
Certain of Iridium's members will own the individual gateways and will have no
obligation to Iridium for any of the amounts due to Motorola under the TNDC. For
the year ended December 31, 1996, Iridium incurred $64 million under the TNDC.
Such costs are capitalized as system under construction in the accompanying
consolidated balance sheets.
The aggregate fixed and determinable portion of all remaining obligations
under the TNDC, assuming that all obligations are settled in cash, is as follow
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------------------------- --------
<S> <C>
1997................................................................. $ 68,000
1998................................................................. 46,900
--------
$114,900
========
</TABLE>
OPERATIONS AND MAINTENANCE CONTRACT
To provide for the operations and maintenance of the space segment upon
completion of the Space System Contract, Iridium has entered into the Operations
and Maintenance Contract ("O&M") with Motorola. This contract obligates Motorola
for a period of five years after completion of the final milestone under the
Space System Contract to operate the Space System, and to exert its best efforts
to monitor, upgrade and replace hardware and software of the space segment
(including the individual space vehicles) at specified levels, in exchange for
specified quarterly payments. Such payments are expected to begin in 1998
F-20
<PAGE> 157
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and to aggregate approximately $2.9 billion. During 1996, Iridium entered into a
two-year option agreement to extend the O&M contract with Motorola after the
completion of the initial five-year term. If such option is exercised, Iridium
will be obligated to make quarterly payments expected to aggregate an additional
$1.3 billion. Assuming that commercial operations commence in September 1998,
the aggregate fixed and determinable portion of all obligations under the O&M is
expected to be as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
1997................................................................ $ --
1998................................................................ 120,000
1999................................................................ 537,000
2000................................................................ 558,000
2001 and thereafter................................................. 1,685,000
----------
$2,900,000
=========
</TABLE>
GATEWAY OWNERS INCENTIVES
Iridium has agreed to issue warrants to purchase 300,000 Class 1 Interests
to each gateway owner whose specified gateway activities are completed on
schedule, and warrants to purchase 7,500 Class 1 Interests for each $1 million
of cumulative Iridium service revenue generated within 15 months of commercial
activation, but in no event will more than an aggregate of 122,200 warrants to
purchase an aggregate of 9,165,000 Class 1 Interests be issued to all gateway
owners. The warrants will have terms identical to those issued to Motorola under
the Guarantee Agreement (see Note 5). As of December 31, 1996, no such warrants
had been issued.
9. EMPLOYEE BENEFITS
Iridium has adopted a comprehensive performance incentive and retirement
benefit package. The performance incentive program became effective in 1993,
while the various retirement plans became effective on February 1, 1994.
INCENTIVE PROGRAMS
Iridium has established short- and long-term incentive plans primarily
based on employee performance. Effective December 31, 1995, Iridium terminated
the long-term incentive plan. The remaining liability of the long-term incentive
plan is approximately $2,426,000 as of December 31, 1996 and is expected to be
paid in 1999. Under these plans, Iridium incurred expenses of approximately
$1,100,000, $1,300,000, and $1,252,000 for the years ended December 31, 1994,
1995, and 1996, respectively.
401(K) EMPLOYEE RETIREMENT SAVINGS PLAN
Iridium adopted a 401(k) employee retirement savings plan in 1994 covering
all employees. Iridium makes matching contributions to this qualified plan on
behalf of participating employees up to 3% of employees' compensation. Employee
contributions to the plan vest immediately. Iridium contributions vest ratably
over a seven-year period, including service credit for any prior employment with
Motorola. Under this plan, Iridium has incurred expenses of approximately
$87,000, $161,000 and $288,000 during the years ended December 31, 1994, 1995
and 1996, respectively.
RETIREMENT PLANS
All employees of Iridium are covered by a non-contributory defined benefit
retirement plan. Vesting in plan benefits generally occurs after five years.
Benefits under the plan are based on years of credited service
F-21
<PAGE> 158
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(including any prior employment with Motorola), age at retirement and the
average earnings over the last four years. The plan is funded annually in
accordance with the Employee Retirement Income Security Act of 1974.
In early 1995, Iridium adopted a non-qualified defined benefit plan
covering employees earning in excess of the maximum amounts which may be
considered under the qualified plan, excluding those executives participating in
the supplemental executive plans described below, who also participate in the
qualified defined benefit plan.
SUPPLEMENTAL EXECUTIVE PLANS
Iridium maintains a non-qualified defined benefit plan for selected senior
officers. During 1994 and 1995, one senior executive officer was covered by a
separate plan and a second plan was added for three additional executive
officers in early 1995. Vesting in these plans generally occur upon the
attainment of age 55 with five years of service. Benefits under these plans are
based on average annual compensation prior to retirement. Iridium has also
agreed to provide for the payment of certain taxes associated with plan
benefits. The supplemental executive plans are not funded. The net periodic
pension cost recognized under the plans was approximately $698,000, $1,256,000
and $1,925,000 for the years ended December 31, 1994, 1995, and 1996,
respectively. In addition, Iridium recorded an additional minimum pension
liability adjustment of ($1,065,000) and $332,000 for the years ended December
31, 1995 and 1996, respectively, for its non-qualified plans. The additional
minimum pension liability is included as a reduction to members' equity.
SUMMARY OF DEFINED BENEFIT PLANS
Pension cost for the qualified and non-qualified defined benefit plans in
total for the years ended December 31, 1994, 1995 and 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------------------- --------------------- ---------------------
NON- NON- NON-
QUALIFIED QUALIFIED QUALIFIED QUALIFIED QUALIFIED QUALIFIED
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service Cost....................... $ 272 $ 294 $ 372 $ 377 $ 789 $ 438
Interest cost on projected benefit
obligation....................... 54 24 70 246 133 339
Actual return on assets............ (34) -- (66) -- (82) 51
Amortization of transition
obligation....................... 17 71 19 238 19 238
--------- --------- --------- --------- --------- ---------
Net periodic cost.................. $ 309 $ 389 $ 395 $ 861 $ 859 $ 1,066
====== ====== ====== ====== ====== ======
</TABLE>
F-22
<PAGE> 159
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table describes the funded status of the plans at December
31, 1995 and 1996 (in thousands). The actuarial calculations were determined by
Iridium's consulting actuaries:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
NON- NON-
QUALIFIED QUALIFIED QUALIFIED QUALIFIED
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Accumulated present value of obligations:
Accumulated benefit obligation, including vested
benefits..................................... $ (1,158) $ (2,209) $ (1,828) $ (2,746)
======== ======== ======== ========
Projected benefit obligation for service
rendered to date............................. $ (1,602) $ (4,404) $ (2,554) $ (5,179)
Plan assets at fair value....................... 1,186 -- 1,931 --
-------- -------- -------- --------
Projected benefit obligation in excess of plan
assets....................................... (416) (4,404) (623) (5,179)
Unrecognized transition obligation.............. 339 2,598 320 2,360
Unrecognized net (gain) loss.................... (122) 662 (227) 609
-------- -------- -------- --------
Accrued pension cost............................ (199) (1,144) (530) (2,210)
Adjustment required to recognize minimum
liability.................................... -- (1,065) -- (733)
-------- -------- -------- --------
Pension liability............................... $ (199) $ (2,209) $ (530) $ (2,943)
======== ======== ======== ========
Actuarial assumptions:
Discount rate................................... 7% 7% 7.5% 7.5%
Long-term rate of return........................ 8% 8% 8% 8%
Salary increases................................ 5% 5% 5% 5%
</TABLE>
OPTION PLAN
On January 1, 1996, Iridium adopted an Option Plan. Under the terms of the
Option Plan, certain key employees were granted, at the discretion of the Board
of Directors, options to purchase Class 1 Interests. At the date of grant, each
employee has the option to purchase in cash all granted amounts of options,
subject to a five-year vesting period, or defer the exercise of such option over
a ten-year period, subject to earlier termination clauses. As of December 31,
1996, 2,625,000 Class 1 Interests have been reserved for issuance under the
Option Plan. As permitted by Statement 123, Iridium applies the intrinsic value
method in accounting for compensation cost under this plan. Accordingly, as all
options to acquire Class 1 Interests have been granted at an exercise price
equal to the fair market value as of the date of grant, no compensation cost has
been recognized under this plan in the accompanying consolidated financial
statements. Had compensation cost been determined consistent with the fair value
method of Statement 123, Iridium's net loss would have been increased to the pro
forma amount indicated below (in thousands except per interest data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C> <C>
Net loss.......................... As reported....................... $ (73,598)
Pro forma......................... (74,172)
Net loss per Class 1 Interest..... As reported....................... $ 0.64
Pro forma......................... 0.65
</TABLE>
During 1996, the fair value of options granted are estimated on the dates
of the grants using the Black-Scholes Option Pricing Model with the following
weighted-average assumptions: dividend yield of 0.0%, expected volatility of
45%, risk-free interest rate of 6.7%, and expected life of five years. The
effects on compensation cost as determined under Statement 123 on net loss in
1996 may not be representative of the effects on pro forma net income (loss) for
future periods.
F-23
<PAGE> 160
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes Iridium's Option Plan:
<TABLE>
<CAPTION>
WEIGHTED
INTERESTS AVERAGE
UNDER EXERCISE
OPTION PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995................................. -- --
Granted..................................................... 729,750 $13.33
Exercised................................................... -- --
Forfeited................................................... -- --
--------- --------
Outstanding at December 31, 1996................................. 729,750 $13.33
--------- --------
Options exercisable at December 31, 1996......................... --
---------
Weighted-average fair value at date of grant of options granted
during the year ended December 31, 1996........................ $ 6.50
---------
Weighted-average remaining contractual life (in years)........... 9.39
---------
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of Iridium's financial instruments as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Guaranteed bank facility....................................... $505,000 $505,000
Long-term debt due to Members.................................. 230,904 230,904
</TABLE>
The fair value of Iridium's long-term debt is estimated based on the
current rates offered to Iridium for similar debt. The carrying amounts of cash
and cash equivalents, short-term investments, due from affiliates and accounts
payable and accrued expenses approximate their fair market value as of December
31, 1996 and 1995 because of the relatively short duration of these accounts.
11. OPERATING LEASE COMMITMENTS
Iridium leases its corporate headquarters office space and certain office
equipment under non-cancelable operating lease agreements expiring through 1999.
The corporate headquarters office lease is for a term of five years, which may
be extended at Iridium's election for an additional five years. Future minimum
payments under all operating lease arrangements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------------------------- ------
<S> <C>
1997............................................................... $1,858
1998............................................................... 1,880
1999............................................................... 156
------
$3,894
======
</TABLE>
The office lease agreement also requires Iridium to pay operating expenses,
which are estimated at $400,000 annually. Rent expense for the years ended
December 31, 1994, 1995, and 1996 was approximately $793,000, $1,025,000, and
$1,194,000, respectively.
F-24
<PAGE> 161
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS
On April 16, 1997, the Limited Liability Company Agreement 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 Interests whereby each existing Class 1 Interest was subdivided into 75
Class 1 Interests. All interest and per interest data appearing in the
consolidated financial statements and notes thereto have been retroactively
adjusted for the subdivision.
F-25
<PAGE> 162
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT INTEREST DATA)
AS OF MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 15,659
Due from affiliates............................................................ 4,347
Prepaid expenses and other current assets...................................... 8,029
----------
Total current assets................................................... 28,035
Property and equipment -- net.................................................... 3,057
System under construction........................................................ 2,395,597
Other assets..................................................................... 56,816
----------
Total assets........................................................... $2,483,505
=========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... $ 18,756
Accounts payable to member..................................................... 75
----------
Total current liabilities.............................................. 18,831
Guaranteed bank facility......................................................... 665,000
Long-term debt due to Members.................................................... 240,178
Other liabilities................................................................ 5,860
----------
Total liabilities...................................................... 929,869
----------
Commitments and Contingencies
Members' equity:
Class 2 Interests, 50,000 interests authorized for Series M; an aggregate of
300,000 interests authorized for Series A, Series B and Series C:
Series M, convertible, no interest issued and outstanding................... --
Series A, redeemable, convertible, 49,268 interests issued and outstanding;
liquidation value of $49,268............................................... 49,268
Series B, redeemable, 1 interest issued and outstanding..................... --
Series C, redeemable, 75 interests issued and outstanding................... --
Class 1 Interests, 225,000,000 interests authorized; 120,836,025 interests
issued and outstanding...................................................... 1,674,869
Deficit accumulated during the development stage............................... (169,768)
Adjustment for minimum pension liability....................................... (733)
----------
Total Members' equity.................................................. 1,553,636
----------
Total liabilities and Members' equity.................................. $2,483,505
=========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-26
<PAGE> 163
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS EXCEPT INTEREST DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH PERIOD FROM
31, JUNE 14, 1991
------------------------- (INCEPTION) THROUGH
1996 1997 MARCH 31, 1997
----------- ----------- -------------------
<S> <C> <C> <C>
Operating expenses
Sales, general and administrative................. $ 8,410 $ 36,054 $ 174,186
Other income
Interest income................................... 1,234 126 12,389
----------- ----------- ---------
Loss before provision for income taxes.............. 7,176 35,928 161,797
Provision for income taxes.......................... 487 -- 7,971
----------- ----------- ---------
Net loss............................................ $ 7,663 $ 35,928 $ 169,768
=========== =========== =========
Preferred dividend requirement...................... -- 2,291
----------- -----------
Net loss applicable to Class 1 Interests............ $ 7,663 $ 38,219
=========== ===========
Net loss per Class 1 Interest....................... $ 0.07 $ 0.32
=========== ===========
Weighted average interests used in computing net
loss per Class 1 Interest......................... 117,505,200 120,115,575
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-27
<PAGE> 164
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED JUNE 14, 1991
MARCH 31, (INCEPTION)
--------------------- THROUGH
1996 1997 MARCH 31, 1997
--------- --------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss...................................................................... $ (7,663) $ (35,928) $ (169,768)
Adjustments to reconcile net loss to net cash used in operating activities --
Depreciation and amortization............................................... 134 231 2,536
Expense recognized from warrants issued in connection with debt guarantee... -- 17,536 43,255
Changes in assets and liabilities:
Decrease (increase) in prepaids and other current assets.................. 163 (875) (8,029)
Increase in due from affiliates........................................... -- (871) (4,347)
Increase in other assets.................................................. (1,200) (13,465) (29,838)
Increase in accounts payable and accrued expenses......................... 414 819 18,756
Increase (decrease) in accounts payable to member......................... (58) (488) 75
Increase (decrease) in other liabilities.................................. 1,490 (1,788) 5,127
--------- --------- --------------
Net cash used in operating activities................................... (6,720) (34,829) (142,233)
--------- --------- --------------
Cash Flows From Investing Activities:
Purchases of property and equipment........................................... (268) (1,224) (5,594)
Additions to system under construction........................................ (270,755) (109,439) (2,358,196)
--------- --------- --------------
Net cash used in investing activities................................... (271,023) (110,663) (2,363,790)
--------- --------- --------------
Cash Flows From Financing Activities:
Net proceeds from issuance of Class 1 and Class 2 Interests................... 139,298 -- 1,649,128
Gross proceeds from issuance of senior subordinated notes and warrants........ 110,195 -- 238,453
Borrowings under bank line of credit.......................................... -- 160,000 665,000
Deferred financing costs...................................................... (302) (738) (30,899)
--------- --------- --------------
Net cash provided by financing activities............................... 249,191 159,262 2,521,682
--------- --------- --------------
Increase (decrease) in cash and cash equivalents................................ (28,552) 13,770 15,659
Cash and Cash Equivalents, beginning of period.................................. 51,332 1,889 --
--------- --------- --------------
Cash and Cash Equivalents, end of period........................................ $ 22,780 $ 15,659 $ 15,659
========= ========= ============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-28
<PAGE> 165
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 LLC ("Iridium") as of March 31, 1997, and the results of
their operations and cash flows for the three month periods ended March 31, 1997
and 1996, and the period from June 14, 1991 (inception) through March 31, 1997.
These condensed consolidated financial statements are unaudited, and do not
include all related footnote disclosures. The results of operations for the
three months ended March 31, 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.
2. WARRANTS ISSUED TO MEMBER
In accordance with the Guarantee Agreement between Iridium and Motorola, an
additional 20,343 warrants to purchase 1,525,725 Class 1 Interests were earned
by Motorola during the three months ended March 31, 1997. Iridium recognized
$17,536,000 as expense during the three months ended March 31, 1997 to reflect
the fair market value of the warrants earned by Motorola.
3. SERIES A, CLASS 2 INTERESTS
Iridium paid 2,291,000 in-kind dividends to holders of Series A, Class 2
interests during the three month period ended March 31, 1997.
4. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 1997 and 1996, $18,712,000 and
$799,000, respectively, of interest expense was incurred and capitalized to the
system under construction. Interest paid was $2,453,000 during the three months
ended March 31, 1997, and no amounts were paid for interest during the three
months ended March 31, 1996.
There were no income taxes paid during the three months ended March 31,
1997, and the amount paid for income taxes was $499,000 during the three months
ended March 31, 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 is negotiating a variety of
pending and anticipated amendments and interpretations to the Terrestrial
Network Development Contract ("TNDC") with Motorola which are estimated to
approximate an aggregate of an additional $110 million under the TNDC. Iridium
expects that such amendments to the TNDC will be completed during the remainder
of 1997.
F-29
<PAGE> 166
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
7. SUBSEQUENT EVENTS
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 P.T.
Bakrie Communications Corporation ("Bakrie") pursuant to which Bakrie has agreed
to acquire from Iridium 7,500,000 Class 1 Interests at $13.33 per interest. The
transaction is scheduled to close on May 30, 1997 with 40% of the total purchase
price payable on that date, 10% on November 15, 1997 and 50% on May 15, 1998. In
connection with its investment in Iridium, Bakrie will be allocated the South
Pacific gateway service territory.
F-30
<PAGE> 167
[BACK INSIDE COVER]
Pictured is the inside of the master control facility. The pictured is
bordered by a list of the current investors in Iridium and is surrounded on the
top and bottom by the following text:
"The Power of Cellular and Satellite Communications"
". . . In the Palm of Your Hand.
IRIDIUM
Iridium LLC is developing and commercializing a mobile wireless
communications system that will combine the convenience of terrestrial
wireless systems with the global reach of the IRIDIUM Satellite System.
The IRIDIUM system is expected to enable subscribers to send and
receive telephone calls virtually anywhere in the world -- all with
one phone, one phone number and one customer bill".
<PAGE> 168
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, IRIDIUM OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OF CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY OR IRIDIUM SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 14
The Company and Iridium's Strategic
Investors.................................. 40
Use of Proceeds.............................. 42
Dividend Policy.............................. 42
Dilution..................................... 43
Capitalization............................... 45
Selected Financial Data...................... 46
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 48
Business..................................... 51
Regulation of Iridium........................ 70
Principal Contracts for the Development of
the IRIDIUM System......................... 78
Management................................... 85
Interest Ownership of Certain Beneficial
Owners and Management...................... 99
Certain Relationships and Related
Transactions of Iridium.................... 100
Iridium's Investors, Number of Class 1
Interests Owned, Percentage Ownership and
Principal Gateway Service Territories...... 101
Governance of the Company and Relationship
with Iridium............................... 106
Description of Capital Stock................. 110
Description of Iridium LLC Limited Liability
Company Agreement.......................... 114
Tax Considerations........................... 121
Shares Eligible for Future Sale.............. 125
Underwriting................................. 127
Validity of the Class A Common Stock......... 130
Experts...................................... 131
Available Information........................ 131
Glossary..................................... A-1
Index to Financial Statements................ F-1
</TABLE>
------------------------
UNTIL JULY 4, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
12,000,000 SHARES
IRIDIUM WORLD
COMMUNICATIONS LTD.
CLASS A COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
JUNE 9, 1997
======================================================
<PAGE> 169
PROSPECTUS
12,000,000 SHARES
IRIDIUM WORLD COMMUNICATIONS LTD.
CLASS A COMMON STOCK
---------------------
Of the 12,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), of Iridium World Communications Ltd., a Bermuda
company (the "Company"), being offered hereby, 2,400,000 shares are being
offered outside of the United States and Canada by the International Managers
(the "International Offering") and 9,600,000 shares are being offered in a
concurrent offering in the United States and Canada by the U.S. Underwriters
(the "U.S. Offering" and, together with the International Offering, the
"Offerings"). The public offering price and the underwriting discount per share
are identical for both Offerings. Of the 12,000,000 shares being offered in the
Offerings, up to 1,200,000 shares are being reserved for sale to eligible
employees of the Company and Iridium and persons having business relationships
with Iridium. See "Underwriting." The Company will use the proceeds of the
Offerings to purchase 12,000,000 Class 1 Membership Interests (the "Class 1
Interests") in Iridium LLC, a Delaware (U.S.A.) limited liability company
("Iridium"). Upon consummation of the Offerings and application of the net
proceeds therefrom to purchase Class 1 Interests in Iridium, the Company will be
admitted as a member of Iridium. Pursuant to the rules promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), Iridium is a
co-registrant on the registration statement of which this Prospectus forms a
part.
Prior to the Offerings, there has been no public market for the Class A
Common Stock. See "Underwriting" for a discussion of factors considered in
determining the initial public offering price. The Class A Common Stock has been
approved for quotation on the Nasdaq National Market System ("NNMS") under the
symbol "IRIDF," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
========================================================================================================
<S> <C> <C> <C>
Per Share.......................... $20.00 $1.20 $18.80
- --------------------------------------------------------------------------------------------------------
Total(3)........................... $240,000,000 $14,400,000 $225,600,000
========================================================================================================
</TABLE>
(1) The Company and Iridium have agreed to indemnify the several Underwriters
against certain liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Expenses of the Offerings are estimated to be $2,000,000 and are payable by
Iridium. See "Underwriting."
(3) The Company has granted the International Managers and the U.S. Underwriters
options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 360,000 and 1,440,000 shares of Class A Common
Stock, respectively, on the same terms as set forth above, solely to cover
over-allotments, if any. The Company will use the proceeds from the sale of
any shares of Class A Common Stock in respect of such over-allotment options
to purchase an equivalent number of Class 1 Interests. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $276,000,000, $16,560,000 and
$259,440,000, respectively. See "Underwriting."
---------------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them and
subject to the approval of certain legal matters by counsel for the Underwriters
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made in New
York, New York on or about June 13, 1997.
---------------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
BARCLAYS DE ZOETE WEDD LIMITED DRESDNER KLEINWORT BENSON
MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. WESTDEUTSCHE LANDESBANK
GIROZENTRALE
---------------------
The date of this Prospectus is June 9, 1997.
<PAGE> 170
UNDERWRITING
Subject to the terms and conditions set forth in an international purchase
agreement (the "International Purchase Agreement") among the Company, Iridium
and each of the Underwriters named below (the "International Managers"), and
concurrently with the sale of 9,600,000 shares of Class A Common Stock to the
U.S. Underwriters (as defined below), the Company has agreed to sell to each of
the International Managers, and each of the International Managers severally has
agreed to purchase from the Company, the number of shares of Class A Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch International............................................... 720,000
Donaldson, Lufkin & Jenrette Securities Corporation....................... 720,000
Goldman Sachs International............................................... 720,000
Barclays de Zoete Wedd Limited............................................ 60,000
Kleinwort Benson Limited.................................................. 60,000
Mediobanca-Banca di Credito Finanziario S.p.A............................. 60,000
Westdeutsche Landesbank Girozentrale...................................... 60,000
---------
Total........................................................... 2,400,000
=========
</TABLE>
Merrill Lynch International, Donaldson, Lufkin & Jenrette Securities
Corporation and Goldman Sachs International are acting as representatives (the
"International Representatives") of the International Managers.
The Company and Iridium have also entered into a purchase agreement (the
"U.S. Purchase Agreement," and, together with the International Purchase
Agreement, the "Purchase Agreements") with certain underwriters in the United
States and Canada (collectively, the "U.S. Underwriters" and, together with the
International Managers, the "Underwriters"), for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. are acting as representatives
(the "U.S. Representatives" and, together with the International
Representatives, the "Representatives"). Subject to the terms and conditions set
forth in the U.S. Purchase Agreement, and concurrently with the sale of
2,400,000 shares of Class A Common Stock to the International Managers pursuant
to the International Purchase Agreement, the Company has agreed to sell to the
U.S. Underwriters, and the U.S. Underwriters have severally agreed to purchase
from the Company, an aggregate of 9,600,000 shares of Class A Common Stock. The
initial public offering price per share of Class A Common Stock and the
underwriting discount per share of Class A Common Stock are identical under the
International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Class A Common Stock being sold
pursuant to each such Agreement if any of the shares of Class A Common Stock
being sold pursuant to such Agreement are purchased. Under certain
circumstances, the commitments of non-defaulting International Managers or U.S.
Underwriters (as the case may be) may be increased. The purchase of shares of
Class A Common Stock by the International Managers is conditioned upon the
purchase of shares of Class A Common Stock by the U.S. Underwriters, and vice
versa.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. The Underwriters are permitted to sell shares
of Class A Common Stock to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the International Managers and
any dealer to whom they sell shares of Class A Common Stock will not offer to
sell or sell shares of Class A Common Stock to persons who are U.S. or Canadian
persons or to persons they believe intend to resell to persons who are U.S. or
Canadian persons, and the U.S. Underwriters and any dealer to whom they sell
shares of Class A Common Stock, other than in connection with the sale of
certain reserved shares, as described below, will not, other than in connection
with
I-1
<PAGE> 171
the sale of certain reserved shares, as described below, offer to sell or sell
shares of Class A Common Stock to non-U.S. persons or to non-Canadian persons or
to persons they believe intend to resell to non-U.S. persons or non-Canadian
persons, except in the case of transactions pursuant to the Intersyndicate
Agreement.
The International Representatives have advised the Company and Iridium that
the International Managers propose initially to offer the shares of Class A
Common Stock to the public at the initial public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $.72 per share of Class A Common Stock. The
International Managers may allow, and such dealers may reallow, a discount not
in excess of $.10 per share of Class A Common Stock on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
Each International Manager has agreed that (i) it has not offered or sold,
and, for a period of six months following consummation of the Offerings, will
not offer or sell, to persons in the United Kingdom, other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied with and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the shares of Class A Common Stock in,
from or otherwise involving the United Kingdom and (iii) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of shares of Class A Common Stock to
a person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996, or is a person to
whom such document may otherwise lawfully be issued or passed on.
At the request of the Company, the U.S. Underwriters have initially
reserved up to 1,200,000 shares of Class A Common Stock for sale at the initial
public offering price set forth on the cover page of this Prospectus to eligible
employees of the Company and Iridium and persons having business relationships
with Iridium. The number of shares of Class A Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be offered
by the Underwriters to the general public on the same basis as other shares
offered hereby. Individuals purchasing reserved shares have agreed, with certain
exceptions, not to sell, offer to sell or otherwise dispose of any shares of
Class A Common Stock, without the prior written consent of Merrill Lynch, for a
period of 180 days after the date of this Prospectus. If in connection with the
sale of the reserved shares the Underwriters are prohibited by law from selling
the reserved shares of Class A Common Stock in any jurisdiction outside the
United States where the Company is permitted by law to sell Class A Common
Stock, the Company may directly sell reserved shares. Such shares would be
included in the 12,000,000 shares being sold pursuant to this Prospectus. If the
Company makes any such sales, no underwriting discount or commission will be
paid to the Underwriters with respect to such shares. The Underwriters have
agreed to reimburse Iridium for certain expenses associated with the Offerings.
The Company has agreed not to, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of the Class A Common Stock or any
securities convertible into or exchangeable or exercisable for Class A Common
Stock or file any registration statement under the Securities Act with respect
to any of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Class A Common Stock, whether any such
swap or transaction is to be settled by delivery of Class A Common Stock or
other securities, in cash or otherwise, without the prior written consent of
Merrill Lynch, for a period of 180 days after the date of this Prospectus. The
foregoing restriction does not apply to the shares of common stock to be sold in
the Offerings or under the Company's Global Ownership Program or the Option
Plan. See "Governance of the Company and Relationship with Iridium -- Exchange
Rights of Iridium Members" and "Shares Eligible for Future Sale" for a
discussion of certain limitations on the rights of holders of Interests in
Iridium to exchange such Interests for shares of Class A Common Stock. In
addition, the foregoing restriction does not apply to the issuance of warrants
to
I-2
<PAGE> 172
purchase shares of Class A Common Stock in connection with any offering of debt
securities of Iridium or its subsidiaries; provided that (i) such warrants have
a per share exercise price not lower than the market price of a share of Class A
Common Stock on the date such warrants are issued and (ii) such warrants are not
exercisable earlier than 180 days from the date of their issuance.
The Company has granted an option to the International Managers,
exercisable within 30 days after the date of this Prospectus, to purchase up to
360,000 additional shares of Class A Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The International Mangers may exercise this option only to cover
over-allotments, if any, made on the sale of the Class A Common Stock offered
hereby. To the extent that the International Managers exercise this option, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Class A Common Stock proportionate to
such International Manager's initial amount reflected in the foregoing table.
The Company also has granted an option to the U.S. Underwriters, exercisable
within 30 days after the date of this Prospectus, to purchase up to an aggregate
of 1,440,000 additional shares of Class A Common Stock to cover over-allotments,
if any, on terms similar to those granted to the International Managers.
Until the distribution of the Class A Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Class A Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of the Class A Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A Common Stock.
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offerings, i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class A Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Class A Common Stock, they may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company, Iridium nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Class A Common
Stock. In addition, neither the Company, Iridium nor any of the Underwriters
makes any representation that the Representatives will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
Prior to the Offerings, there has been no public market for the shares of
Class A Common Stock of the Company. The initial public offering price was
determined through negotiations among the Company, Iridium and the
Representatives. Among the factors that were considered in determining the
initial public offering price, in addition to prevailing market conditions, are
the current market valuations of publicly traded companies that the
Representatives believe to be reasonably comparable to the Company and Iridium,
certain financial information of the Company and Iridium, the history of, and
the prospects for, the Company and Iridium and the industry in which Iridium
will compete, an assessment of the Company and Iridium management, the past and
present operations of Iridium, the prospects for, and timing of, future revenues
of the Company and Iridium, the present state of Iridium's development, and the
above factors in relation to market values and various valuation measures of
other companies engaged in activities similar to the Company and Iridium. There
can be no assurance given as to the liquidity of the trading market for the
Class A
I-3
<PAGE> 173
Common Stock or that an active public market will develop for the Class A Common
Stock or that the Class A Common Stock will trade in the public market
subsequent to the Offerings at or above the initial public offering price. If an
active public market for the Class A Common Stock does not develop, the market
price and liquidity of the Class A Common Stock may be adversely affected.
The Class A Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "IRIDF," subject to official notice of
issuance.
The International Managers and the U.S. Underwriters have informed the
Company that they do not intend to confirm sales of the Class A Common Stock
offered hereby to any accounts over which they exercise discretionary authority.
The Company and Iridium have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and may provide in the future, commercial and investment banking services
to the Company and its affiliates, including Iridium and Motorola, for which
such Underwriters or their affiliates have received or will receive fees and
commissions.
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<PAGE> 174
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, IRIDIUM OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OF CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY OR IRIDIUM SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 14
The Company and Iridium's Strategic
Investors.................................. 40
Use of Proceeds.............................. 42
Dividend Policy.............................. 42
Dilution..................................... 43
Capitalization............................... 45
Selected Financial Data...................... 46
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 48
Business..................................... 51
Regulation of Iridium........................ 70
Principal Contracts for the Development of
the IRIDIUM System......................... 78
Management................................... 85
Interest Ownership of Certain Beneficial
Owners and Management...................... 99
Certain Relationships and Related
Transactions of Iridium.................... 100
Iridium's Investors, Number of Class 1
Interests Owned, Percentage Ownership and
Principal Gateway Service Territories...... 101
Governance of the Company and Relationship
with Iridium............................... 106
Description of Capital Stock................. 110
Description of Iridium LLC Limited Liability
Company Agreement.......................... 114
Tax Considerations........................... 121
Shares Eligible for Future Sale.............. 125
Underwriting................................. 127
Validity of the Class A Common Stock......... 130
Experts...................................... 131
Available Information........................ 131
Glossary..................................... A-1
Index to Financial Statements................ F-1
</TABLE>
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UNTIL JULY 4, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
12,000,000 SHARES
IRIDIUM WORLD
COMMUNICATIONS LTD.
CLASS A COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
BARCLAYS DE ZOETE WEDD LIMITED
DRESDNER KLEINWORT BENSON
MEDIOBANCA-BANCA DI CREDITO FINANZIARIO S.P.A.
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
JUNE 9, 1997
======================================================
