<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
IRIDIUM WORLD COMMUNICATIONS LTD.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
BERMUDA 0-22637 52-2025291
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
CLARENDON HOUSE, 2 CHURCH STREET, HAMILTON HM 11, BERMUDA
(441) 295-5950
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
IRIDIUM LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-22637-01 52-1984342
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
IRIDIUM OPERATING LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-22637-02 52-2066319
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
<PAGE> 2
IRIDIUM CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-31741-03 52-2048739
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
IRIDIUM IP LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-31741-01 52-2048736
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
IRIDIUM ROAMING LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-31741-02 52-2048734
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
IRIDIUM FACILITIES CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-44349-04 52-2083969
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
<TABLE> - -
<CAPTION>
SHARES OUTSTANDING
CLASS AT NOVEMBER 10, 1998
------------------------------------ --------------------------------
<S> <C>
Iridium World
Communications Ltd. 12,179,485
Common Stock, Class A
$0.01 par value per share
</TABLE>
<PAGE> 3
IRIDIUM WORLD COMMUNICATIONS LTD.
-----------
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
-----------
IRIDIUM OPERATING LLC
(A WHOLLY-OWNED SUBSIDIARY OF IRIDIUM LLC)
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
-----------
IRIDIUM CAPITAL CORPORATION
IRIDIUM IP LLC
IRIDIUM ROAMING LLC
IRIDIUM FACILITIES CORPORATION
-----------
INDEX TO FORM 10-Q
-----------
<TABLE>
<CAPTION>
PAGE
NUMBER
---------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
IRIDIUM WORLD COMMUNICATIONS LTD.
Condensed Balance Sheets
September 30, 1998 and December 31, 1997 5
Unaudited Condensed Statements of Loss
For the three and nine months ended September 30, 1998 and 1997 6
Unaudited Condensed Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997 7
Notes to Unaudited Condensed Financial Statements 8
IRIDIUM LLC
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 10
Unaudited Condensed Consolidated Statements of Loss
For the three and nine months ended September 30, 1998 and 1997 11
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
NUMBER
--------------
<S> <C>
Unaudited Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997 12
Notes to Unaudited Condensed Consolidated Financial Statements 13
IRIDIUM OPERATING LLC (INCLUDING: IRIDIUM CAPITAL CORPORATION,
IRIDIUM IP LLC, IRIDIUM ROAMING LLC AND IRIDIUM FACILITIES CORPORATION)
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 17
Unaudited Condensed Consolidated Statements of Loss
For the three and nine months ended September 30, 1998 and 1997 18
Unaudited Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997 19
Notes to Unaudited Condensed Consolidated Financial Statements 20
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 32
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 33
ITEM 2 Changes in Securities and Use of Proceeds 33
ITEM 3 Defaults upon Senior Securities 33
ITEM 4 Submission of Matters to a Vote of Security Holders 33
ITEM 5 Other Information 33
ITEM 6 Exhibits and Reports on Form 8-K 33
SIGNATURES 34
EXHIBIT INDEX 36
</TABLE>
4
<PAGE> 5
IRIDIUM WORLD COMMUNICATIONS LTD.
CONDENSED BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
------------ --------------
ASSETS
<S> <C> <C>
Cash .............................................................................. $ - $ -
Investment in Iridium LLC ......................................................... 223,922 157,294
--------- ---------
Total assets .......................................................... $ 223,922 $ 157,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities ....................................................................... $ - $ -
Stockholders' equity:
Class B Common stock, non-voting, par value $0.01; 2,500,000 shares authorized;
none and 20,625 issued and outstanding ..................................... - -
Class A Common stock, voting, par value $0.01; 50,000,000 shares authorized;
12,003,262 and 12,175,690 issued and outstanding .......................... 120 122
Additional paid-in capital .................................................... 242,636 245,980
Accumulated deficit ........................................................... (18,834) (88,808)
--------- ---------
223,922 157,294
--------- ---------
Total liabilities and stockholders' equity ............................ $ 223,922 $ 157,294
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE> 6
IRIDIUM WORLD COMMUNICATIONS LTD.
UNAUDITED CONDENSED STATEMENTS OF LOSS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1997 1998 1997 1998
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Equity in loss of Iridium LLC ............................ $ 7,260 $ 31,615 $ 8,039 $ 69,974
---------- ---------- --------- ----------
Loss before income taxes ................................. 7,260 31,615 8,039 69,974
Income taxes ............................................. - - - -
---------- ---------- --------- ----------
Net loss ................................................. $ 7,260 $ 31,615 $ 8,039 $ 69,974
========== ========== ========= ==========
Net loss per Class A Common share - basic and diluted .... $ 0.61 $ 2.62 $ 1.62 $ 5.81
---------- ---------- --------- ----------
Weighted average shares used in computing
net loss per Class A Common share - basic and diluted .. 12,000,000 12,084,446 4,967,033 12,050,913
========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
<PAGE> 7
IRIDIUM WORLD COMMUNICATIONS LTD.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
( In Thousands )
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss ............................................................................. $ (8,039) $ (69,974)
Adjustments to reconcile net loss to net cash
used in operating activities -
Equity in loss of Iridium LLC ................................................ 8,039 69,974
--------- ---------
Net cash used in operating activities .................................................... - -
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES :
Investments in Iridium LLC ........................................................... (242,713) (3,346)
--------- ---------
(242,713) (3,346)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES :
Net proceeds from equity offering .................................................... 225,600 -
Proceeds from Class B Common Stock ................................................... - 275
Proceeds from Class A Common Stock subscribed ........................................ 12 -
Retirement of Class A Common Stock ................................................... (12) -
Proceeds from warrants issued in conjunction with Iridium LLC Series A Senior Notes .. 17,113 -
Proceeds from warrants exercised in conjunction with Iridium LLC Series A Senior Notes - 2,065
Proceeds from exercise of stock options .............................................. - 1,006
--------- ---------
Net cash provided by financing activities ................................................ 242,713 3,346
--------- ---------
Increase (decrease) in cash .............................................................. - -
CASH, beginning of period ................................................................ - -
--------- ---------
CASH, end of period ...................................................................... $ - $ -
========= =========
</TABLE>
The accompanying notes are in integral part of these condensed financial
statements.
7
<PAGE> 8
IRIDIUM WORLD COMMUNICATIONS LTD.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Iridium World Communications Ltd. ("IWCL") was incorporated under the
laws of Bermuda on December 12, 1996. At inception, IWCL was wholly owned by
Iridium LLC, which was a development stage limited liability company at that
time. In June 1997, IWCL registered with the Securities and Exchange Commission
a total of 13,800,000 shares of its Class A Common Stock ("Class A Common
Stock") for sale in an initial public offering (the "Offering"), and on June 13,
1997, IWCL consummated the Offering and issued 12,000,000 shares of Class A
Common Stock. Pursuant to the 1997 Subscription Agreement between IWCL and
Iridium LLC, approximately $225 million in net proceeds from the Offering was
invested in 12,000,000 Class 1 Membership Interests of Iridium LLC ("Class 1
Interests"), at which time the outstanding shares of Class A Common Stock held
by Iridium LLC were retired, and IWCL became a member of Iridium LLC.
On July 13, 1997, in connection with the issuance of Series A Notes
by Iridium LLC, IWCL issued 300,000 warrants to purchase up to 1,560,000 shares
of Class A Common Stock and applied the net proceeds to purchase warrants to
acquire up to 1,560,000 Class 1 Interests from Iridium LLC. When a warrant to
purchase Class A Common Stock is exercised, IWCL is required to exercise a
corresponding warrant to purchase Class 1 Interests. As of September 30, 1998,
19,000 warrants were exercised to purchase 98,800 shares of Class A Common Stock
resulting in net proceeds of approximately $2 million to IWCL. The net proceeds
from the exercise of these 19,000 warrants were used by IWCL to exercise
warrants to purchase 98,800 invested in Class 1 Interests of Iridium LLC.
Iridium LLC through its wholly-owned subsidiary Iridium Operating LLC
("Iridium"), a Delaware limited liability company, is devoting substantially all
of its efforts to commercializing the Iridium communications system (the
"Iridium System").
IWCL's sole assets are its investments in Iridium LLC. At September
30, 1998, IWCL owned approximately 8.62% of the total outstanding Class 1
Interests in Iridium LLC.
2. 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 IWCL as of September 30, 1998 and its results of
operations for the three and nine month periods ended September 30, 1998 and
1997, and its cash flows for the nine month periods ended September 30, 1998 and
1997. These condensed financial statements are unaudited and do not include all
related footnote disclosures. These financial statements should be read in
conjunction with the audited financial statements of IWCL and footnotes thereto
included in the Annual Report on Form 10-K and the audited consolidated
financial statements of Iridium LLC and the footnotes thereto included in the
Annual Report on Form 10-K.
Since its inception on December 12, 1996 through September 30, 1998,
IWCL has not entered into any operating transactions or incurred any operating
expenses. The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results of operations
expected in the future.
3. STOCKHOLDERS' EQUITY
NOMAD PROGRAM
IWCL and Iridium LLC have commenced a NOMAD Program which is designed
to offer up to an aggregate of 2,500,000 shares of IWCL'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 are required to pay only a
minimum amount equal to the per share par value of the Class B Common Stock;
$.01 per share. The balance of the purchase price is payable through the
withholding of dividends, if any, which would otherwise be payable on
8
<PAGE> 9
IRIDIUM WORLD COMMUNICATIONS LTD.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
the shares of Class B Common Stock. However, a holder of Class B Common Stock
may elect to pay the entire 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 and expiration of a minimum holding period. The proceeds
generated from each sale of Class B Common Stock are used to purchase Class 1
Interests in Iridium LLC. The payment terms with respect to such Iridium LLC
Class 1 Interests mirror the payment terms on the Class B Common Stock. As of
September 30, 1998, 20,625 shares of Class B Common Stock had been issued under
this program resulting in net proceeds of $275,000 to IWCL. The shares were
recognized at a fair value of $33.88 per share (the trading price of the Class A
Common Stock at the date of issue) with a corresponding increase in IWCL's
investment in Iridium LLC. In accordance with the Share Issuance Agreement, the
net proceeds were invested in Class 1 Interests of Iridium LLC.
4. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per Class A Common share is calculated by dividing net
income (loss) by the weighted average number of Class A Common shares
outstanding during the period. Diluted earnings (loss) per share is calculated
by dividing net income (loss) by the weighted average number of Class A Common
shares and, to the extent dilutive, other potentially dilutive securities
outstanding during the period. Potentially dilutive securities are comprised of
warrants to purchase Class A Common Stock issued in conjunction with the Series
A Notes, stock options and Class B Common Stock. Due to the losses incurred
during the three and nine months ended September 30, 1998 and 1997, the impact
of the warrants, stock options and Class B Common Stock is anti-dilutive and is
not included in the diluted earnings (loss) per share calculations.
9
<PAGE> 10
IRIDIUM LLC
( A Development Stage Limited Liability Company )
CONDENSED CONSOLIDATED BALANCE SHEETS
( In Thousands Except Member Interest Data )
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
--------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents.................................................... $ 9,040 $ 65,207
Restricted cash.............................................................. 350,220 -
Due from affiliates.......................................................... 13,604 20,667
Prepaid expenses and other current assets.................................... 6,612 18,407
--------------------- ----------------------
Total current assets..................................................... 379,476 104,281
Property and equipment, net...................................................... 1,526,326 2,865,070
System under construction........................................................ 1,625,054 523,739
Other assets..................................................................... 114,831 71,512
--------------------- ----------------------
Total assets............................................................. $ 3,645,687 $ 3,564,602
===================== ======================
LIABILITIES AND MEMBERS' EQUITY
Current liabilities :
Accounts payable and accrued expenses........................................ $ 106,794 $ 101,036
Accounts payable to Member................................................... 10,601 221,765
Bank facilities, current portion............................................. 350,000 681,500
--------------------- ----------------------
Total current liabilities................................................ 467,395 1,004,301
Bank facilities, net of current portion.......................................... 210,000 -
Long-term debt due to Members.................................................... 273,302 310,149
Notes payable, $1,450,000 principal amount as of September 30, 1998.............. 1,054,288 1,404,742
Other liabilities................................................................ 6,065 11,169
--------------------- ----------------------
Total liabilities........................................................ 2,011,050 2,730,361
--------------------- ----------------------
Commitments and Contingencies
Members' equity:
Class 2 Interests, authorized 50,000 interests for Series M; authorized an
aggregate of 300,000 interests for Series A, Series B and Series C:
Series M, convertible, no interests issued and outstanding........... - -
Series A, redeemable, convertible, 39,907 and 44,406 interests issued
and outstanding; liquidation value of $39,907 and $44,406......... 39,907 44,406
Series B, redeemable, 1 interest issued and outstanding.............. - -
Series C, redeemable, 75 interests issued and outstanding............ - -
Class 1 Interests, authorized 225,000,000 interests, 141,222,442 and
141,415,495 interests issued and outstanding............................. 2,024,220 2,031,835
Deferred Class 1 Interest compensation....................................... (1,454) (1,242)
Adjustment for minimum pension liability..................................... (643) (643)
Deficit accumulated during the development stage............................. (427,393) (1,240,115)
--------------------- ----------------------
Total members' equity.................................................... 1,634,637 834,241
--------------------- ----------------------
Total liabilities and members' equity.................................... $ 3,645,687 $ 3,564,602
===================== ======================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
10
<PAGE> 11
IRIDIUM LLC
( A Development Stage Limited Liability Company )
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In Thousands Except Member Interest Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1998
-------------------- --------------------
<S> <C> <C>
OPERATING EXPENSES
Sales, general and administrative................... $ 39,061 $ 129,099
Depreciation and amortization....................... 45,936 152,627
-------------------- --------------------
Total operating expenses........................ 84,997 281,726
OTHER INCOME
Interest expense (income), net...................... (902) 82,655
-------------------- --------------------
Loss before provision for income taxes.................. 84,095 364,381
Provision for income taxes.............................. - -
-------------------- --------------------
Net loss................................................ $ 84,095 $ 364,381
==================== ====================
Preferred dividend requirement.......................... 1,317 1,553
-------------------- --------------------
Net loss applicable to Class 1 Interests................ $ 85,412 $ 365,934
==================== ====================
Net loss per Class 1 Interest - basic and diluted....... $ 0.60 $ 2.59
==================== ====================
Weighted average interests used in computing
net loss per Class 1 Interest - basic and diluted..... 141,219,180 141,324,251
==================== ====================
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 14, 1991
(INCEPTION) THROUGH
NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998
------------------------------------------------ --------------------
1997 1998
--------------------- -----------------------
<S> <C> <C> <C>
OPERATING EXPENSES
Sales, general and administrative................... $ 122,926 $ 261,261 $ 574,562
Depreciation and amortization....................... 46,539 378,276 499,705
--------------------- ----------------------- --------------------
Total operating expenses........................ 169,465 639,537 1,074,267
OTHER INCOME
Interest expense (income), net...................... (1,516) 173,185 157,877
--------------------- ----------------------- --------------------
Loss before provision for income taxes.................. 167,949 812,722 1,232,144
Provision for income taxes.............................. - - 7,971
--------------------- ----------------------- --------------------
Net loss................................................ $ 167,949 $ 812,722 $ 1,240,115
===================== ======================= ====================
Preferred dividend requirement.......................... 4,924 4,499
--------------------- -----------------------
Net loss applicable to Class 1 Interests................ $ 172,873 $ 817,221
===================== =======================
Net loss per Class 1 Interest - basic and diluted....... $ 1.33 $ 5.78
===================== =======================
Weighted average interests used in computing
net loss per Class 1 Interest - basic and diluted..... 130,065,304 141,289,887
===================== =======================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
11
<PAGE> 12
IRIDIUM LLC
( A Development Stage Limited Liability Company )
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( In Thousands )
<TABLE>
<CAPTION>
NINE MONTHS ENDED PERIOD FROM
SEPTEMBER 30, JUNE 14, 1991
----------------------------- (INCEPTION) THROUGH
1997 1998 SEPTEMBER 30, 1998
----------- -------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss.................................................................. $ (167,949) (812,722) $ (1,240,115)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization..................................... 46,539 378,276 499,705
Interest converted to additional debt............................. - 52,570 52,570
Expense recognized for warrants issued in
connection with debt guarantee................................. 48,631 8,344 89,678
Employee Class 1 Interest compensation............................ 38 212 364
Loss on disposal of assets........................................ - - 87
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets......... (7,699) (4,266) (10,878)
Increase in due from affiliates............................... (10,142) (7,063) (20,667)
Decrease (Increase) in other assets........................... (36,825) (582) (19,241)
(Decrease) Increase in accounts payable and accrued expenses.. 33,232 5,278 54,072
Increase (Decrease) in other liabilities...................... (676) 5,104 11,089
----------- -------------- -------------
Net cash used in operating activities..................... (94,851) (374,849) (583,336)
----------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of property and equipment....................................... (4,189) (15,954) (39,209)
Additions to system under construction.................................... (614,045) (365,386) (3,456,821)
----------- -------------- -------------
Net cash used in investing activities..................... (618,234) (381,340) (3,496,030)
----------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES :
Net proceeds from issuance of Class 1 and Class 2 Interests............... 283,666 3,346 1,935,665
Net proceeds from issuance of senior notes and warrants................... 745,939 341,742 1,619,384
Borrowings under guaranteed bank line of credit........................... 410,000 346,500 1,506,500
Payments under guaranteed bank line of credit............................. (680,000) (285,000) (1,235,000)
Borrowings under senior secured line of credit............................ - 60,000 410,000
Decrease in restricted cash............................................... - 350,220 -
Deferred financing costs.................................................. (39,220) (4,452) (91,976)
----------- -------------- -------------
Net cash provided by financing activities................. 720,385 812,356 4,144,573
----------- -------------- -------------
Increase in cash and cash equivalents......................................... 7,300 56,167 65,207
CASH AND CASH EQUIVALENTS, beginning of period................................ 1,889 9,040 -
----------- -------------- -------------
CASH AND CASH EQUIVALENTS, end of period...................................... $ 9,189 $ 65,207 $ 65,207
=========== ============== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
12
<PAGE> 13
IRIDIUM LLC
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Iridium LLC (the "Parent") and its subsidiaries are devoting
substantially all of their efforts to establishing 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. As a result of three private placements of
equity, five supplemental private placements with certain additional equity
investors and proceeds received from the initial public offering of common
stock of Iridium World Communications Ltd. ("IWCL"), Motorola's direct and
indirect Class 1 Membership Interest in the Parent has been reduced to
approximately 19.3% as of September 30, 1998, before considering unexercised
warrants held by Motorola.
On July 29, 1996, the Parent 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. Also on July 29, 1996, Iridium, Inc. was merged with and into the
Parent, with the Parent as the surviving entity. Concurrent with the merger,
all shares of Common Stock of Iridium, Inc. were exchanged for Class 1
Membership Interests in the Parent ("Class 1 Interests").
On December 18, 1997, the Parent entered into an asset drop-down
transaction ("the Asset Drop-Down Transaction") with Iridium Operating LLC
("Iridium"), a newly formed wholly-owned subsidiary of the Parent. Pursuant to
the Asset Drop-Down Transaction, substantially all of the assets and
liabilities of the Parent were transferred to Iridium, including, without
limitation, all liabilities with respect to the outstanding 13% Senior Notes
due 2005, Series A and 14% Senior Notes due 2005, Series B and the 11 1/4%
Senior Notes due 2005, Series C (collectively, the "Senior Notes"). Pursuant to
the indentures relating to the Senior Notes, Iridium has been substituted for
the Parent, and the Parent has been released from all obligations under the
indentures relating to the Senior Notes. All assets and liabilities were
transferred to Iridium at the Parent's carrying value. Accordingly, unless
otherwise specified, references within these notes to Iridium that relate to
any action prior to the date of the Asset Drop-Down Transaction should be
construed as references to Parent, as predecessor of Iridium. As a result of
the Asset Drop-Down Transaction, the Parent's only significant asset is its
investment in Iridium.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of only
normal recurring accruals, necessary for a fair presentation of the financial
position of the Parent and subsidiaries as of September 30, 1998, and the
results of their operations for the three and nine month periods ended
September 30, 1998 and 1997, and the period from June 14, 1991 (inception)
through September 30, 1998, and their cash flows for the nine month periods
ended September 30, 1998 and 1997, and the period from June 14, 1991
(inception) through September 30, 1998. These condensed consolidated financial
statements are unaudited, and do not include all related footnote disclosures.
The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results of operations expected in
the future, although the Parent continued to be a development stage limited
liability company until the commencement of commercial operations and
anticipates a net loss for the year. These financial statements should be read
in conjunction with the Parent's audited consolidated financial statements and
footnotes thereto included in the Annual Report on Form 10-K.
13
<PAGE> 14
IRIDIUM LLC
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. MEMBERS' EQUITY
The Parent declared approximately $1,553,000 and $1,317,000 of in-kind
dividends to holders of Series A Class 2 Membership Interests during the three
month periods ended September 30, 1998 and 1997, respectively, and $4,499,000
and $4,924,000 for the nine month periods ended September 30, 1998 and 1997,
respectively.
NOMAD PROGRAM
The Parent, in conjunction with IWCL, has commenced a NOMAD Program
which is designed to offer up to an aggregate of 2,500,000 shares of IWCL'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. As
of September 30, 1998, 20,625 shares of Class B Common Stock had been issued
under this program resulting in net proceeds of $275,000 to IWCL. In
accordance with the Share Issuance Agreement, IWCL invested the net proceeds in
Parent in exchange for 20,625 Class 1 Interests. The shares were recognized at
a fair value of $33.88 per share (the trading price of IWCL's Class A Common
Stock at the date of issue) with the difference between the purchase price and
fair value capitalized as license costs. During the nine months ended
September 30, 1998, $424,000 was capitalized to license costs under this
program. No amounts were capitalized during the nine months ended September
30, 1997.
4. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 1998 and 1997, $247,438,000
and $80,970,000, respectively, of interest costs were incurred. Interest
expensed for the nine months ended September 30, 1998 was $168,169,000 with the
remaining interest capitalized to the system under construction. For the nine
months ended September 30, 1997, all interest expense was capitalized to the
system under construction. Interest paid was $181,422,000 and $24,344,000
during the nine months ended September 30, 1998 and 1997, respectively.
5. TRANSACTIONS WITH MEMBERS
GUARANTEED BANK FACILITY
In accordance with the Second Amended and Restated Agreement Regarding
Guarantee, dated May 11, 1998, among the Parent, Iridium and Motorola, pursuant
to which Motorola guaranteed Iridium's obligations under the Guaranteed Bank
Facility, an additional 9,209 and 56,416 warrants to purchase 690,675 and
4,231,200 Class 1 Interests, respectively, were earned by Motorola during the
nine months ended September 30,1998 and 1997, respectively. The Parent
recognized $8,344,000 and $48,631,000 as expense during the nine months ended
September 30, 1998 and 1997, respectively, in connection with the warrants
earned by Motorola. Warrant expense for the three months ended September 30,
1998 and 1997 was $459,000 and $13,364,000, respectively.
The Second Amended and Restated Agreement Regarding Guarantee provides
that, when the Guaranteed Bank Facility and Motorola's Guarantee have been
permanently reduced to $275 million or less, the Parent and Iridium have the
option to compensate Motorola for its Guarantee by having the Parent continue
to pay warrant compensation at the existing rate or (i) having Iridium pay
interest on the guaranteed amount at a rate based on the difference between the
interest rate on the Guaranteed Bank Facility and the interest rate on the
Series A and Series B Senior Notes plus (ii) having the Parent pay
substantially reduced warrant compensation based on the number of warrants
issued in connection with the offering of the Series A Notes (the "High Yield
Compensation"). Interest incurred on the guaranteed amount was $5,094,000 and
$7,927,000 for the three and nine months ended September 30, 1998,
respectively.
On May 13, 1998, Iridium permanently reduced the commitment of the
bank lenders under the Guaranteed Bank Facility from $450 million to $275
million. As a result of the reduction, the maximum number of warrants Motorola
is expected to earn as compensation for their guarantee of that facility from
inception until the expected maturity in June 1999 is 104,229 warrants to
purchase approximately 7,817,000 Class 1 Interests (assuming Iridium and Parent
pay High Yield Compensation,
14
<PAGE> 15
IRIDIUM LLC
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
including interest on the guaranteed amount, through maturity).
Currently, Iridium and the Parent have elected to pay Motorola High
Yield Compensation. While the Parent and Iridium expect that electing to pay
High Yield Compensation will reduce the effective cost of the Motorola
Guarantee, there can be no assurance that such expectation will prove correct
or that the Motorola Guarantee will not exceed $275 million.
STANDBY PURCHASE AGREEMENT
In an effort to ensure that sufficient quantities of hand-held phones
and pagers are available for distribution in advance of the commencement of
commercial operations, Parent has signed with Motorola and intends to enter
into with Kyocera Corporation, standby commitments to purchase an aggregate of
up to $400 million in subscriber equipment. The Motorola commitment would be
triggered on or after January 1, 1999, but only to the extent such subscriber
equipment is not purchased by and shipped to gateway operators or service
providers prior to January 1, 1999, and the Kyocera commitment is expected to
contain similar provisions triggered on or after February 8, 1999.
6. LONG TERM DEBT
On May 13, 1998, Iridium and Iridium Capital Corporation completed an
offering of $350 million principal amount of 10 7/8% Senior Notes due 2005,
Series D ("Series D Notes"). The Series D Notes are guaranteed by Iridium
Roaming LLC, Iridium IP LLC and Iridium Facilities Corporation. The Series D
Notes have substantially the same terms as the Senior Notes other than interest
rate and issue date. The net proceeds received were approximately $342
million. Interest on the Series D Notes is payable in cash semi-annually on
January 15 and July 15 of each year, commencing on July 15, 1998. The Series D
Notes are redeemable at the option of Iridium, in whole or in part, at any time
on or after July 15, 2002. The Series D Notes mature on July 15, 2005.
7. EARNINGS PER SHARE
Basic earnings (loss) per Class 1 Interest is calculated by dividing
net income (loss), after considering required dividends on Class 2 Interests,
by the weighted average number of Class 1 Interests outstanding during the
period. Diluted earnings (loss) per share is calculated by dividing net income
(loss), after considering required dividends on Class 2 Interests, by the
weighted average number of Class 1 Interests and, to the extent dilutive, other
potentially dilutive securities outstanding during the period. Potentially
dilutive securities are comprised of options, warrants, and convertible Class 2
Interests. Due to the losses incurred during the three and nine months ended
September 30, 1998, the impact of other potentially dilutive securities is
anti-dilutive and is not included in the diluted earnings (loss) per Class 1
Interest calculations.
8. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income. Accumulated other
comprehensive income (loss) consists entirely of the minimum pension liability.
The new disclosure requirements with respect to comprehensive income are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss, as reported . . . . . . . . . . . . . $(84,095) $(364,381) $(167,949) $(812,722)
Other comprehensive income (loss) . . . . . . . - - - -
-------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . $(84,095) $(364,381) $(167,949) $(812,722)
======== ========= ========= =========
Accumulated other comprehensive income (loss):
Beginning of period . . . . . . . . . . . . . .
$ (733) $ (643) $ (733) $ (643)
======== ========= ========= =========
End of period . . . . . . . . . . . . . . . . .
$ (733) $ (643) $ (733) $ (643)
======== ========= ========= =========
</TABLE>
15
<PAGE> 16
IRIDIUM LLC
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. IRIDIUM SUBSIDIARIES
Iridium Promotions, Inc. ("Promotions"), a Delaware Corporation and a
wholly-owned subsidiary of the Parent, was formed on September 11, 1998.
Iridium Geolink LLC ("Geolink"), a Delaware limited liability company and a
wholly-owned subsidiary of the Parent, was formed on August 25, 1998.
Promotions and Geolink have no assets or liabilities and have not engaged in
any business activities.
16
<PAGE> 17
IRIDIUM OPERATING LLC
( A Wholly-Owned Subsidiary of Iridium LLC )
( A Development Stage Limited Liability Company )
CONDENSED CONSOLIDATED BALANCE SHEETS
( In Thousands )
<TABLE>
<CAPTION>
September 30,
December 31, 1998
1997 (Unaudited)
---------- ----------
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents ........................................ $ 5,940 $ 65,207
Restricted cash .................................................. 350,220 -
Due from affiliates .............................................. 13,604 20,667
Prepaid expenses and other current assets ........................ 6,612 18,407
---------- ----------
Total current assets ......................................... 376,376 104,281
Property and equipment, net .......................................... 1,526,326 2,865,070
System under construction ............................................ 1,625,054 523,739
Other assets ......................................................... 114,831 70,964
---------- ----------
Total assets ................................................. $ 3,642,587 $ 3,564,054
========== ==========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities :
Accounts payable and accrued expenses ............................ $ 106,794 $ 101,036
Accounts payable to Parent's Members ............................. 10,601 221,765
Bank facilities, current portion ................................. 350,000 681,500
---------- ----------
Total current liabilities .................................... 467,395 1,004,301
Bank facilities, net of current portion .............................. 210,000 -
Long-term debt due to Parent's Members ............................... 273,302 310,149
Notes payable, $1,450,000 principal amount as of September 30, 1998 .. 1,054,288 1,404,742
Other liabilities .................................................... 6,065 11,169
---------- ----------
Total liabilities ............................................ 2,011,050 2,730,361
---------- ----------
Commitments and Contingencies
Member's equity :
Member's Interest ................................................ 2,059,421 2,074,087
Deficit accumulated during the development stage ................. (427,241) (1,239,751)
Adjustment for minimum pension liability ......................... (643) (643)
---------- ----------
Total member's equity ........................................ 1,631,537 833,693
---------- ----------
Total liabilities and member's equity ........................ $ 3,642,587 $ 3,564,054
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
17
<PAGE> 18
IRIDIUM OPERATING LLC
( A Wholly-Owned Subsidiary of Iridium LLC )
( A Development Stage Limited Liability Company )
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In Thousands)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 14, 1991
(INCEPTION) THROUGH
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998
-------------------------------- ------------------------------- ------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Sales, general and administrative .... $ 39,023 $ 129,018 $ 122,888 $ 261,049 $ 574,198
Depreciation and amortization ........ 45,936 152,627 46,539 378,276 499,705
--------- --------- --------- --------- ---------
Total operating expenses ......... 84,959 281,645 169,427 639,325 1,073,903
OTHER INCOME
Interest expense (income), net ....... (902) 82,655 (1,516) 173,185 157,877
--------- --------- --------- --------- ---------
Loss before provision for income taxes ... 84,057 364,300 167,911 812,510 1,231,780
Provision for income taxes ............... - - - - 7,971
--------- --------- --------- --------- ---------
Net loss ................................. $ 84,057 $ 364,300 $ 167,911 $ 812,510 $1,239,751
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
18
<PAGE> 19
IRIDIUM OPERATING LLC
( A Wholly-Owned Subsidiary of Iridium LLC )
( A Development Stage Limited Liability Company )
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( In Thousands )
<TABLE>
<CAPTION>
NINE MONTHS ENDED PERIOD FROM
SEPTEMBER 30, JUNE 14, 1991
----------------------------- (INCEPTION) THROUGH
1997 1998 SEPTEMBER 30, 1998
---------- ---------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss ................................................................. $ (167,911) (812,510) $(1,239,751)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization .................................... 46,539 378,276 499,705
Interest converted to additional debt ............................ - 52,570 52,570
Expense recognized for warrants issued in
connection with debt guarantee ................................ 48,631 8,344 89,678
Loss on disposal of assets ....................................... - - 87
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets ........ (7,699) (4,266) (10,878)
Increase in due from affiliates .............................. (10,142) (7,063) (20,667)
Decrease (Increase) in other assets .......................... (36,825) (582) (19,241)
(Decrease) Increase in accounts payable and accrued expenses . 33,232 5,278 54,072
Increase (Decrease) in other liabilities ..................... (676) 5,104 11,089
---------- ---------- ----------
Net cash used in operating activities .................... (94,851) (374,849) (583,336)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of property and equipment ...................................... (4,189) (15,954) (39,209)
Additions to system under construction ................................... (614,045) (365,386) (3,456,821)
---------- ---------- ----------
Net cash used in investing activities .................... (618,234) (381,340) (3,496,030)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Net proceeds from issuance of Parent's Class 1 and Class 2 Interests ..... 283,666 3,346 1,935,665
Net proceeds from issuance of senior notes and warrants .................. 745,939 341,742 1,619,384
Borrowings under guaranteed bank line of credit .......................... 410,000 346,500 1,506,500
Payments under guaranteed bank line of credit ............................ (680,000) (285,000) (1,235,000)
Borrowings under senior secured line of credit ........................... - 60,000 410,000
Decrease in restricted cash .............................................. - 350,220 -
Deferred financing costs ................................................. (39,220) (4,452) (91,976)
Transfer from Parent ..................................................... - 3,100 -
---------- ---------- ----------
Net cash provided by financing activities ................ 720,385 815,456 4,144,573
---------- ---------- ----------
Increase in cash and cash equivalents ........................................ 7,300 59,267 65,207
CASH AND CASH EQUIVALENTS, beginning of period ............................... 1,889 5,940 -
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period ..................................... $ 9,189 $ 65,207 $ 65,207
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
19
<PAGE> 20
IRIDIUM OPERATING LLC
(A Wholly-Owned Subsidiary of Iridium LLC)
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Iridium Operating LLC ("Iridium"), a wholly-owned subsidiary of
Iridium LLC (the "Parent") is devoting substantially all of its efforts to
establishing 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. As a result of three private placements of
equity, five supplemental private placements with certain additional equity
investors and proceeds received from the initial public offering of common
stock of Iridium World Communications Ltd. ("IWCL"), Motorola's direct and
indirect Class 1 Membership Interest in the Parent has been reduced to
approximately 19.3% as of September 30, 1998, before considering unexercised
warrants held by Motorola.
On July 29, 1996, the Parent 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. Also on July 29, 1996, Iridium, Inc. was merged with and into the
Parent, with the Parent as the surviving entity. Concurrent with the merger,
all shares of Common Stock of Iridium, Inc. were exchanged for Class 1
Membership Interests in the Parent ("Class 1 Interests").
On December 18, 1997, the Parent entered into an asset drop-down
transaction ("the Asset Drop-Down Transaction") with Iridium Operating LLC
("Iridium"), a newly formed wholly-owned subsidiary of the Parent. Pursuant to
the Asset Drop-Down Transaction, substantially all of the assets and
liabilities of the Parent were transferred to Iridium, including, without
limitation, all liabilities with respect to the outstanding 13% Senior Notes
due 2005, Series A and 14% Senior Notes due 2005, Series B and the 11 1/4%
Senior Notes due 2005, Series C (collectively, the "Senior Notes"). Pursuant
to the indentures relating to the Senior Notes, Iridium has been substituted
for the Parent, and the Parent has been released from all obligations under the
indentures relating to the Senior Notes. All assets and liabilities were
transferred to Iridium at the Parent's carrying value. Accordingly, unless
otherwise specified, references within these notes to Iridium that relate to
any action prior to the date of the Asset Drop-Down Transaction should be
construed as references to Parent, as predecessor of Iridium. As a result of
the Asset Drop-Down Transaction, the Parent's only significant asset is its
investment in Iridium.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of only
normal recurring accruals, necessary for a fair presentation of the financial
position of Iridium and subsidiaries as of September 30, 1998, and the results
of their operations for the three and nine month periods ended September 30,
1998 and 1997, and the period from June 14, 1991 (inception) through September
30, 1998, and their cash flows for the nine month periods ended September 30,
1998 and 1997, and the period from June 14, 1991 (inception) through September
30, 1998. These condensed consolidated financial statements are unaudited, and
do not include all related footnote disclosures. The results of operations for
the three and nine months ended September 30, 1998 are not necessarily
indicative of the results of operations expected in the future, although
Iridium continued to be a development stage limited liability company until the
commencement of commercial operations and anticipates a net loss for the year.
These financial statements should be read in conjunction with Iridium's audited
consolidated financial statements and footnotes thereto included in the Annual
Report on Form 10-K.
3. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 1998 and 1997, $247,438,000
and $80,970,000, respectively, of interest costs were incurred. Interest
expensed for the nine months ended September 30, 1998 was $168,169,000 with
20
<PAGE> 21
IRIDIUM OPERATING LLC
(A Wholly-Owned Subsidiary of Iridium LLC)
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the remaining interest capitalized to the system under construction. For the
nine months ended September 30, 1997, all interest expense was capitalized to
the system under construction. Interest paid was $181,422,000 and $24,344,000
during the nine months ended September 30, 1998 and 1997, respectively.
4. TRANSACTIONS WITH MEMBERS OF THE PARENT
GUARANTEED BANK FACILITY
In accordance with the Second Amended and Restated Agreement Regarding
Guarantee, dated May 11, 1998, among Iridium, the Parent and Motorola, pursuant
to which Motorola guaranteed Iridium's obligations under the Guaranteed Bank
Facility, an additional 9,209 and 56,416 warrants to purchase 690,675 and
4,231,200 Class 1 Interests, respectively, were earned by Motorola during the
nine months ended September 30,1998 and 1997, respectively. The Parent
recognized $8,344,000 and $48,631,000 as expense during the nine months ended
September 30, 1998 and 1997, respectively, in connection with the warrants
earned by Motorola. Warrant expense for the three months ended September 30,
1998 and 1997 was $459,000 and $13,364,000, respectively.
The Second Amended and Restated Agreement Regarding Guarantee provides
that, when the Guaranteed Bank Facility and Motorola's Guarantee have been
permanently reduced to $275 million or less, the Parent and Iridium have the
option to compensate Motorola for its Guarantee by having the Parent continue
to pay warrant compensation at the existing rate or (i) having Iridium pay
interest on the guaranteed amount at a rate based on the difference between the
interest rate on the Guaranteed Bank Facility and the interest rate on the
Series A and Series B Senior Notes of Iridium Operating LLC plus (ii) having
Parent pay substantially reduced warrant compensation based on the number of
warrants issued in connection with the offering of the Series A Notes (the
"High Yield Compensation"). Interest incurred on the guaranteed amount were
$5,094,000 and $7,927,000 for the three and six months ended September 30,
1998, respectively.
On May 13, 1998, Iridium permanently reduced the commitment of the
bank lenders under the Guaranteed Bank Facility from $450 million to $275
million. As a result of the reduction, the maximum number of warrants Motorola
is expected to earn as compensation for their guarantee of that facility from
inception until the expected maturity in June 1999 is 104,229 warrants to
purchase approximately 7,817,000 Class 1 Interests (assuming Iridium and the
Parent pay High Yield Compensation, including interest on the guaranteed
amount, through maturity).
Currently, Iridium and the Parent have elected to pay Motorola High
Yield Compensation. While Iridium and the Parent expect that electing to pay
High Yield Compensation will reduce the effective cost of the Motorola
Guarantee, there can be no assurance that such expectation will prove correct
or that the Motorola Guarantee will not exceed $275 million.
STANDBY PURCHASE AGREEMENT
In an effort to ensure that sufficient quantities of hand-held phones
and pagers are available for distribution in advance of the commencement of
commercial operations, Iridium has entered into with Motorola and intends to
enter into with Kyocera Corporation, standby commitments to purchase an
aggregate of up to $400 million in subscriber equipment. The Motorola
commitment would be triggered on or after January 1, 1999, but only to the
extent such subscriber equipment is not purchased by and shipped to gateway
operators or service providers prior to January 1, 1999, and the Kyocera
commitment is expected to contain similar provisions triggered on or after
February 8, 1999.
21
<PAGE> 22
IRIDIUM OPERATING LLC
(A Wholly-Owned Subsidiary of Iridium LLC)
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. LONG TERM DEBT
On May 13, 1998, Iridium and Iridium Capital Corporation completed an
offering of $350 million principal amount of 10 7/8% Senior Notes due 2005,
Series D ("Series D Notes"). The Series D Notes are guaranteed by Iridium
Roaming LLC, Iridium IP LLC and Iridium Facilities Corporation. The Series D
Notes have substantially the same terms as the Senior Notes other than interest
rate and issue date. The net proceeds received were approximately $342
million. Interest on the Series D Notes is payable in cash semi-annually on
January 15 and July 15 of each year, commencing on July 15, 1998. The Series D
Notes are redeemable at the option of Iridium, in whole or in part, at any time
on or after July 15, 2002. The Series D Notes mature on July 15, 2005.
6. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income. Accumulated other
comprehensive income consists entirely of the minimum pension liability. The
new disclosure requirements with respect to comprehensive income are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1997 1998 1997 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss, as reported . . . . . . . . . . . . . $(84,057) $(364,300) $(167,911) $(812,510)
Other comprehensive income (loss) . . . . . . . - - - -
----------- ---------- -------- ---------
Total . . . . . . . . . . . . . . . . . . . . . $(84,057) $(364,300) $(167,911) $(812,510)
========= ========== ========== ==========
Accumulated other comprehensive income (loss):
Beginning of period . . . . . . . . . . . . . . $(733) $(643) $(733) $(643)
====== ====== ====== ======
End of period . . . . . . . . . . . . . . . . . $(733) $(643) $(733) $(643)
====== ====== ====== ======
</TABLE>
7. IRIDIUM SUBSIDIARIES
The Senior Notes are co-issued by Iridium and Iridium Capital
Corporation ("Capital") and are fully and unconditionally guaranteed, jointly
and severally, on a senior unsecured basis by Iridium Roaming LLC, Iridium IP
LLC and Iridium Facilities Corporation (collectively, the "Guarantor
Subsidiaries" and together with Capital and Iridium Facilities Canada Inc., the
"Iridium Subsidiaries"). Each of the Iridium Subsidiaries is a wholly-owned
subsidiary of Iridium and, as of September 30, 1998, Iridium has no
subsidiaries other than the Iridium Subsidiaries. Capital was formed and
capitalized by the Parent on June 16, 1997 (subscribed capital of $100).
Iridium Roaming LLC was formed by the Parent on June 15, 1997. Iridium IP LLC
was formed by the Parent on February 28, 1997. In connection with the Asset
Drop-Down Transaction, Parent's interest in Capital, Iridium Roaming LLC and
Iridium IP LLC was transferred to Iridium. Iridium Facilities Corporation and
Iridium Facilities Canada Inc. were formed by Iridium on February 6, 1998 and
March 19, 1998, respectively.
22
<PAGE> 23
IRIDIUM OPERATING LLC
(A Wholly-Owned Subsidiary of Iridium LLC)
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following is summarized financial information of Capital as of
September 30, 1998 and for the period from inception through September 30,
1998. Full financial statements of Capital are not presented because management
believes they are not material to investors.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . $0
Total assets . . . . . . . . . . . . . . . . . . . . 0
Current liabilities . . . . . . . . . . . . . . . . . 0
Total liabilities . . . . . . . . . . . . . . . . . . 0
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
INCEPTION THROUGH
SEPTEMBER 30, 1998
-----------------------
<S> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . $0
Cost of services . . . . . . . . . . . . . . . . . . 0
Net loss . . . . . . . . . . . . . . . . . . . . . . 0
</TABLE>
Iridium has recognized the obligations relating to the Senior Notes
and Series D Notes because Iridium expects to have the operations to service
such obligations.
The following is summarized financial information of the Guarantor
Subsidiaries and Iridium Facilities Canada Inc. as of September 30, 1998, and
for the period from inception of each of the Guarantor Subsidiaries and Iridium
Facilities Canada Inc. through September 30, 1998. Full financial statements
of the Guarantor Subsidiaries and Iridium Facilities Canada Inc. are not
presented because management believes they are not material to investors.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . $0
Total assets . . . . . . . . . . . . . . . . . . . . 0
Current liabilities . . . . . . . . . . . . . . . . . 0
Total liabilities . . . . . . . . . . . . . . . . . . 0
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
INCEPTION THROUGH
SEPTEMBER 30, 1998
-----------------------
<S> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . $0
Cost of services . . . . . . . . . . . . . . . . . . 0
Net loss . . . . . . . . . . . . . . . . . . . . . . 0
</TABLE>
23
<PAGE> 24
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report is filed jointly by Iridium World Communications Ltd.
("IWCL"), Iridium LLC ("Parent"), Iridium Operating LLC ("Iridium"), Iridium
Capital Corporation ("Capital"), Iridium Roaming LLC ("Roaming"), Iridium IP
LLC ("IP") and Iridium Facilities Corporation ("Facilities"). IWCL acts as a
member of the Parent and has no other business. The business of Iridium
constitutes substantially all of the business of the Parent. Capital, Roaming,
IP, and Facilities are wholly-owned subsidiaries of Iridium.
FORWARD LOOKING STATEMENTS
Iridium is currently transitioning from a development stage company to an
operating company and has no meaningful operating history. Many of the
statements in this report are forward looking and actual results may be
materially different from those expressed or implied by these statements.
Forward looking statements are based on a number of assumptions, and one or
more of these assumptions is likely to be incorrect. Examples of forward
looking statements include statements concerning: expected funding needs, the
satellite maintenance launch schedule, the expected progress of improvements
and software enhancements, expected operational and software improvements, the
transition to commercial service, Iridium's expectations regarding Year 2000
issues and the integration and compliance testing of service providers and
roaming partners.
Factors which may cause IWCL's, Parent's or Iridium's results to differ
materially from those expressed or implied by such forward looking statements
and other factors that may materially affect Iridium's operations, are
described in greater detail in Exhibit 99 to this Report -- "Certain Factors
Which May Affect Iridium" -- and should be carefully considered by investors
and prospective investors in IWCL, Parent or Iridium.
BACKGROUND
IWCL was incorporated by Parent as an exempted company under the Companies
Act 1981 of Bermuda on December 12, 1996. IWCL is organized to act as a
member of Parent and to have no other business. On June 13, 1997, IWCL
consummated an initial public offering (the "IWCL IPO") of 12,000,000 shares of
its Class A Common Stock, par value $0.01 per share (the "Class A Common
Stock") and applied the net proceeds of approximately $225 million to purchase
12,000,000 Class 1 Membership Interests in Parent. As of November 9, 1998, IWCL
owned 12,179,485 Class 1 Membership Interests in Parent (approximately 8.6% of
the amount outstanding).
Parent 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. Parent's purpose is to acquire, own and manage the Iridium Communications
System (the "Iridium System").
Iridium was formed as a limited liability company pursuant to the provisions
of the Delaware Act on October 23, 1997. Iridium is a wholly-owned subsidiary
of Parent, has the same purpose as Parent and acts as the main operating
company in the Iridium group.
Iridium has four series of Senior Notes outstanding: its 13% Senior Notes
due 2005, Series A/EN ("Series A Notes"), its 14% Senior Notes due 2005, Series
B/EN ("Series B Notes"), its 11 1/4% Senior Notes due 2005, Series C and Series
C/EN ("Series C Notes"), and its 10 7/8% Senior Notes due 2005, Series D
("Series D Notes", and, together with its Series A Notes, Series B Notes and
Series C Notes, the "Senior Notes"). Iridium's Senior Notes are co-issued by
Capital and guaranteed by Roaming, IP and Facilities.
24
<PAGE> 25
Capital is a Delaware corporation and a wholly-owned subsidiary of Iridium.
Capital has no business other than serving as a co-issuer of Iridium's Senior
Notes and guarantor of Iridium's Secured Bank Facility (as defined). Capital
has no significant assets and does not conduct any operations.
Roaming, a Delaware limited liability company and a wholly-owned subsidiary
of Iridium, is the entity that enters into roaming agreements with other
wireless telecommunications providers on behalf of Iridium. IP, also a Delaware
limited liability company and a wholly-owned subsidiary of Iridium, holds the
worldwide trademark registrations of Iridium. Facilities, a Delaware
corporation and a wholly-owned subsidiary of Iridium, holds certain real
property of Iridium. Each of Roaming, IP and Facilities is a guarantor of the
Senior Notes and the Secured Bank Facility.
IWCL's sole assets are its Class 1 Membership Interests, and warrants to
purchase additional Class 1 Membership Interests of Parent upon the exercise of
outstanding IWCL warrants. IWCL's results of operations reflect its
proportionate share of the results of operations of Parent on an equity
accounting basis. IWCL has no operations other than those related to its
interest in Parent and, indirectly, Iridium. The business of Iridium
constitutes substantially all of Parent's business. Accordingly, this
discussion focuses on the financial condition and results of operations of
Iridium.
RECENT DEVELOPMENTS
Iridium began commercial satellite phone service on November 1, 1998.
During the third quarter, Iridium successfully launched seven additional
satellites aboard two launch vehicles. Three of the seven new satellites
filled gaps in the operational constellations, while the other four will serve
as spares for future constellation replenishment. Satellite maintenance
launches are expected on an on-going basis during commercial operations.
During the third quarter, Iridium's ground control facilities became
commercially operational and 12 gateways were staffed and began functioning.
Internal and customer trials were conducted during the third quarter, which
were designed to test the system design, architecture and service features.
Constellation software was uploaded throughout the network and test results
demonstrated improvements in system performance, including L-band availability,
cross-link functionality, call establishment and completion, and dropped call
rates. Additional software enhancements may be required as the system matures
and commercial customers use the Iridium System. While testing of paging
functionality was delayed due to concentration of efforts on voice performance,
Iridium intends to begin commercial satellite paging service on November 15,
1998.
Iridium phones and pagers are the first commercial products to carry the
newly approved International Telecommunications Union "mark", which is intended
to enable subscribers to carry Iridium phones and pagers into, and out of,
countries without restriction. Iridium believes that this mark will enhance
the company's ability to deliver on its promise to provide global
communications services.
More than 120 countries and territories have licensed Iridium World
Satellite Service, enabling satellite services to be offered in countries that
collectively account for approximately 75% of Iridium's expected market for
satellite services.
Service provider and roaming partner integration and compliance testing have
been underway for several months. As of November 1, 1998, Iridium had
integrated approximately 56 service providers and had completed compliance
testing for approximately 50 roaming partners. Iridium has signed agreements
with a significant number of additional roaming partners that have not yet been
integrated and tested. Integration and compliance testing are necessary to
ensure proper signaling, interconnection, billing system interface, product
handling and marketing readiness. In order to meet its distributor and roaming
partner goals, Iridium will need to make substantial progress in integration
and compliance testing.
25
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
FUNDING REQUIREMENTS
Iridium commenced commercial satellite phone service on November 1, 1998.
Iridium estimates aggregate cash funding requirements of approximately $5.5
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. At September 30,
1997 and 1998, Iridium had expended, since inception, approximately $3.15
billion (or 57%) and approximately $4.18 billion (or 76%), respectively, of
such $5.5 billion estimate. While Iridium raised sufficient funds to meet its
pre-commercial operations project costs, Iridium expects to require an
additional approximately $1.7 billion in funding for refinancing, project costs
and operations prior to year-end 1999. These projections of aggregate funding
needs assume that Iridium will not be required to make any payments under the
Standby Equipment Purchase Commitments (as defined below). In addition, such
projections are forward looking and could vary, perhaps substantially, from
actual results, due to events outside of the control of Iridium, including
without limitation unforeseen construction, systems integration or regulatory
delays, launch failures and lower than anticipated customer demand.
With respect to the development and construction of the Iridium System,
Iridium and Motorola are parties to (i) the Space System Contract for the
design, development, production and delivery in orbit of the space segment,
(ii) the Terrestrial Network Development Contract to design the gateway
hardware and software, and (iii) the Operations and Maintenance Contract to
provide day-to-day management of the space segment after deployment and to
monitor, upgrade and replace hardware and software of the space segment as
necessary to maintain performance specifications. Substantially all of the
initial capital raised by Iridium is being used and will continue to be used to
make payments to Motorola under the Space System Contract and, to a lesser
extent, the Terrestrial Network Development Contract. The Space System Contract
provides for a fixed price of $3.45 billion (subject to certain adjustments),
scheduled to be paid by Iridium to Motorola over approximately a five-year
period for completion of milestones under the contract. Payments under the
Operations and Maintenance Contract will be payable quarterly and are expected
to aggregate approximately $2.88 billion over such contract's initial five-year
term, 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. The
Terrestrial Network Development Contract provides for payments aggregating
approximately $321 million. As a result of technological developments, changes
in the product mix of Iridium World Services, and scheduling adjustments,
including the implementation of Iridium World Roaming Services into Iridium's
service offerings, there have been, and Iridium anticipates there will be,
amendments and interpretations of the Terrestrial Network Development Contract
and the Operations and Maintenance Contract and other agreements and letters
with Motorola which may increase the total costs of these contracts. While
Iridium's estimate of the cost of anticipated amendments and interpretations is
reflected in Iridium's estimates of its funding requirements, there can be no
assurance that any such amendments or interpretations will not affect the price
and terms of those agreements in a manner not reflected in Iridium's funding
estimates.
Through September 30, 1998, Iridium incurred expenditures totaling $3.2
billion to Motorola under the Space System Contract in respect of completed
milestones and expenditures totaling $285 million under the Terrestrial Network
Development Contract. Based on estimates and the planned schedule as of
September 30, 1998, Iridium's expected future cash requirements by year under
the contracts through December 31, 1999 are approximately as follows (in
millions):
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Space System Contract . . . . . . . . . . . . . . . . . . $ 332 $ -
Terrestrial Network Development Contract . . . . . . . . . 79 87
Operations and Maintenance Contract . . . . . . . . . . . 86 537
</TABLE>
Iridium will also require funds for working capital, business software
development, interest on anticipated borrowings, financing costs and operating
expenses.
26
<PAGE> 27
In an effort to ensure that sufficient quantities of hand-held phones and
pagers are available for distribution in advance of the commencement of
commercial operations, Iridium has entered into with Motorola, and intends to
enter into with Kyocera Corporation, standby commitments to purchase an
aggregate of up to $400 million in subscriber equipment (the "Standby Equipment
Purchase Commitments"). The Motorola Commitment would be triggered on or after
January 1, 1999, but only to the extent such subscriber equipment is not
purchased by and shipped to gateway operators or service providers prior to
January 1, 1999, and the Kyocera Commitment is expected to contain similar
provisions triggered on or after February 8, 1999. See "SOURCES OF FUNDING."
Iridium's interest expense will increase significantly as a result of its
financing plan. From approximately the time of commencement of commercial
operations through approximately year-end 1999 (the last year in which Iridium
projects negative cash flow and a net increase in year-end outstanding
borrowings) Iridium expects to service its interest expense partly from
available cash and bank facilities and partly from revenues from operations.
During commercial service, Iridium will be required to make payments to Motorola
under the Operations and Maintenance Contract. After December 31, 1999,
Iridium's obligations related to the Operations and Maintenance Contract, funds
needed for working capital, capital expenditures and debt service are
anticipated to be funded through operations.
SOURCES OF FUNDING
As of September 30, 1998, Iridium had indirectly received $1.94 billion from
equity investments in the Parent, and has the right to receive approximately
$52 million due from South Pacific Iridium Holdings Limited pursuant to the
terms of a definitive purchase agreement. As of September 30, 1998 Iridium's
indebtedness for borrowed money equaled approximately $2.4 billion, including
approximately $1.4 billion in aggregate principal amount of Senior Notes (as
defined), approximately $310 million in aggregate principal amount of 14 1/2%
Senior Subdinated Notes due 2006, approximately $271.5 million of borrowings
under the Guaranteed Bank Facility (as defined) and approximately $410 million
of borrowings under the Secured Bank Facility (as defined).
Iridium has entered into a Credit Agreement with Chase Securities Inc., The
Chase Manhattan Bank, Barclays Bank PLC and Barclays Capital, the investment
banking division of Barclays Bank PLC, and a syndicate of lenders (the "Secured
Lenders") for a senior bank facility in a principal amount of $1.0 billion (the
"Secured Bank Facility"). As of September 30, 1998, Iridium had drawn $410
million under this Secured Bank Facility. The availability of the Secured Bank
Facility is subject to significant conditions, including technical conditions
relating to the Iridium System, conditions relating to regulatory approvals and
conditions relating to other financing sources. The final $250 million of the
Secured Bank Facility is not available until the Iridium System meets certain
commercial service conditions. The Secured Bank Facility is secured by
substantially all of Iridium's assets. The Secured Bank Facility is further
secured by the Reserve Capital Call (as defined) of the Parent and all of the
membership interests in Iridium. In addition, each of Iridium's subsidiaries
has guaranteed Iridium's obligations thereunder. The Reserve Capital Call is
the contractual commitment by 17 of Parent's investors to purchase up to
18,206,550 Class 1 Interests at $13.33 per interest (an aggregate of
approximately $243 million). The $1.0 billion Secured Bank Facility matures on
December 31, 1998 and, accordingly, Iridium is required to refinance the
outstanding amount of the Secured Bank Facility by that date.
Iridium is exploring several options for refinancing the Secured Bank
Facility. However, there can be no assurance that Iridium will obtain such
replacement financing. Failure to obtain replacement financing for the Secured
Bank Facility would have a material adverse effect on Iridium. Iridium
estimates that in addition to raising replacement financing in the amount of
$1.0 billion for the Secured Bank Facility, it will need to raise an additional
$700 million to operate through 1999, the last year in which Iridium projects
negative cash flow and a net increase in year end borrowing. Iridium's estimated
funding needs may increase, perhaps substantially, for a number of reasons,
including if Iridium is unable to generate revenues in the amount and within the
time frame it expects or if Iridium has unexpected cost increases. Such
additional and replacement financing may be secured or guaranteed in whole or in
part. There is a risk that Iridium may not be able to find banks or any other
lender that will be willing to lend to Iridium on terms it will accept.
As of September 30, 1998, Iridium had drawn $271.5 million under a $275
million unsecured borrowing facility with a syndicate of banks (the "Guaranteed
Bank Facility"). Borrowings under the Guaranteed Bank Facility are guaranteed
by Motorola (the "Motorola Guarantee"). Depending on market conditions,
Iridium may make additional senior note offerings in order to further reduce
the Guaranteed Bank Facility or for other purposes. However, there can be no
assurance that Iridium will be able to complete additional senior note
offerings even if favorable market conditions exist. The Guaranteed Bank
Facility matures on June 30, 1999.
Pursuant to the Memorandum of Understanding, dated May 11, 1998, among
Iridium, Parent and Motorola (the "Motorola MOU"), in addition to the Motorola
Guarantee, Motorola has conditionally agreed that it will (i) guarantee up to
$350 million of additional indebtedness (including principal and interest) under
the Guaranteed Bank Facility or another credit facility on identical terms (the
"Motorola Additional Guarantee"), provided that borrowings under such additional
indebtedness are made on or prior to February 28, 1999 and (ii) guarantee up to
approximately $175 million of additional indebtedness (including principal and
interest) under the Guaranteed Bank Facility or a credit agreement having the
identical terms as the Guaranteed Bank Facility (other than maturity) to be used
by Iridium only for payments to Motorola in respect of Motorola Standby
Commitment and amounts overdue to Motorola (the "Motorola Equipment Guarantee").
Borrowings under the Guaranteed Bank Facility mature on June 30, 1999. Pursuant
to the Motorola MOU, Motorola has agreed to extend the Motorola Guarantee
(including the Motorola Additional Guarantee, if committed) until after July 15,
2005, if the Guaranteed Bank Facility is so extended. Iridium currently believes
it would be able to amend the Guaranteed Bank Facility to increase its amount to
the extent of the Motorola Additional Guarantee and to extend its maturity until
after July 15, 2005, if it so requests. However, there are many factors that
could affect the availability of such a credit facility, and there can be no
assurance that the bank lenders would agree, if so requested by Iridium, to
increase the amount of the Guaranteed Bank Facility or to extend the term of the
Guaranteed Bank Facility.
27
<PAGE> 28
OPERATIONS
Iridium commenced commercial satellite phone service on November 1, 1998. As
of September 30, 1998, Iridium's only source of income was interest income on
the cash and investment balances from the proceeds of equity commitments in
Parent, which interest income amounted to approximately $21.2 million from July
29, 1993 (the "Initial Capital Contribution Date") to September 30, 1998.
During the same period, Iridium recorded a net loss of approximately $1.253
billion. In addition, during the periods 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 Parent to Motorola pursuant to a reimbursement agreement.
From September 30, 1997 to September 30, 1998, Iridium's aggregate net loss
increased substantially from $168 million to $813 million for the nine months
ended September 30, 1997 and 1998, respectively. This was primarily the result
of the following increases for the nine months ended September 30, 1998,
as compared to the corresponding period in 1997: $138 million for sales,
general and administrative expenses due to increased activities associated with
commercial activation, $331 million for depreciation expense due to the
depreciation of a greater number of satellites and $176 million for increased
interest expense. See "CAPITALIZATION OF COSTS", "OPERATING EXPENSES" and
"INTEREST EXPENSE."
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 delivery of each satellite to
its mission orbit. Depreciation related to the ground control stations
commences with the placement in service of each such station. Losses from
satellite failures for which Iridium has financial responsibility under its
contractual arrangements with Motorola are recognized currently. Motorola bears
the risk of loss for launch failures and satellite failures before a satellite
is placed into service. Iridium has obtained a satellite insurance policy to
cover certain costs associated with the loss of a satellite. Capitalized
amounts under the Space System Contract and the Terrestrial Network Development
Contract aggregated approximately $3.45 billion through September 30, 1998. In
addition, costs incurred in connection with the issuance by Parent of
28
<PAGE> 29
Class 1 Interests are reflected as a reduction of Parent's additional paid-in
capital and Iridium's debt issuance costs are deferred and amortized over the
term of the related indebtedness. Payment of these costs and charges has
resulted in significant negative operating cash flow. Certain interest costs
also will be capitalized through the date of commencement of commercial
operations.
A portion of the payments made under the Operations and Maintenance Contract
will be capitalized and depreciated. The amount so capitalized will be
determined depending upon the number of replacement satellites put into
service. Any costs under the Operations and Maintenance Contract not
capitalized will be expensed as incurred.
OPERATING EXPENSES
For the period from the Initial Capital Contribution Date through September
30, 1998, total operating expenses were approximately $1.06 billion. 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
Iridium System is under construction and will be depreciated thereafter. This
has resulted in all interest costs being capitalized during 1995, 1996, and
1997. For the nine months ended September 30, 1998, approximately $247.4
million of interest cost was incurred. Interest expensed for the nine months
ended September 30, 1998 was approximately $168.2 million with the remaining
interest capitalized to the system under construction. It is likely that a
meaningful portion of interest cost will be expensed in 1998 and all interest
cost will be expensed beginning in 1999. Some portion of interest expense will
not be paid in cash, including the interest expense related to Iridium's 14
1/2% Senior Subordinated Notes through March 1, 2001. Such non-cash interest
will be accrued and such accrual will increase outstanding indebtedness on
Iridium's and Parent's consolidated balance sheets.
INCOME TAXES
Each of Parent and 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.
IWCL is taxed directly.
YEAR 2000 READINESS DISCLOSURE STATEMENT
Iridium has established a Year 2000 Program (the "Y2K Program") to address
information-technology ("IT") and non-IT problems that may exist within the
Iridium System, including Iridium's suppliers, roaming partners, service
providers and other material distributors.
Until recently, only two digits were used to represent the year in dates
recorded in computer systems. This practice did not anticipate the problem
generated by the turn of the century, after which dates entered as "00" could
be understood by computers to mean 1900 instead of 2000. This and other date
handling processes could result in the incorrect performance of computer
calculations and functionality involving dates. Such miscalculations could
adversely affect Iridium's installed computer systems, network elements,
software applications and other business systems containing time sensitive
programs. The Year 2000 issue may also affect the systems and applications of
Iridium's roaming partners, service providers and other material distributors.
29
<PAGE> 30
Y2K Program
The Y2K Program encompasses the Iridium space and ground facilities, as well
as the relevant operations of Iridium's material suppliers and distributors,
and addresses both IT and non-IT systems.
The Y2K Program is divided into five major phases - Awareness, Inventory and
Risk Assessment, Repair and Renovation, Verification and Validation, and
Implementation and Monitoring. The Awareness Phase is intended to ensure the
establishment of the Y2K Program and the awareness of potential risks and Year
2000 issues. This phase, which involves communicating the status and progress
of the Y2K Program within Iridium and to third parties, is an on-going activity
and will continue as Iridium proceeds through the other phases.
The Inventory and Risk Assessment Phase involves the performance of an
initial inventory of all Iridium hardware, software and infrastructure, as well
as material vendors, to identify potential Year 2000 issues and to determine
the action required, if any, to mitigate the risk to Iridium. Through the
gateways, Iridium is contacting its third party roaming partners and service
providers to determine the Year 2000 status of their systems, as well as their
plans to bring them into compliance. That process is on-going. Material items
are those believed by Iridium to have a significant impact on the business from
a customer service, financial or legal perspective. This phase is being
performed by Iridium's internal Y2K team. Iridium anticipates that this phase
will be substantially complete by the end of the first quarter in 1999.
The Repair, Replacement and Renovation Phase is intended to ensure that the
appropriate items as identified in the final inventory and risk assessment are
upgraded to meet Year 2000 compliance criteria. This may include software
updates, hardware upgrades, development of new processes, new business
practices, training programs, etc. While completion of the various elements of
this phase is tied to corresponding elements within the assessment phase,
Iridium anticipates that material repairs, replacements and renovations will be
substantially complete by mid-1999 for systems under the direct control of
Iridium. No current assessment of the completion dates for material repairs,
replacements and renovations not under Iridium's direct control, and for which
third parties such as gateways, service providers and roaming partners are
responsible, will be available until completion of that portion of the
Inventory and Risk Assessment phase.
The Verification and Validation Phase ensures that critical business
processes, systems and infrastructure are verified and tested to ensure Year
2000 issues will not cause major disruption in the on-going operation of the
Iridium business. Verification and testing of those systems under Iridium's
direct control will be performed by Iridium's internal Y2K team with the support
of its technicians and certain of the principal suppliers of those systems.
This phase is ongoing, but Iridium expects all testing of those systems under
its direct control to be substantially complete in the third quarter of 1999.
Finally, during the Implementation and Monitoring Phase, the Year 2000
upgrades will be installed into Iridium's operating systems, as necessary. In
addition, the monitoring activity will be employed in an effort to ensure that
unforeseen Year 2000 critical items are appropriately prioritized for
correction. While the implementation component of this phase is scheduled to
be complete by the end of the third quarter in 1999, Iridium's monitoring
activities will be on-going.
State of Readiness
While there is general uncertainty inherent in the Year 2000 problem
resulting in part from the uncertainty of the readiness of third party
distributors and vendors, Iridium's progress towards completing risk assessment
within the Iridium System is on schedule to be completed in the first quarter
1999.
Although the remediation, testing and implementation phases have not yet
commenced, Iridium anticipates that these phases will proceed along the
schedule as contemplated by its Y2K Program.
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to Iridium's financial position or
results of operations. The current estimated total cost to
30
<PAGE> 31
Iridium of the Y2K Program is $2 million. However, the accuracy of this
estimate cannot be verified until completion of the Inventory and Risk
Assessment Phase. Factors which may affect this $2 million estimate include
unanticipated problems with Iridium's systems or any of its suppliers' or
distribution partners' systems. Iridium estimates that the amount expended on
the Y2K Program through December 31, 1998, will be approximately $304,000, all
of which will be expensed by Iridium, with $24,000 of this amount incurred in
the first nine months of 1998. This estimate does not reflect all costs
because, for example, the Iridium Business Support Systems were developed from
the outset to handle Year 2000 issues, and the cost of this capability was not
separately identified by the supplier. Other significant or critical non-Year
2000 information technology projects under Iridium's direct control have not
been materially delayed or impacted by Year 2000 initiatives.
Risks
In a reasonably likely worst case scenario, the failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations, including operations that
are essential to the provision of Iridium's services. Such failures could
materially and adversely affect Iridium's results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting in major part from the present state of Iridium's knowledge
concerning the Year 2000 readiness of third-parties such as its roaming partners
and service providers, Iridium is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on Iridium's
results of operations, liquidity or financial condition. The Y2K Program is
expected to significantly reduce Iridium's level of uncertainty about the Year
2000 problem and, in particular, about the Year 2000 compliance and readiness of
its material partners. Iridium believes that, with the completion of the Y2K
Program as scheduled, the potential of significant interruptions of normal
operations should be reduced.
Contingency Plans
After reviewing information gathered in the Inventory and Risk Assessment
Phase, and to prepare for the possibility that certain information systems or
third party partners and vendors will not be Year 2000 compliant, Iridium
intends to develop contingency plans, as appropriate.
These plans may include the establishment of teams to monitor and correct
disruptions, utilization of back-up processes including data back-up and
storage, and the development of manual "work-around" solutions.
Readers are cautioned that the discussion of Iridium's efforts and
expectations related to Year 2000 are forward-looking statements and should be
read in conjunction with Iridium's disclosures under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward Looking
Statements", as well as Exhibit 99 to this Report -- "Certain Factors Which May
Affect Iridium."
31
<PAGE> 32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
32
<PAGE> 33
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10 Amendment Number 7 to the Iridium Space System
Contract and Amendment Number 5 to the Terrestrial
Network Development Contract
11.1 Computation of Loss Per Class A Common Share
11.2 Computation of Loss per Class 1 Interest
27.1 Financial Data Schedule of Iridium LLC
27.2 Financial Data Schedule of Iridium Operating
LLC
27.3 Financial Data Schedule of Iridium World
Communications Ltd.
99 Certain Factors Which May Affect Iridium
(b) Reports on Form 8-K
During the quarter, Iridium filed one report on Form 8-K
dated September 9, 1998, which reported a press release
relating to a delay of the launch of commercial service to
November 1, 1998.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
IRIDIUM WORLD COMMUNICATIONS LTD.
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
Chairman and Chief Executive Officer
/s/ Roy T. Grant
----------------
Roy T. Grant
Vice President and Chief Financial Officer
IRIDIUM LLC
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
Vice Chairman and Chief Executive Officer
/s/ Roy T. Grant
----------------
Roy T. Grant
Vice President and Chief Financial Officer
IRIDIUM OPERATING LLC
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
Vice Chairman and Chief Executive Officer
/s/ Roy T. Grant
----------------
Roy T. Grant
Vice President and Chief Financial Officer
IRIDIUM CAPITAL CORPORATION
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
Chairman and Chief Executive Officer
/s/ Roy T. Grant
----------------
Roy T. Grant
Chief Financial Officer
IRIDIUM IP LLC
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
acting chief executive
officer
/s/ Roy T. Grant
----------------
Roy T. Grant
acting chief financial officer
34
<PAGE> 35
IRIDIUM ROAMING LLC
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
acting chief executive
officer
/s/ Roy T. Grant
----------------
Roy T. Grant
acting chief financial officer
IRIDIUM FACILITIES CORPORATION
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
Chairman and Chief Executive Officer
/s/ Roy T. Grant
----------------
Roy T. Grant
Chief Financial Officer
Date: November 10, 1998
35
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ---------------------- ----
<S> <C> <C>
10 Amendment Number 7 to the Iridium Space System
Contract and Amendment Number 5 to the Terrestrial
Network Development Contract
11.1 Computation of Loss Per Class A Common Share
11.2 Computation of Loss per Class 1 Interest
27.1 Financial Data Schedule of Iridium LLC
27.2 Financial Data Schedule of Iridium Operating LLC
27.3 Financial Data Schedule of Iridium World Communications Ltd.
99 Certain Factors Which May Affect Iridium
</TABLE>
36
<PAGE> 1
EXHIBIT 10
AMENDMENT NUMBER 7
IRIDIUM SPACE SYSTEM CONTRACT
AND
AMENDMENT NUMBER 5
TERRESTRIAL NETWORK DEVELOPMENT CONTRACT
This Amendment is entered into by Motorola, Inc. ("Seller") a corporation
organized under the laws of the state of Delaware, USA, and Iridium Operating
LLC ("Buyer"), a Delaware limited liability company and constitutes Amendment
Number 7 to the Iridium Space System Contract ("SSC") and Amendment Number 5 to
the Terrestrial Network Development Contract ("TNDC"). This Amendment also
amends, to the extent specified, the Operations and Maintenance Contract between
Buyer and Seller.
1.0 INTRODUCTION
This Amendment specifies the revised conditions which Buyer and Seller have
agreed to for acceptance of Milestone 47 of the SSC and Milestones 7 and 8 of
the TNDC (collectively, the "Milestones"), and for payment thereunder. The
conditions set forth below replace in their entirely the criteria for acceptance
and payment with respect to the Milestones. This Amendment also specifies a
revised date for the commencement of the Operations and Maintenance Contract
between Buyer and Seller.
2.0 ACCEPTANCE CRITERIA
2.1 The "Milestone Description" and "Milestone Acceptance Criteria" set forth
in Exhibit B (Statement of Work) of the SSC in Section 5.47 with respect to
Milestone 47, and TNDC Exhibit A (Statement of Work) Sections 4.2.3 and 4.2.4
with respect to Milestones 7 and 8, are replaced with the following acceptance
criteria (the "Milestones Acceptance Criteria"):
Space System Contract Milestone 47 and TNDC Milestones 7 and 8, are
deemed completed when all the Key Performance Indicators (KPI) set forth
in Phase 1 of the Customer Satisfaction Test Plan (Annex A) have been met
as specified in Annex A. Upon completion of all such KPI set forth in
Phase 1 of the Customer Satisfaction Test Plan, Buyer will provide to
Seller certification that such KPI have been met.
3.0 PAYMENT
3.1 With respect to the Milestones, a payment of $162 million, subject to
reductions below (such payment, as so reduced, being the "Milestones Payment"),
shall be due and payable immediately (notwithstanding Articles 6.B and 6.C of
the TNDC and Articles 5.A and 5.B of the SSC) on December 31, 1998, so long as
either (a) full commercial service has
<PAGE> 2
commenced, or (b) the Milestones Acceptance Criteria have been met. If neither
of these has occurred by December 31, 1998, then the Milestones Payment shall be
due and payable (notwithstanding Articles 6.B and 6.C of the TNDC and Articles
5.A and 5.B of the SSC) thirty (30) days following the earlier of (a) the date
that full commercial service has commenced, or (b) the date that the Milestones
Acceptance Criteria have been met.
3.2 Notwithstanding the foregoing, Buyer may withhold the amount of
$5,000,000 from the Milestones Payment, and such amount shall become due and
payable immediately on the earlier of (a) the date of Buyer's receipt of an
invoice and certification from Seller that the activation of Release 3
functionality into the Iridium Communications System for commercial services has
been completed, which is currently scheduled for April 1999, or (b) June 1,
1999.
3.3 If by September 23, 1998, either the Milestones Acceptance Criteria have
not been met, or full commercial service has not commenced, then the Milestones
Payment, will be reduced by $388,889 per day for each day of the first ninety
days (up to a maximum price reduction of $35,000,000), until the earlier of (a)
the date that the Milestones Acceptance Criteria have been met, or (b) the date
that full commercial service has commenced. If by December 22, 1998, the
Milestones Acceptance Criteria have not been met, or full commercial service has
not commenced, then for each complete period of thirty (30) days after December
22, 1998, the Milestones Payment will be reduced by $12,777,777 (up to a maximum
price reduction of $115,000,000) until the earlier of (a) the date that the
Milestones Acceptance Criteria have been met, or (b) the date that full
commercial service has commenced.
3.4 Notwithstanding the foregoing, if all the KPI set forth in Phase 3 of the
Customer Satisfaction Test Plan (Annex A) have not been met, and the Capacity
Verification Criteria (Annex B) have not been met, by the date that the
Milestones Payment is to be made, Buyer may withhold $50,000,000 from the
Milestones Payment, with the $50,000,000 withheld being due and payable on the
earlier of (a) the thirtieth (30th) day following the date all such KPI have
been met and such Capacity Verification Criteria have been met, or (b) March 31,
1999.
3.5 BUYER AGREES THAT THE FOREGOING PRICE REDUCTIONS SHALL BE ITS EXCLUSIVE
REMEDY FOR DELAYS BY SELLER IN COMPLETING THE MILESTONES, EXCEPT THAT A DELAY IN
COMPLETING THE MILESTONES ACCEPTANCE CRITERIA IN EXCESS OF TWELVE (12) MONTHS
BEYOND THE SCHEDULED COMPLETION DATE OF SEPTEMBER 23, 1998, AS SUCH DATE MAY BE
ADJUSTED UNDER THE SSC, SHALL PERMIT BUYER TO DECLARE SELLER IN DEFAULT OF THE
SSC UNDER ARTICLE 23. DEFAULT BY SELLER, OF THE SSC, UNLESS BUYER HAS COMMENCED
FULL COMMERCIAL SERVICE.
-2-
<PAGE> 3
4.0 CONFORMING PROVISIONS
4.1 The parties agree that the acceptance criteria set forth in Article 8,
and in Section 5.47 of Exhibit B, of the SSC with respect to Milestone 47 and
the completion criteria for Milestones 7 and 8 in Sections 4.2.3 and 4.2.4 of
the TNDC Exhibit A are those criteria set forth in this Amendment. Consequently,
Section C of Article 8 and Section B(3) of Article 6 of the SSC and Section E of
Article 6 of the TNDC are hereby deleted.
4.2 The parties agree that the Price, Payment, and Gateway Delivery
Commitment provisions (which, in the case of the Gateway Delivery Commitment,
have been deemed to be satisfied) set forth in Articles 4, 5, and 6 of the SSC,
with respect to Milestone 47 and the payments described in this Amendment, and
that the Price and Payment provisions of Articles 5 and 6 of the TNDC with
respect to Milestones 7 and 8, are superseded by and rendered inapplicable to
this Amendment.
4.3 For purposes of the Operations and Maintenance Contract between the
parties, the parties agree that completion of the SSC shall occur and the
Operations and Maintenance Contract shall commence, on the earlier of (a) the
date upon which all the KPI set forth in Phase 2 of the Customer Satisfaction
Test Plan (Annex A) have been met, as specified in such Annex and the Capacity
Verification Criteria (Annex B) have been met, as specified in such Annex, or
(b) the date at which full commercial service commences, but no earlier than
October 30, 1998 in either case.
5.0 GENERAL
This Amendment consists of this document and Annex A (Customer Satisfaction Test
Plan) and Annex B (Capacity Verification Criteria), which are incorporated into
and made a part of this Amendment, and this Amendment supersedes all prior or
concurrent discussions, agreements, proposals and understandings with respect to
the provisions discussed in this Amendment. Except as specifically amended by
this agreement, the SSC, as amended, and the TNDC, as amended, and the
Operations and Maintenance Contract, as amended, shall remain in full force and
effect.
-3-
<PAGE> 4
ACCEPTED AND AGREED TO:
Iridium Operating LLC Motorola, Inc.
Signed: /s/ F.T. Tuttle Signed: /s/ Bary Bertiger
-------------------------- --------------------------
Name: F. T. Tuttle Name: Bary Bertiger
Title: Vice President and General Title: Senior Vice President and
Counsel General Manager
Date: 18 September 1998 Date: 9-18-98
-4-
<PAGE> 1
Exhibit 11.1
IRIDIUM WORLD COMMUNICATIONS LTD.
COMPUTATION OF LOSS PER CLASS A COMMON SHARES
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET LOSS APPLICABLE TO CLASS A COMMON SHARES:
Net loss $ 7,260 $ 31,615 $ 8,039 $ 69,974
Incremental equity loss upon assumed exercise of options,
warrants and conversion of Class B Common shares 706 5,548 1,680 12,617
----------- ----------- ----------- -----------
Net loss applicable to Class A Common shares $ 7,966 $ 37,163 $ 9,719 $ 82,591
=========== =========== =========== ===========
AVERAGE NUMBER OF CLASS A SHARES:
Average number of Class A Common shares outstanding 12,000,000 12,084,446 4,967,033 12,050,913
Diluted adjustments (2):
Assumed exercise of options, warrants and
conversion of Class B Common shares 1,307,628 2,392,709 1,367,233 2,439,316
----------- ----------- ----------- -----------
Average number of Class A Common shares assumed to be
outstanding, assuming dilution 13,307,628 14,477,155 6,334,266 14,490,229
=========== =========== =========== ===========
NET LOSS PER CLASS A COMMON SHARE:
Basic (1) $ 0.61 $ 2.62 $ 1.62 $ 5.81
Diluted (2) $ 0.60 $ 2.57 $ 1.53 $ 5.70
</TABLE>
(1) The assumed exercise of options and warrants in periods of net loss are
anti-dilutive and are not included in the computation and presentation of
loss per Class A Common share.
(2) The assumed exercise of options and warrants are anti-dilutive but are
included in the calculation of diluted loss per Class A Common share in
accordance with Regulation S-K, Item 601 (a) (11).
<PAGE> 1
Exhibit 11.2
IRIDIUM LLC
(A Development Stage Limited Liability Company)
COMPUTATION OF LOSS PER CLASS 1 INTEREST
(in thousands except Member Interest data)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET LOSS APPLICABLE TO CLASS 1 INTERESTS:
Net loss $ 84,095 $ 364,381 $ 167,949 $ 812,722
Preferred dividend requirement 1,317 1,553 4,924 4,499
----------- ----------- ----------- -----------
Net loss applicable to Class 1 Interests $ 85,412 $ 365,934 $ 172,873 $ 817,221
=========== =========== =========== ===========
AVERAGE NUMBER OF CLASS 1 INTERESTS:
Average number of Class 1 Interests outstanding 141,219,180 141,324,251 130,065,304 141,289,887
Subscribed but unissued Class 1 Interests - - - -
Assumed exercise of options, warrants and
conversion of Class B Common Shares 13,731,572 17,887,479 13,755,599 17,917,484
Assumed conversion of Series A Class 2 Interest 688,461 793,209 869,544 738,679
----------- ----------- ----------- -----------
Average number of Class 1 Interests assumed to be
outstanding, assuming dilution 155,639,213 160,004,939 144,690,447 159,946,050
=========== =========== =========== ===========
NET LOSS PER CLASS 1 INTEREST:
Basic (1) $ 0.60 $ 2.59 $ 1.33 $ 5.78
Diluted (2) $ 0.55 $ 2.29 $ 1.19 $ 5.11
</TABLE>
(1) The assumed exercise of options and warrants in periods of net loss are
anti-dilutive and are not included in the computation and presentation of
loss per Class 1 Interest.
(2) The assumed exercise of options, warrants, and conversion of Series A Class
2 Interests are anti-dilutive but are included in the calculation of
diluted loss per Class 1 Interest in accordance with Regulation S-K, Item
601 (a) (11).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Iridium
LLC's financial statements for the nine months ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000948421
<NAME> IRIDIUM LLC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 65,207
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 104,281
<PP&E> 3,887,153
<DEPRECIATION> 498,344
<TOTAL-ASSETS> 3,564,602
<CURRENT-LIABILITIES> 1,004,301
<BONDS> 1,714,891
0
44,406
<COMMON> 2,031,835
<OTHER-SE> (1,242,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,564,602
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 639,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173,185
<INCOME-PRETAX> (812,722)
<INCOME-TAX> 0
<INCOME-CONTINUING> (812,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812,722)
<EPS-PRIMARY> (5.78)
<EPS-DILUTED> (5.11)
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Iridium
Operating LLC's financial statements for the nine months ended September 30,
1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001051721
<NAME> IRIDIUM OPERATING LCC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 65,207
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 104,281
<PP&E> 3,887,153
<DEPRECIATION> 498,344
<TOTAL-ASSETS> 3,564,054
<CURRENT-LIABILITIES> 1,004,301
<BONDS> 1,714,891
0
0
<COMMON> 2,074,087
<OTHER-SE> (1,240,394)
<TOTAL-LIABILITY-AND-EQUITY> 3,564,054
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 639,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173,185
<INCOME-PRETAX> (812,510)
<INCOME-TAX> 0
<INCOME-CONTINUING> (812,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812,510)
<EPS-PRIMARY> [BLANK]
<EPS-DILUTED> [BLANK]
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IRIDIUM
WORLD COMMUNICATIONS LTD.'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001035442
<NAME> IRIDIUM WORLD COMMUNICATIONS LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 157,294
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 246,102
<OTHER-SE> (88,808)
<TOTAL-LIABILITY-AND-EQUITY> 157,294
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 69,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (69,974)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,974)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,974)
<EPS-PRIMARY> (5.81)
<EPS-DILUTED> (5.70)
</TABLE>
<PAGE> 1
EXHIBIT 99
CERTAIN FACTORS WHICH MAY AFFECT IRIDIUM
The following risk factors should be carefully considered by prospective
investors in IWCL or Iridium.
RISK OF ERROR IN FORWARD LOOKING STATEMENTS
MANY OF THE STATEMENTS IN THIS REPORT ARE FORWARD LOOKING AND ACTUAL RESULTS
MAY BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY THESE
STATEMENTS.
IN PARTICULAR, YOU SHOULD RECOGNIZE THAT STATEMENTS ABOUT THE FOLLOWING
TOPICS ARE FORWARD LOOKING:
- IRIDIUM'S ESTIMATE OF THE LAST YEAR IN WHICH IT PROJECTS A NEGATIVE CASH
FLOW;
- IRIDIUM'S ESTIMATES OF THE AMOUNT OF ITS FUNDING NEEDS;
- IRIDIUM'S EXPECTATIONS ABOUT ITS ABILITY TO OBTAIN ADDITIONAL FINANCING;
- IRIDIUM'S EXPECTATIONS ABOUT ITS ABILITY TO GENERATE REVENUES FROM
COMMERCIAL OPERATIONS; AND
- IRIDIUM'S EXPECTATIONS ABOUT HOW MUCH REVENUE IT WILL GENERATE FROM
COMMERCIAL OPERATIONS.
THE FORWARD LOOKING STATEMENTS ARE BASED ON A NUMBER OF ASSUMPTIONS AND ONE
OR MORE OF THESE ASSUMPTIONS IS LIKELY TO BE INCORRECT.
Iridium is transitioning from a development stage company to an operating
company and has no meaningful operating history. Accordingly, many statements
made by Iridium, including those contained in this report, are forward looking.
Examples of these forward looking statements include the statements concerning
Iridium's:
- operations;
- prospects;
- markets;
- technical capabilities;
- funding needs;
- financing sources;
- expected revenues;
- regulatory activities (including its ability to obtain or maintain the right
to operate virtually anywhere in the world);
- pricing;
- commercial operations schedule;
- expectations regarding characteristics of competing systems;
- expectations regarding actions of third parties such as equipment
suppliers, gateway operators, service providers and roaming partners; and
- Year 2000 readiness and compliance plans.
Forward looking statements are inherently predictive and speculative and we
cannot assure you that our forward looking statements will prove to be correct.
Actual results and developments are likely to be different, and may be
materially different, from those expressed or implied by these statements. You
should carefully review the other risk factors set forth below for a discussion
of some of the factors which could result in any forward looking statement
proving to be inaccurate.
In particular, you should recognize that forward looking statements are based on
a number of assumptions. For example, many of the statements made by Iridium,
inlcuding those in this report, assume that Iridium will transition smoothly
from a development stage company to an operating company, and assume among other
things, that:
- - there will be a sufficient number of customers and usage of the Iridium
System to generate revenues in the amounts, and at the times, anticipated
by Iridium, including the amount of revenue anticipated from the
commencement of commercial operations to year-end 1999;
- - the Iridium System will provide service acceptable to the market and will
meet all systems specifications set forth in its development contracts and
will have service characteristics across Iridium's various service
offerings that are at least as favorable as those that Iridium expects;
- - there will be no increased costs under the development and maintenance
contracts for the Iridium System;
1
<PAGE> 2
- - Motorola and Kyocera will manufacture and distribute a sufficient number
of portable, hand-held phones and pagers for use with the Iridium System on
a timely basis, and Iridium will not incur any significant additional
expenses as a result of any need to place orders for, or subsidize the sale
of, any Iridium phones and pagers;
- - there will be a sufficient number of operational gateways to maintain the
service quality and system capacity Iridium expects;
- - Iridium's satellite navigation and communications software and its business
support systems software have been effectively integrated into Iridium's
operations and will function as expected under the various service demands
the Iridium System experiences;
- - Iridium will contract with a sufficient number of service providers and
cellular roaming partners to ensure effective marketing and distribution of
its services;
- - the operation of the Iridium System will not be impaired by the loss of
satellites or the need to put replacement satellites in orbit and Iridium
will not be required to bear the costs of satellite replacement;
- - in the various jurisdictions in which Iridium operates or expects to
operate, there will be no material change in legislation or regulations or
the administration thereof that will have an adverse effect on the business
of Iridium;
- - there will be no material adverse changes in any of Iridium's existing
material contracts or the ability of Iridium's various contractors to perform
their obligations;
- - Iridium, its gateways, its service providers and other companies doing
business with Iridium will obtain timely regulatory approvals in sufficient
countries to permit Iridium to operate on the virtually worldwide basis it
expects; and
- - the capacity of the Iridium System, as affected by, among other things,
spectrum allocation and customer usage patterns, will meet or exceed
Iridium's expectations.
You should understand that one or more of these assumptions is likely to be
incorrect.
Iridium does not intend to publish updates or revisions of its forward
looking statements or of this discussion of factors that could cause actual
results to be materially different from those expressed or implied in the
forward looking statements.
IRIDIUM IS TRANSITIONING FROM A DEVELOPMENT STAGE COMPANY TO
AN OPERATING COMPANY; IRIDIUM HAS NO MEANINGFUL REVENUES OR HISTORY OF
OPERATIONS; IRIDIUM'S FUTURE REVENUES MAY NOT COVER ITS EXPENSES
IRIDUM IS A START-UP COMPANY WITH SUBSTANTIAL DEBT AND NO MEANINGFUL
OPERATING HISTORY OR SIGNIFICANT REVENUES.
Iridium is in the initial stages of transitioning from a development stage
company to an operating company. It is extremely important to Iridium's success
that it effects this transition smoothly. This will require Iridium to complete
successfully a number of complex tasks for the operation of Iridium's system
while simultaneously attracting customers and ensuring that they are satisfied
with Iridium Services. Iridium has no meaningful operating history on which
investors can evaluate its performance and has no significant revenues. In
addition, the services Iridium offers and intends to offer are new and there is
no operational service that provides a
2
<PAGE> 3
direct comparison. Further, Iridium has accumulated significant losses in the
development and construction of the Iridium System and expects to continue to
accumulate significant losses until sometime in late 1999.
Iridium has incurred significant indebtedness to fund the development and
construction of the Iridium System. Until Iridium has substantial revenues from
operations, it will rely on additional indebtedness to pay its expenses and to
make payments on its indebtedness. We cannot give you any assurance about:
- - Whether or when Iridium will have sufficient revenues to satisfy its
funding requirements, including servicing and repaying its outstanding
indebtedness.
- - Whether Iridium will ever be profitable.
RISK OF HIGHLY LEVERAGED CAPITAL STRUCTURE
IRIDIUM HAS ALREADY BORROWED APPROXIMATELY $2.4 BILLION AS OF NOVEMBER 1, 1998
AND NEEDS TO BORROW A SUBSTANTIAL AMOUNT OF ADDITIONAL FUNDS PRIOR TO THE TIME
IT EXPECTS TO ACHIEVE POSITIVE CASH FLOW. IRIDIUM IS NOT CURRENTLY GENERATING
ANY MEANINGFUL REVENUES TO FUND ITS OPERATIONS OR REPAY ITS INDEBTEDNESS.
Iridium is a highly leveraged company and it expects to incur substantial
additional indebtedness, including indebtedness that is secured by its assets.
Iridium currently is not generating any meaningful revenues to fund its
operations or repay its indebtedness. The amount of debt needed to finance the
Iridium System could be increased by one or more factors outside Iridium's
control, including:
- - the inability to generate revenues in the amount and within the time frame
Iridium expects;
- - cost increases for the construction or operation of the Iridium System; and
- - increases in applicable interest rates.
Iridium's current and future debt service requirements could have important
consequences on its business including:
- - limiting Iridium's ability to obtain additional financing;
- - reducing the amount of funds available for operations because a substantial
portion of Iridium's cash flow from operations will be dedicated to the
payment of principal and interest on its indebtedness; and
- - increasing Iridium's sensitivity to adverse economic conditions.
In addition, Iridium's management is not able to make decisions freely about
certain business matters because Iridium's guaranteed bank facility, the secured
bank facility and the indentures relating to Senior Notes include certain
covenants that, among other things, restrict the ability of Iridium and its
subsidiaries to:
- - dispose of assets;
- - incur additional indebtedness;
- - incur or guarantee obligations;
- - prepay other indebtedness or amend other debt instruments;
- - pay dividends;
- - create liens on assets;
- - make investments, loans or advances;
- - make acquisitions;
- - engage in mergers or consolidations;
- - change the business conducted by Iridium; or
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- - engage in certain transactions with affiliates and otherwise will restrict
certain corporate activities.
In addition, any future debt instruments to which Iridium becomes a party
may contain similar and additional covenants.
SIGNIFICANT ADDITIONAL
FUNDING NEEDS
IRIDIUM NEEDS TO REFINANCE ITS $1.0 BILLION SENIOR SECURED CREDIT FACILITY BY
DECEMBER 31, 1998 AND ESTIMATES IT WILL NEED TO BORROW AN ADDITIONAL $700
MILLION TO OPERATE THROUGH THE TIME IT EXPECTS TO ACHIEVE POSITIVE CASH FLOW.
IRIDIUM'S ESTIMATED FUNDING NEEDS MAY INCREASE, PERHAPS SUBSTANTIALLY, FOR A
NUMBER OF REASONS, INCLUDING IF IRIDIUM IS UNABLE TO GENERATE REVENUES IN THE
AMOUNT AND WITHIN THE TIME FRAME IT EXPECTS, OR IF IRIDIUM HAS UNEXPECTED COST
INCREASES.
Iridium anticipates that its total cash funding requirements for the
development, construction and commercial operation of the Iridium System will be
approximately $5.5 billion (net of assumed revenues from commercial operations)
through year-end 1999. Based on its estimated cash funding requirements and its
schedule for refinancing its existing $1.0 billion senior secured bank facility,
which currently matures on December 31, 1998, Iridium estimates that it will
need to refinance its existing $1.0 billion senior secured bank facility and to
arrange approximately $700 million in additional funding in the near future.
There can be no assurance that Iridium will be able to find banks or any other
lender that will be willing to lend to Iridium on terms it will accept or that
Iridium will be able to satisfy its funding needs. In addition, Iridium's
estimated funding requirements do not reflect any contingency amounts and may
increase, perhaps substantially, in the event Iridium is unable to generate
revenues in the amount and within the time frame it expects, or if Iridium has
unexpected cost increases.
RISK OF LOW SERVICE DEMAND BECAUSE OF PRICING, SERVICE QUALITY, EQUIPMENT
CHARACTERISTICS, COMPETITION AND OTHER MARKET FACTORS
MANY MARKET FACTORS, INCLUDING PRICING, COULD PREVENT IRIDIUM FROM GENERATING
REVENUE IN THE AMOUNT AND WITHIN THE TIME FRAME IT EXPECTS.
The Iridium System is not intended to provide communications services that
compete with landline and land-based wireless services. Instead, the Iridium
System is designed to complement such services. Iridium World Satellite Services
will be priced significantly higher than most land-based phone and paging
services, and Iridium customers are not expected to discontinue their use of
land-based wireless services.
Iridium's estimates of its funding needs assume there will be substantial demand
for Iridium services shortly after Iridium commences commercial operations and
that Iridium will be able to charge a premium over the cost of a land-based call
for its satellite services because such services provide global mobility.
Iridium currently expects that its wholesale usage fees for international
Iridium World Satellite Services calls between two countries will result in
suggested retail roaming prices that, in aggregate, are approximately 25% to 30%
above the retail prices for land-based voice calling options that traveling
customers could use for a similar call between the same two countries (e.g.,
international calling card and international cellular roaming rates). If demand
for Iridium services is not significant or if the market will not support such a
global mobility premium, Iridium may be unable to generate sufficient revenues.
In addition to pricing, a number of other market factors, including service
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quality, equipment characteristics and competition, could adversely affect
demand for Iridium services.
THE PRICE OF IRIDIUM'S PHONES AND PAGERS MAY ADVERSELY AFFECT CUSTOMER DEMAND
FOR IRIDIUM'S SERVICES.
Motorola's multi-mode phone generally has an initial retail price of at least
$3,000 and Motorola's alphanumeric pager generally has an initial retail price
of at least $500. Iridium expects the initial prices for Kyocera phones and
pagers to be similar to Motorola's prices. These prices substantially exceed
current prices for cellular phones and pagers.
IRIDIUM DOES NOT CONTROL ITS RETAIL PRICES AND IF THEY ARE SET TOO HIGH DEMAND
FOR IRIDIUM'S SERVICES MAY BE ADVERSELY AFFECTED. PRICES IN THE
TELECOMMUNICATIONS INDUSTRY HAVE BEEN DROPPING, WHICH MAY ADVERSELY AFFECT
IRIDIUM'S ABILITY TO GENERATE REVENUES.
Under Iridium's pricing strategy it will set wholesale prices for its services
and service providers will control the price to the customer. Service providers
may price Iridium services at a level that is too high, thereby reducing total
demand without an offsetting increase in per minute revenue to Iridium.
Moreover, competition may force Iridium and its service providers to lower
retail prices. 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.
The Iridium System does not afford the same voice quality, signal strength and
degree of building penetration in areas that mature land-based wireless voice or
paging systems serve. This difference in service quality could adversely affect
demand for Iridium services.
THE LARGE SIZE OF IRIDIUM'S PHONES AND PAGERS MAY ADVERSELY AFFECT CUSTOMER
DEMAND FOR IRIDIUM SERVICES.
The Kyocera and Motorola telephones are larger and heavier than today's
pocket-sized cellular phones and have a significantly longer and thicker
antenna. Motorola's pager is slightly larger than today's standard alphanumeric
belt-worn pagers. The large size of Iridium's phones and pagers may adversely
affect customer demand for Iridium services.
In addition, competition, including competition from other satellite systems and
from the extension of land-based telecommunications systems to areas that are
currently not serviced by landline or land-based wireless phone or paging
systems, could reduce demand that might otherwise exist in such areas for
Iridium services.
FACTORS AFFECTING CUSTOMER ACCEPTANCE OF SATELLITE-BASED SERVICE
THE USE OF SATELLITES IN THE IRIDIUM SYSTEM EXPANDS COVERAGE BUT CREATES
CERTAIN SERVICE LIMITATIONS THAT CUSTOMERS MAY NOT BE WILLING TO ACCEPT.
Iridium's ability to generate sufficient operating revenues will depend upon
customer satisfaction with Iridium services. Iridium believes that customer
satisfaction will depend on a variety of factors, including:
- - price;
- - the technical capabilities of Iridium's equipment;
- - the quality of the services Iridium offers, including voice quality, call
completion rates and dropped call rates; and
- - the extent, availability and price of alternative telecommunications services.
Satellite-based communications over the Iridium System will experience
degradation in service quality in certain places and will be completely
unavailable in some places. In particular:
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- - Satellite-based services will be adversely affected in places where
obstructions, such as buildings and other natural and man-made obstacles, are
positioned between a satellite and the user.
- - These adverse effects on satellite calls will increase as the obstacles
become larger and more densely spaced.
- - In densely packed urban areas 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), Iridium expects that
only extremely limited satellite voice service, or no satellite voice service,
will be available.
- - Use of an Iridium phone in a moving automobile for a satellite call will
make the effect of obstructions temporary but more pronounced because the
structure of automobiles will tend to obstruct the satellite signal.
- - The actual limitations on satellite-based services will vary, sometimes
significantly, as conditions change and as the satellites move across the sky.
The Iridium satellite paging service also will experience degradation in certain
places. Iridium expects that these limitations on satellite-based services will
be more significant than current limitations on service experienced by customers
of land-based wireless ("cellular") systems and traditional paging systems.
For Iridium to succeed, its customers must accept:
- - the service limitations described above;
- - higher prices for Iridium's satellite services than the current prices for
cellular and paging services; and
- - heavier hand-held phones and larger pagers than those currently used for
most commercial service.
Iridium's customers may not accept these limitations. These limitations could
result in significantly lower sales or lower usage of Iridium's services than
Iridium anticipates.
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 its facsimile and data services (which will not be available until mid-1999)
will be limited.
Also, the Iridium System will lack the operational capacity to provide service
to large numbers of customers in concentrated areas.
RISKS RELATING TO LOW DEMAND FOR PAGERS AND PHONES; POTENTIAL NEED FOR
SUBSIDIES
IRIDIUM HAS COMMITTED TO PURCHASE UP TO APPROXIMATELY $400 MILLION OF PHONES
AND PAGERS FROM THE MANUFACTURERS IF THE GATEWAYS DO NOT BUY THEM. IRIDIUM
MAY HAVE TO SUBSIDIZE THE PRICE OF PHONES AND PAGERS TO CUSTOMERS TO
STIMULATE DEMAND FOR ITS SERVICES.
In an effort to ensure that sufficient quantities of hand-held phones and pagers
are available for early distribution, Iridium has entered into a standby
equipment purchase commitment with Motorola and expects to enter into a
similar commitment with Kyocera. These standby commitments would require
Iridium to purchase an aggregate of up to approximately $400 million of phones
and pagers from Kyocera and Motorola, but only, in the case of the Motorola
commitment, if such equipment is not
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purchased by and shipped to gateway operators or service providers prior to
January 1, 1999. The Kyocera commitment is expected to provide a similar
trigger using a date of February 8, 1999.
In addition, there is a risk that sufficient demand for Iridium services will
not materialize in a timely manner unless Iridium, its gateway operators or
service providers subsidize the cost of Iridium 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 those subsidies, including
Iridium's portion of those costs, could be significant. Iridium's current
projected funding needs do not reflect any costs associated with its standby
equipment purchase commitments or any subsidization.
POTENTIAL UNDERSUPPLY OF TELEPHONES AND PAGERS
INSUFFICIENT SUPPLY OF IRIDIUM TELEPHONES AND PAGERS COULD HARM IRIDIUM.
The Iridium telephones and pagers are an essential part of the Iridium System.
Motorola and Kyocera have started manufacture of the telephones and Motorola has
delivered telephones for commercial use. Kyocera has delivered telephones for
customer trials but software development issues have delayed production.
Motorola's or Kyocera's inability to manufacture enough telephones and pagers to
meet demand could constrain Iridium's commercial operations and adversely affect
its generation of meaningful revenues. In addition, if enough telephones and
pagers are not available to supply those people who want to become Iridium
customers, those people could develop a negative impression of Iridium and
decide not to become Iridium customers.
RELIANCE ON MOTOROLA, GATEWAY OWNERS AND OTHER THIRD PARTIES.
IRIDIUM RELIES EXTENSIVELY ON THIRD PARTIES TO PERFORM FUNCTIONS CRITICAL TO
ITS OPERATIONS, INCLUDING THE OPERATION OF THE IRIDIUM SYSTEM AND THE
DISTRIBUTION AND MARKETING OF IRIDIUM WORLD SERVICES.
Operation of the Iridium System. Iridium relies extensively on third parties to
perform functions critical to its operations. Iridium does not independently
have and does not intend to acquire, except by contracting with other parties,
the ability to:
- - develop or produce the components of the Iridium System;
- - launch additional or replacement satellites; or
- - operate and maintain the Iridium system.
Currently, Iridium relies on Motorola to provide these critical functions under
various contracts.
Gateway Operators. Iridium is dependent on the activities of its gateway
operators for its success. 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 their
gateway territories;
- - constructing and operating their gateways;
- - connecting the Iridium System to public earth-based telephone systems;
- - marketing Iridium Services;
- - selecting, or acting as, service providers; and
- - managing relationships with Iridium's customers either directly or through
service providers.
Distribution and Marketing of Iridium Services. Iridium's success also will
depend upon the motivation and ability of its service providers to generate
demand for Iridium Services, phones and pagers on a timely basis. Service
providers will be responsible for the sales of Iridium Services and of Iridium
subscriber equipment to consumers. The service providers will be, or
will be selected by, Iridium's gateway operators. Iridium's business plan
assumes the service providers will make substantial sales of Iridium phones as
Iridium transitions from a development stage company to an operating company.
However, demand for Iridium services may not be generated on a timely basis and
there can be no assurance that service providers will effectively market and
distribute Iridium services or that gateway operators will effectively
coordinate the marketing and distribution efforts in their territories. If
Iridium services are not timely marketed and distributed on a coordinated basis
there would be a material adverse effect on Iridium.
TECHNOLOGY IMPLEMENTATION RISKS
INTEGRATING THE IRIDIUM SYSTEM'S VARIOUS TECHNOLOGIES, INCLUDING SOFTWARE
AND COMMUNICATIONS HARDWARE, IS A COMPLEX TASK AND FUTURE OPERATIONS COULD
REVEAL SERIOUS PROBLEMS.
For the Iridium System to operate properly, Motorola, Iridium and their
respective subcontractors must make a number of sophisticated and diverse
technologies work together -- a complex task that no one has attempted before.
This task is further complicated by the following facts:
- - the Iridium System is expected to operate 24 hours a day;
- - most of the Iridium System's hardware is in space; and
- - system-wide testing, maintenance and repair may adversely affect Iridium's
ability to provide the service quality it anticipates.
Iridium believes that the development and implementation of the software for the
Iridium System has been one of the largest and most complex software creation
and integration tasks ever undertaken in the telecommunications industry. The
Iridium System software, including the software that controls the satellites and
the on-the-ground business support systems necessary for customer billing, has
not been subject to the demands of commercial operations at the levels Iridium
will need to achieve to be successful. This software will have to be
reprogrammed if errors are revealed.
In addition, the integration of each of Iridium's roaming partners into
Iridium's telecommunications and business systems requires substantial
programing and testing. For Iridium to provide roaming capabilities that match
its expectations it will have to successfully integrate approximately 130
roaming partners into its systems. There can be no assurance that Iridium will
be able to complete this task in a timely manner or at all.
POTENTIAL FOR DELAYED OR IMPAIRED OPERATIONS
IF IRIDIUM'S TRANSITION FROM A DEVELOPMENT STAGE COMPANY TO A COMPANY WITH
SUBSTANTIAL COMMERCIAL OPERATIONS IS DELAYED OR ITS ABILITY TO PROVIDE THE
SERVICE QUALITY IT EXPECTS IS IMPAIRED, ITS ABILITY TO GENERATE REVENUES AND
ITS COMPETITIVE POSITION COULD BE MATERIALLY HARMED.
The Iridium System is the first satellite-based personal communications system.
However, other companies are attempting to develop satellite-based systems to
compete with Iridium. Part of Iridium's competitive strategy depends on its
commencing substantial commercial operations
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well before any of its competitors. If Iridium's transition from a development
stage company to an operating company is delayed or its ability to provide the
service quality it expects is impaired, there likely would be:
- - harm to the competitive advantage Iridium expects to achieve under its
current strategy;
- - delay in Iridium's generation of revenue; and
- - a significant effect on Iridium's ability to repay its indebtedness.
A significant delay in Iridium's transition to commercial operations could
occur if:
- - significant errors in the design and implementation of the Iridium System
are discovered during commercial operations;
- - commercial operations reveal that significant improvements in service
quality are needed if Iridium services are to generate the demand Iridium
expects; or
- - a significant number of satellites fail to operate for any reason. (See
"Risks Related to the Satellites", below.)
LIMITED SATELLITE-BASED SERVICE CAPACITY
IF IRIDIUM EXPERIENCES UNEXPECTED CUSTOMER USAGE PATTERNS OR ITS AVAILABLE
SPECTRUM IS FULLY UTILIZED, THE ABILITY OF CUSTOMERS TO PLACE OR RECEIVE
CALLS MAY BE ADVERSELY AFFECTED.
Iridium's ability to supply satellite-based service depends upon the capacity of
the Iridium System. Various factors, including customer usage patterns, will
have a significant effect on the Iridium System's capacity for a particular
geographic area and on a system-wide basis. The most important factors include:
- - customer usage patterns; and
- - the amount of spectrum (the frequencies at which Iridium is allowed to
operate the Iridium System).
Iridium could experience unexpected customer usage patterns that could exceed
the capacity of the Iridium System at one or more gateways -- similar to the
overload of regional circuits on an earth-based system. If Iridium faces
significant capacity issues, its ability to increase its available spectrum
(which can be thought of as similar to adding more "lines" to an earth-based
system) is subject to significant regulatory hurdles. If adverse usage patterns
occur or other significant constraints are placed on the Iridium System, Iridium
may not be able to acquire additional spectrum and customers may have difficulty
in placing or receiving calls on the system, which would materially and
adversely affect Iridium.
RISKS RELATED TO THE SATELLITES
THE RISK OF SATELLITE LOSS OR DAMAGE IS SIGNIFICANT, AND THE EFFECT OF
SATELLITE LOSSES OR DAMAGE COULD BE SUBSTANTIAL.
A significant portion of Iridium's tangible assets are low earth orbit
satellites and the related earth-based control facilities. Maintaining this
equipment is a complex and costly undertaking which has not been attempted
previously on a commercial basis. In particular, the risk of satellite loss is
significant.
The loss or failure of one or more satellites, including temporary losses, that
for whatever reason are not promptly corrected or replaced, could cause:
- - gaps in service availability;
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- - significantly degraded service quality;
- - increased costs; and
- - losses of revenue for the period that service is interrupted or impaired.
Accordingly, the loss or failure of any satellite or satellites could materially
and adversely affect Iridium. A satellite can be lost or fail for a variety of
reasons, including:
- - colliding with something, including space debris, another man-made object or
space phenomena such as comets or meteors;
- - mechanical anomalies or malfunctions; and
- - failure of the rocket, by explosion or otherwise, that was to place the
satellite in orbit.
Space debris and other in-space risks. Iridium's satellites operate in low earth
orbit and, as a result, face a higher risk of damage from space debris than
satellites that operate farther away from the earth. Because objects in low
earth orbit are moving at different speeds, the Iridium satellites can be more
readily hit by space debris -- which can include sand, pebbles, dust and rocks
shed by comets, as well as the remains of man-made objects floating in space.
Even a very small piece of space debris can do great damage to a satellite.
One potential area of risk includes meteor showers and storms. In November 1998
and November 1999, the Leonid meteor storm is expected to dramatically increase
the amount of space debris in Earth's orbit and could pose a risk to Iridium's
satellites. Although smaller meteor showers occur annually, the Leonid meteor
storm reoccurs every 33 years. The last storm occurred in 1966, when commercial
space programs were just beginning and few, if any, satellites were in the sky.
Therefore, there is no relevant experience to base an assessment of the damage,
if any, that the storm might cause to low earth orbit satellites, but such
damage could be significant.
Mechanical Anomalies and Malfunctions. During the deployment of the Iridium
System, Iridium experienced anomalies in several of its satellites. Those
anomalies, which in some cases included control problems and the satellite's
failure to function as expected, caused those satellites to be excluded from
Iridium's constellation. You should note that:
- - anomalies such as occurred with respect to those satellites, or other
anomalies with comparable effects, could occur in the future;
- - such anomalies could have a significant adverse effect on Iridium;
- - from time to time certain events could occur that may cause Iridium or
Motorola to conclude that one or more malfunctioning satellites should not be
included in the Iridium System, and the unavailability of such satellite could
have an adverse effect on the operation of the Iridium System; and
- - Motorola has absorbed the financial consequences of all satellite losses to
date.
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Launch-related risks. Iridium expects that it will need to launch additional
satellites from time to time to maintain the Iridium System. Accordingly, a
launch failure could have a material adverse effect on Iridium. Satellites are
launched on launch vehicles, or rockets. Launches of satellites can fail
because:
- - a rocket crashes, aborts or explodes (which recently happened to one of
Iridium's competitors); and
- - satellites are damaged as they are loaded into the rocket, during the launch,
or as they leave the rocket.
In addition, launches can be delayed for many reasons, including poor weather
conditions, other launch failures or government actions. Placing multiple
satellites in each Iridium launch vehicle significantly increases the risk that
a launch failure will have a material and adverse effect.
Life Expectancy of the Satellites; Financial Effect of Loss of Satellites.
Iridium's business plan currently assumes that each of the satellites will have
a useful life of five years from its launch date. Iridium's satellites may not,
however, remain in operation for the full five years that Iridium expects. If
the satellites do not remain in operations for the full five years, Iridium's
operations, including its ability to provide service and generate revenues,
could be materially harmed and its costs of operating will likely increase.
Iridium has entered into an Operations and Maintenance Contract with Motorola
which provides for the operation and maintenance of Iridium's space assets for
Iridium's first five years of operation. Iridium has the option to extend the
Operations and Maintenance Contract for an additional two years. Under the
Operations and Maintenance Contract, Motorola will bear the risk of satellite
malfunction, but Iridium will bear the risk of damage to satellites by the acts
of third parties, including the degradation or complete loss of any satellite
due to contact with space debris.
COMPETITION RISKS
IRIDIUM FACES DIRECT COMPETITION FROM A VARIETY OF OPERATING AND PLANNED
SATELLITE SYSTEMS AND LAND-BASED SERVICES.
The telecommunications industry is highly competitive. 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 other than Iridium serves the global
mobile personal communications market today, Iridium anticipates that more than
one system or a collaboration of systems will serve this market in the future.
Iridium believes that its most likely direct competition will come from the
following planned low or mid-earth orbit satellite-based systems:
- - ICO Global Communications (Holdings) Limited;
- - Globalstar (backed by Loral/Qualcomm Partnership, L.P.);
- - Ellipso; and
- - Constellation.
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Iridium also expects to face competition from regional geostationary
satellite-based systems, including Asia Pacific Mobile Telecommunications
Satellite, Afro-Asian Satellite and PT Asia Cellular Satellite ("ACeS") and from
the existing Inmarsat geostationary global satellite system.
While Iridium believes that no competition will be able to offer virtually
worldwide satellite paging prior to the year 2000, Iridium World Page Service
will face competition from existing satellite- and land-based paging services,
some of which have an established customer base that may be reluctant to switch
services. In addition, certain paging services offer two-way paging capability
which Iridium does not offer.
Other Competitors. Iridium expects to offer Iridium World Cellular Service
across a variety of countries where different cellular standards have made
roaming difficult in the past. However, certain services currently 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 networks and some European and other
networks. The availability of such international near-global roaming services
is likely to increase. These services will compete directly with Iridium World
Cellular Service and with Iridium's satellite-based phone services. Two other
proposed systems, ICO and Globalstar, and at least one regional geostationary
satellite, ACeS, have indicated that they may also offer some form of dual-mode
satellite/cellular service, which may include roaming capabilities (enabling
roaming across different cellular standards) similar to those Iridium expects
to offer.
In addition, it is expected that GSM-based wireless service (a form of wireless
used mostly in Europe) will continue to expand its reach (including further into
North America), permitting broader roaming capability across incompatible
cellular standards 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
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.
COMPETITION FOR SERVICE PROVIDERS AND SPECTRUM ALLOCATION
IRIDIUM WILL FACE COMPETITION FROM OTHER SERVICES FOR LOCAL SERVICE
PROVIDERS.
In addition to competing for customers for 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 Iridium's ability to effectively market and distribute its
services and equipment.
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, an international satellite organization, and investors in ICO and
Inmarsat include many state-owned telecommunications companies and the
regulatory authorities in their countries.
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RISKS ASSOCIATED WITH LICENSING
IRIDIUM CANNOT YET OFFER COMMERCIAL SERVICE IN EVERY COUNTRY.
The Iridium System's operation is subject to United States and international
regulation. This regulation is pervasive and largely outside Iridium's control.
Iridium, Motorola and the various gateway owners have made substantial progress
in receiving the authorizations necessary to operate the Iridium System, but a
significant number of regulatory authorizations have not yet been obtained,
including:
- - in two countries, Saudi Arabia and India, in which a gateway will be located,
an authorization to operate the gateway, including necessary radio spectrum
assignments for the links between the gateway and the Iridium satellites;
- - in certain countries in which Iridium expects its customers will want to use
Iridium's services, the authority to offer Iridium's services and operate
Iridium phones and pagers, and unless Iridium receives such authorizations,
service in those countries will be limited or will not exist at all.
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RISKS ASSOCIATED WITH PRINCIPAL SUPPLY CONTRACTS.
IRIDIUM'S MAJOR CONTRACTS RELATING TO THE IRIDIUM SYSTEM ARE OF LIMITED
DURATION, AND MOTOROLA'S LIABILITY UNDER THEM IS SIGNIFICANTLY LIMITED.
Iridium has three principal supply contracts:
- - The Space System Contract with Motorola for the design, development,
construction and delivery in orbit of the Iridium System's space segment;
- - The Operations and Maintenance Contract with Motorola which runs for five
years from the date Iridium commenced commercial operations and covers the
operation of the space segment of the Iridium System, including monitoring,
upgrading and replacing the hardware and software necessary to maintain
specified performance levels; and
- - The Terrestrial Network Development Contract with Motorola for the design and
development of the gateway hardware and software.
These contracts are of limited duration and Motorola's liability under them is
significantly limited. The contracts provide that if Motorola has any liability
to Iridium under the Space System Contract, the Operations and Maintenance
Contract, the Terrestrial Network Development Contract or any other contract
between Iridium and Motorola in connection with the Iridium System, that
liability may be limited to $100 million in the aggregate in virtually all
circumstances. In addition, under the Space System Contract, Motorola is not
required to refund amounts Iridium previously paid to it. 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 in orbit. The Operations and
Maintenance Contracts and the Terrestrial Network Development Contract have
similar provisions regarding excusable delays, waivers and limitations on
liability.
CONFLICTS OF INTEREST WITH MOTOROLA
BECAUSE OF MOTOROLA'S VARYING ROLES WITH RESPECT TO IRIDIUM, THERE ARE A
NUMBER OF SIGNIFICANT CONFLICTS OF INTEREST BETWEEN IRIDIUM AND 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;
- - responsible for the design, construction, operation and maintenance of the
Iridium System;
- - a founding member of, and the largest single investor in, Iridium LLC;
- - a gateway owner;
- - Iridium LLC's largest Class 1 Membership Interest holder (and potentially the
largest Class A Common Stock holder because Class 1 Membership Interests are
exchangeable for Class A Common Stock);
- - a holder of warrants to acquire additional membership interests in Iridium
LLC; and
- - the guarantor of some of Iridium's borrowings.
Motorola's Influence on Iridium. Motorola does not by itself control the Iridium
Board of Directors and it is not permitted to participate in Iridium's decisions
or other actions concerning the Space System Contract, Operations and
Maintenance Contract or the Terrestrial Network Development Contract. However,
Motorola could in certain situations exercise significant influence over Iridium
because:
- - Motorola currently has the right to appoint 5 of the 27 members of the Iridium
Board and its representation could increase if it provides further financial
support to Iridium; and
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- - Motorola could have control over Iridium similar to that of a creditor through
its position as a guarantor of some of Iridium's borrowings and as a creditor
under various material contracts.
Motorola's Contractual Relations with Iridium. Motorola and Iridium entered into
the Space System Contract, the Operations and Maintenance Contract and the
Terrestrial Network Development Contract after extensive negotiations. The
predecessor of Iridium under those contracts, 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 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 Iridium's expenses.
CONFLICTS OF INTEREST WITH GATEWAY OWNERS
IRIDIUM HAS CERTAIN CONFLICTS OF INTEREST WITH ITS GATEWAY OWNERS AND SERVICE
PROVIDERS.
The Iridium Board of Directors 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 satellite airtime and other
Iridium services.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND DEVELOPING MARKETS
CERTAIN RISKS RELATED TO THE DOMESTIC AND INTERNATIONAL POLICIES AND
ECONOMIES OF THE VARIOUS COUNTRIES IN WHICH IRIDIUM OPERATES COULD
ADVERSELY AFFECT IRIDIUM.
Iridium expects its telecommunications services to be available in almost every
country. As a result, Iridium and its gateway operators and service providers
will be subject to risks related to each country's domestic and international
policies and risks related to economic conditions in many regions of the world,
such as:
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- - 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.
Iridium, its gateway operators or service providers could be adversely affected
on a country-specific, regional or system-wide basis by these factors.
DEPENDENCE ON KEY MANAGEMENT AND QUALIFIED PERSONNEL
IRIDIUM RELIES ON KEY EMPLOYEES WITH WHOM IT DOES NOT HAVE EMPLOYMENT
AGREEMENTS.
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 its
employees. The loss of one or more of these key employees could adversely affect
Iridium. In addition, Iridium's success will be dependent in part upon gateway
operators having qualified personnel at the various gateways to:
- - oversee the construction and operation of the gateway; and
- - execute significant aspects of Iridium's licensing, marketing and distribution
efforts.
RISKS ASSOCIATED WITH GROWTH
THE IRIDIUM SYSTEM CANNOT CURRENTLY GROW ABOVE CERTAIN LIMITS.
If significant and rapid growth in demand for Iridium World Services is achieved
it would require Iridium and its gateways to make additions to personnel and
management information systems to manage that growth while continuing to meet
customer service expectations. In addition, because Iridium's assigned spectrum
(frequency band) and satellite infrastructure characteristics have inherent
capacity limitations, growth above certain levels would not be possible with the
current Iridium System.
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