<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
IRIDIUM WORLD COMMUNICATIONS LTD.
(Exact name of Registrant as specified in its charter)
BERMUDA 0-22637 52-2025291
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
DELAWARE 0-22637-01 52-1984342
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
DELAWARE 0-22637-02 52-2066319
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
DELAWARE 333-31741-03 52-2048739
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
DELAWARE 333-31741-01 52-2048736
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
DELAWARE 333-31741-02 52-2048734
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
DELAWARE 333-44349-04 52-2083969
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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
--- ---
SHARES OUTSTANDING
CLASS AT AUGUST 6, 1998
------------------------- -------------------------
Iridium World
Communications Ltd. 12,073,544
Common Stock, Class A
$0.01 par value per share
<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
June 30, 1998 and December 31, 1997 5
Unaudited Condensed Statements of Loss
For the three and six months ended June 30, 1998 and 1997 6
Unaudited Condensed Statements of Cash Flows
For the six months ended June 30, 1998 and 1997 7
Notes to Unaudited Condensed Financial Statements 8
IRIDIUM LLC
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 10
Unaudited Condensed Consolidated Statements of Loss
For the three and six months ended June 30, 1998 and 1997 11
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
Unaudited Condensed Consolidated Statements of Cash Flows
For the six months ended June 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
June 30, 1998 and December 31, 1997 16
Unaudited Condensed Consolidated Statements of Loss
For the three and six months ended June 30, 1998 and 1997 17
Unaudited Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 1998 and 1997 18
Notes to Unaudited Condensed Consolidated Financial Statements 19
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 30
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 31
ITEM 2 Changes in Securities and Use of Proceeds 31
ITEM 3 Defaults upon Senior Securities 31
ITEM 4 Submission of Matters to a Vote of Security Holders 31
ITEM 5 Other Information 31
ITEM 6 Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBIT INDEX 34
</TABLE>
4
<PAGE> 5
IRIDIUM WORLD COMMUNICATIONS LTD.
CONDENSED BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
--------------- -------------
<S> <C> <C>
ASSETS
Cash................................................................................... $ - $ -
Investment in Iridium LLC.............................................................. 223,922 187,197
--------------- -------------
Total Assets............................................................... $ 223,922 $ 187,197
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities............................................................................ $ - $ -
Stockholders' equity:
Class B Common stock, non-voting, par value $0.01; 2,500,000 shares authorized;
no and 20,625 issued and outstanding............................................ - -
Class A Common stock, voting, par value $0.01; 50,000,000 shares authorized;
12,003,262 and 12,073,344 issued and outstanding............................... 120 121
Additional paid-in capital......................................................... 242,636 244,269
Accumulated deficit................................................................ (18,834) (57,193)
--------------- -------------
223,922 187,197
--------------- -------------
Total liabilities and stockholders' equity................................. $ 223,922 $ 187,197
=============== =============
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Equity in loss of Iridium LLC....................... $ 779 $ 20,933 779 $ 38,359
------------ ------------ ---------- ------------
Loss before income taxes............................ 779 20,933 779 38,359
Income taxes........................................ - - - -
------------ ------------ ---------- ------------
Net loss............................................ $ 779 $ 20,933 779 $ 38,359
============ ============ ========== ============
Net loss per Class A Common share - basic and
diluted .......................................... $ 0.28 $ 1.74 0.56 $ 3.19
------------ ------------ ---------- ------------
Weighted average shares used in computing
net loss per Class A Common share - basic
and diluted....................................... 2,769,231 12,058,897 1,392,265 12,033,944
============ ============ ========== ============
</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>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss.............................................................. $ (779) $ (38,359)
Adjustments to reconcile net loss to net cash
used in operating activities -
Equity in loss of Iridium LLC................................. 779 38,359
------------ ------------
Net cash used in operating activities..................................... - -
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES :
Investments in Iridium LLC............................................ (225,600) (1,209)
------------ ------------
Net cash used in investing activities..................................... (225,600) (1,209)
------------ ------------
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 exercise of stock options............................... - 934
------------ ------------
Net cash provided by financing activities......... 225,600 1,209
------------ ------------
Increase (decrease) in cash............................................... - -
CASH, beginning of period................................................. - -
------------ ------------
CASH, end of period....................................................... $ - $ -
============ ============
</TABLE>
The accompanying notes are an 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, a development stage limited liability company. 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 were invested in 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.
Iridium LLC through its wholly-owned subsidiary Iridium Operating
LLC ("Iridium"), a Delaware limited liability company, is currently devoting
substantially all of its efforts to establishing and commercializing the Iridium
communications system (the "Iridium System").
IWCL's sole assets are its investments in Iridium LLC. At June 30,
1998, IWCL's investment was approximately 8.5% 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 June 30, 1998 and its results of
operations for the three and six month periods ended June 30, 1998 and 1997, and
its cash flows for the six month period ended June 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 the Annual Report on Form
10-K.
Since its inception on December 12, 1996 through June 30, 1998, IWCL
has not entered into any operating transactions or incurred any expenses. The
results of operations for the three and six months ended June 30, 1998 are not
necessarily indicative of the results of operations expected in the future.
3. STOCKHOLDERS' EQUITY
GLOBAL OWNERSHIP PROGRAM
IWCL and Iridium LLC have commenced a Global Ownership 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 will be payable through the
withholding of dividends, if any, which would otherwise be payable on 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
8
<PAGE> 9
IRIDIUM WORLD COMMUNICATIONS LTD.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
purchase Class 1 Interests in Iridium LLC. The payment terms with respect to
such Iridium LLC Class 1 Interests will mirror the payment terms on the Class B
Common Stock. As of June 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 six months ended June 30, 1998 and 1997,
the impact of the warrants and stock options 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>
JUNE 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
--------------- -------------
ASSETS
<S> <C> <C>
Current assets :
Cash and cash equivalents......................................... $ 9,040 $ 33,027
Restricted cash................................................... 350,220 -
Due from affiliates............................................... 13,604 21,693
Prepaid expenses and other current assets......................... 6,612 13,900
-------------- --------------
Total current assets.......................................... 379,476 68,620
Property and equipment, net........................................... 1,526,326 2,796,288
System under construction............................................. 1,625,054 576,175
Other assets.......................................................... 114,831 87,480
-------------- --------------
Total assets.................................................. $ 3,645,687 $ 3,528,563
============== ==============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities :
Accounts payable and accrued expenses............................. $ 106,794 $ 107,013
Accounts payable to Member........................................ 10,601 99,381
Bank facilities, current portion.................................. 350,000 415,000
-------------- --------------
Total current liabilities..................................... 467,395 621,394
Bank facilities, net of current portion............................... 210,000 -
Long-term debt due to Members......................................... 273,302 297,336
Notes payable, $1,450,000 principal amount as of June 30, 1998........ 1,054,288 1,403,783
Other liabilities..................................................... 6,065 10,156
-------------- --------------
Total liabilities............................................. 2,011,050 2,332,669
-------------- --------------
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 42,853
interests issued and outstanding; liquidation value of
$39,907 and $42,853....................................... 39,907 42,853
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 141,313,149 interests issued and outstanding.... 2,024,220 2,030,741
Deferred Class 1 Interest compensation............................ (1,454) (1,323)
Adjustment for minimum pension liability.......................... (643) (643)
Deficit accumulated during the development stage.................. (427,393) (875,734)
-------------- --------------
Total members' equity......................................... 1,634,637 1,195,894
-------------- --------------
Total liabilities and members' equity......................... $ 3,645,687 $ 3,528,563
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed 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 JUNE 30,
--------------------------------
1997 1998
-------------- -------------
<S> <C> <C>
OPERATING EXPENSES
Sales, general and administrative........ $ 48,042 $ 71,651
Depreciation and amortization............ 372 117,858
-------------- -------------
Total operating expenses............. 48,414 189,509
OTHER INCOME
Interest expense (income), net........... (488) 55,266
-------------- -------------
Loss before provision for income taxes....... 47,926 244,775
Provision for income taxes................... - -
-------------- -------------
Net loss..................................... $ 47,926 $ 244,775
============= =============
Preferred dividend requirement............... 1,316 1,499
-------------- -------------
Net loss applicable to Class 1
Interests................................. $ 49,242 $ 246,274
============== =============
Net loss per Class 1 Interest -
basic and diluted......................... $ 0.40 $ 1.74
============== =============
Weighted average interests used
in computing net loss per Class
1 Interest - basic and diluted............ 124,627,234 141,298,702
============== =============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 14, 1991
(INCEPTION) THROUGH
SIX MONTHS ENDED JUNE 30, JUNE 30, 1998
------------------------------------ -------------------
1997 1998
-------------- --------------
<S> <C> <C> <C>
OPERATING EXPENSES
Sales, general and administrative........ $ 83,865 $ 132,162 $ 445,463
Depreciation and amortization............ 603 225,649 347,078
-------------- -------------- -------------
Total operating expenses............. 84,468 357,811 792,541
OTHER INCOME
Interest expense (income), net........... (614) 90,530 75,222
-------------- -------------- -------------
Loss before provision for income taxes....... 83,854 448,341 867,763
Provision for income taxes................... - - 7,971
-------------- -------------- -------------
Net loss..................................... $ 83,854 $ 448,341 $ 875,734
============== ============== =============
Preferred dividend requirement............... 3,607 2,946
-------------- --------------
Net loss applicable to Class 1
Interests................................. $ 87,461 $ 451,287
============== ==============
Net loss per Class 1 Interest -
basic and diluted......................... $ 0.71 $ 3.19
============== ==============
Weighted average interests used
in computing net loss per Class
1 Interest - basic and diluted............ 123,625,227 141,272,496
============== ==============
</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>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, JUNE 14, 1991
-------------------------------- (INCEPTION) THROUGH
1997 1998 JUNE 30, 1998
-------------- ------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss....................................................... $ (83,854) (448,341) $ (875,734)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization.......................... 603 225,649 347,078
Interest converted to additional debt.................. - 77,208 77,208
Expense recognized for warrants issued in
connection with debt guarantee...................... 35,266 7,885 89,219
Employee Class 1 Interests compensation............... - 131 283
Loss on diposal of assets.............................. - - 87
Changes in assets and liabilities:
Increase in prepaid expenses and other
current assets.................................. (2,167) (7,288) (13,900)
Increase in due from affiliates.................... (6,793) (8,089) (21,693)
Decrease (Increase) in other assets................ (16,643) 1,451 (17,208)
(Decrease) Increase in accounts payable and
accrued expenses................................ 20,811 (62,234) (13,440)
Increase (Decrease) in other liabilities........... (1,321) 4,091 10,076
-------------- ------------- -------------------
Net cash used in operating activities.......... (54,098) (209,537) (418,024)
-------------- ------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of property and equipment............................ (2,422) (11,069) (34,324)
Additions to system under construction......................... (224,566) (298,830) (3,390,265)
-------------- ------------- -------------------
Net cash used in investing activities.......... (226,988) (309,899) (3,424,589)
-------------- ------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES :
Net proceeds from issuance of Class 1 and Class 2 Interests.... 263,691 1,209 1,933,528
Net proceeds from issuance of senior notes and warrants........ - 341,379 1,619,021
Borrowings under guaranteed bank line of credit................ 230,000 140,000 1,300,000
Payments under guaranteed bank line of credit.................. (75,000) (285,000) (1,235,000)
Borrowings under senior secured line of credit................. - - 350,000
Decrease in restricted cash.................................... - 350,220 0
Deferred financing costs....................................... (33,075) (4,385) (91,909)
-------------- ------------- -------------------
Net cash provided by financing activities...... 385,616 543,423 3,875,640
-------------- ------------- -------------------
Increase in cash and cash equivalents.............................. 104,530 23,987 33,027
CASH AND CASH EQUIVALENTS, beginning of period..................... 1,889 9,040 -
-------------- ------------- -------------------
CASH AND CASH EQUIVALENTS, end of period........................... $ 106,419 $ 33,027 $ 33,027
============== ============= ===================
</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 their
present efforts to developing and commercializing a global wireless system --
the Iridium(R) Communications System (the "Iridium System") -- that will enable
subscribers to send and receive telephone calls virtually anywhere in the world
- -- all with one phone, one phone number and one customer bill.
Iridium, Inc. was incorporated on June 14, 1991. Iridium, Inc.
operated as a wholly-owned subsidiary of Motorola, Inc. ("Motorola") until July
29, 1993. On July 29, 1993, Iridium, Inc. closed on, and had its first capital
draw under, a private placement of shares of Common Stock, subscribed to by
U.S. and foreign investors. 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 19.73% as
of June 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.
Iridium has contracted with Motorola to design, develop, produce and
deliver into orbit the space segment component of the Iridium System. The
scheduled date for delivery of the approximately $3.45 billion space segment is
in 1998. Iridium plans to begin its commercial operations in September 1998.
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 June 30, 1998, and the results of
their operations for the three and six month periods ended June 30, 1998 and
1997, and the period from June 14, 1991 (inception) through June 30, 1998, and
their cash flows for the six month periods ended June 30, 1998 and 1997, and the
period from June 14, 1991 (inception) through June 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 six months
ended June 30, 1998 are not necessarily indicative of the results of operations
expected in the future, although the Parent will continue 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 $1,449,000 and $1,316,000 of
in-kind dividends to holders of Series A Class 2 Membership Interests during the
three month periods ended June 30, 1998 and 1997, respectively, and $2,946,000
and $3,607,000 for the six month periods ended June 30, 1998 and 1997,
respectively.
GLOBAL OWNERSHIP PROGRAM
The Parent, in conjunction with IWCL, has commenced a Global
Ownership 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 June 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 six months ended June 30, 1998,
$424,000 was capitalized to license costs under this program. No amounts were
capitalized during the six months ended June 30, 1997.
4. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 1998 and 1997, $160,628,000 and
$32,032,000, respectively, of interest costs were incurred. Interest expensed
for the six months ended June 30, 1998 was $90,857,000 with the remaining
interest capitalized to the system under construction. For the six months ended
June 30, 1997, all interest expense was capitalized to the system under
construction. Interest paid was $82,781,000 and $7,931,000 during the six months
ended June 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 9,071 and 40,912 warrants to purchase 680,325 and
3,068,400 Class 1 Interests, respectively, were earned by Motorola during the
six months ended June 30,1998 and 1997, respectively. The Parent recognized
$7,885,000 and $35,266,000 as expense during the six months ended June 30, 1998
and 1997, respectively, in connection with the warrants earned by Motorola.
Warrant expense for the three months ended June 30, 1998 and 1997 was $2,624,000
and $17,536,000, 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 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 $2,833,000
for both the three and six months ended June 30, 1998.
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 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. These Commitments 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.
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 $341 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 six months ended June
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1997 1998 1997 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss, as reported.................................................. $(47,926) $(244,775) $(83,854) $(448,341)
Other comprehensive income (loss)...................................... - - - -
--------- ---------- --------- ----------
Total.................................................................. $(47,926) $(244,775) $(83,854) $(448,341)
========= ========== ========= ==========
Accumulated other comprehensive income (loss):
Beginning of period.................................................... $(733) $(643) $(733) $(643)
====== ====== ====== ======
End of period.......................................................... $(733) $(643) $(733) $(643)
====== ====== ====== ======
</TABLE>
15
<PAGE> 16
IRIDIUM OPERATING LLC
( A Wholly-Owned Subsidiary of Iridium LLC )
( A Development Stage Limited Liability Company )
CONDENSED CONSOLIDATED BALANCE SHEETS
( In Thousands )
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
------------- -------------
ASSETS
<S> <C> <C>
Current assets :
Cash and cash equivalents............................................ $ 5,940 $ 33,027
Restricted cash ..................................................... 350,220 -
Due from affiliates.................................................. 13,604 21,693
Prepaid expenses and other current assets............................ 6,612 13,900
------------- -------------
Total current assets............................................. 376,376 68,620
Property and equipment, net ............................................ 1,526,326 2,796,288
System under construction .............................................. 1,625,054 576,175
Other assets ............................................................ 114,831 86,932
------------- -------------
Total assets..................................................... $ 3,642,587 $ 3,528,015
============= =============
LIABILITIES AND MEMBER'S EQUITY
Current liabilities :
Accounts payable and accrued expenses................................ $ 106,794 $ 107,013
Accounts payable to Parent's Members................................. 10,601 99,381
Bank facilities, current portion..................................... 350,000 415,000
------------- -------------
Total current liabilities........................................ 467,395 621,394
Bank facilities, net of current portion.................................. 210,000 -
Long-term debt due to Parent's Members................................... 273,302 297,336
Notes payable, $1,450,000 principal amount as of June 30, 1998........... 1,054,288 1,403,783
Other liabilities........................................................ 6,065 10,156
------------- -------------
Total liabilities................................................ 2,011,050 2,332,669
------------- -------------
Commitments and Contingencies
Member's equity :
Member's Interest.................................................... 2,059,421 2,071,440
Deficit accumulated during the development stage..................... (427,241) (875,451)
Adjustment for minimum pension liability............................. (643) (643)
------------- -------------
Total member's equity............................................ 1,631,537 1,195,346
------------- -------------
Total liabilities and member's equity............................ $ 3,642,587 $ 3,528,015
============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
16
<PAGE> 17
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 JUNE 30, SIX MONTHS ENDED JUNE 30, JUNE 30, 1998
----------------------------- ------------------------------- -------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Sales, general and
administrative................ $ 48,042 $ 71,570 $ 83,865 $ 132,031 $ 445,180
Depreciation and amortization.... 372 117,858 603 225,649 347,078
------------ ------------ ------------ ------------ ------------
Total operating expenses..... 48,414 189,428 84,468 357,680 792,258
OTHER INCOME
Interest expense (income),
net............................ (488) 55,266 (614) 90,530 75,222
------------ ------------ ------------ ------------ ------------
Loss before provision for
income taxes....................... 47,926 244,694 83,854 448,210 867,480
Provision for income taxes........... - - - - 7,971
------------ ------------ ------------ ------------ ------------
Net loss............................. $ 47,926 $ 244,694 $ 83,854 $ 448,210 $ 875,451
============ ============ ============ ============ ============
</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 CASH FLOWS
( In Thousands )
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED JUNE 14, 1991
JUNE 30, (INCEPTION)
--------------------------- THROUGH
1997 1998 JUNE 30, 1998
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net loss................................................................. $ (83,854) (448,210) $ (875,451)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization.................................... 603 225,649 347,078
Interest converted to additional debt............................ - 77,208 77,208
Expense recognized for warrants issued in
connection with debt guarantee................................ 35,266 7,885 89,219
Loss on diposal of assets........................................ - - 87
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets........ (2,167) (7,288) (13,900)
Increase in due from affiliates.............................. (6,793) (8,089) (21,693)
Decrease (Increase) in other assets.......................... (16,643) 1,451 (17,208)
(Decrease) Increase in accounts payable and accrued
expenses.................................................. 20,811 (62,234) (13,440)
Increase (Decrease) in other liabilities..................... (1,321) 4,091 10,076
------------ ------------ --------------
Net cash used in operating activities.................... (54,098) (209,537) (418,024)
------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of property and equipment...................................... (2,422) (11,069) (34,324)
Additions to system under construction................................... (224,566) (298,830) (3,390,265)
------------ ------------ --------------
Net cash used in investing activities.................... (226,988) (309,899) (3,424,589)
------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES :
Net proceeds from issuance of Parent's Class 1 and Class 2
Interests.............................................................. 263,691 1,209 1,933,528
Net proceeds from issuance of senior notes and warrants.................. - 341,379 1,619,021
Borrowings under guaranteed bank line of credit.......................... 230,000 140,000 1,300,000
Payments under guaranteed bank line of credit............................ (75,000) (285,000) (1,235,000)
Borrowings under senior secured line of credit........................... - - 350,000
Decrease in restricted cash.............................................. - 350,220 -
Deferred financing costs................................................. (33,075) (4,385) (91,909)
Transfer from Parent..................................................... - 3,100 -
------------ ------------ --------------
Net cash provided by financing activities................ 385,616 546,523 3,875,640
------------ ------------ --------------
Increase in cash and cash equivalents........................................ 104,530 27,087 33,027
CASH AND CASH EQUIVALENTS, beginning of period............................... 1,889 5,940 -
------------ ------------ --------------
CASH AND CASH EQUIVALENTS, end of period..................................... $ 106,419 $ 33,027 $ 33,027
============ ============ ==============
</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)
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 its present efforts to developing and
commercializing a global wireless system -- the Iridium(R) Communications System
(the "Iridium System") -- that will enable subscribers to send and receive
telephone calls virtually anywhere in the world -- all with one phone, one phone
number and one customer bill.
Iridium, Inc. was incorporated on June 14, 1991. Iridium, Inc.
operated as a wholly-owned subsidiary of Motorola, Inc. ("Motorola") until July
29, 1993. On July 29, 1993, Iridium, Inc. closed on, and had its first capital
draw under, a private placement of shares of Common Stock, subscribed to by U.
S. and foreign investors. 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 19.73% as
of June 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.
Iridium has contracted with Motorola to design, develop, produce and
deliver into orbit the space segment component of the Iridium System. The
scheduled date for delivery of the $3.45 billion space segment is in 1998.
Iridium plans to begin its commercial operations in September 1998.
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 June 30, 1998, and the results of
their operations for the three and six month periods ended June 30, 1998 and
1997, and the period from June 14, 1991 (inception) through June 30, 1998, and
their cash flows for the six month periods ended June 30, 1998 and 1997, and the
period from June 14, 1991 (inception) through June 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 six months
ended June 30, 1998 are not necessarily indicative of the results of operations
expected in the future, although Iridium will continue 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.
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
3. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 1998 and 1997, $160,628,000 and
$32,032,000, respectively, of interest costs were incurred. Interest expensed
for the six months ended June 30, 1998 was $90,857,000 with the remaining
interest capitalized to the system under construction. For the six months ended
June 30, 1997, all interest expense was capitalized to the system under
construction. Interest paid was $82,781,000 and $7,931,000 during the six months
ended June 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 9,071 and 40,912 warrants to purchase 680,325 and
3,068,400 Class 1 Interests, respectively, were earned by Motorola during the
six months ended June 30,1998 and 1997, respectively. The Parent recognized
$7,885,000 and $35,266,000 as expense during the six months ended June 30, 1998
and 1997, respectively, in connection with the warrants earned by Motorola.
Warrant expense for the three months ended June 30, 1998 and 1997 was $2,624,000
and $17,536,000, 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 was $2,833,000
for both the three and six months ended June 30, 1998.
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. These Commitments 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.
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
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 $341 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1997 1998 1997 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss, as reported.................................................. $(47,926) $(244,694) $(83,854) $(448,210)
Other comprehensive income (loss)...................................... - - - -
--------- ---------- --------- ----------
Total.................................................................. $(47,926) $(244,694) $(83,854) $(448,210)
========= ========== ========= ==========
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 June 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.
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
The following is summarized financial information of Capital as of
June 30, 1998 and for the period from inception through June 30, 1998. Full
financial statements of Capital are not presented because management believes
they are not material to investors.
<TABLE>
<CAPTION>
JUNE 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
JUNE 30, 1998
-------------------
<S> <C>
Net revenues................................ $ 0
Cost of services............................ 0
Net loss.................................... 0
</TABLE>
Iridium has recognized the obligations relating to the Series A
Notes, the Series B Notes and the Series C 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 June 30, 1998, and for the
period from inception of each of the Guarantor Subsidiaries and Iridium
Facilities Canada Inc. through June 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>
JUNE 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
JUNE 30, 1998
-------------------
<S> <C>
Net revenues................................ $ 0
Cost of services............................ 0
Net loss.................................... 0
</TABLE>
22
<PAGE> 23
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 a development stage company with no operating history.
Accordingly, many statements in this report are forward looking. Examples of
such forward looking statements include, but are not limited to, statements
concerning the expected commercial operations date, testing schedule,
operational capabilities, launch schedule, financing needs, financing sources,
the last year in which Iridium will have negative cash flow and a net increase
in year-end borrowings, software installation schedule, availability of Iridium
handsets and actions of third parties, including equipment suppliers, gateway
operators, system contractors, service providers and roaming partners. These
forward looking statements are based on a number of assumptions and are
inherently predictive and speculative. One or more of the assumptions underlying
such forward looking statements is likely to be incorrect. Therefore, actual
results may be materially different from those expressed or implied by such
statements.
Factors which may cause IWCL's, the Parent's or Iridium's results to differ
materially from those expressed or implied by such forward looking statements
include, but are not limited to, (i) Iridium's absence of current revenues,
highly leveraged capital structure and significant additional funding needs,
(ii) delays and cost overruns related to the construction, deployment and
operation of the Iridium System, including, but not limited to, the
implementation of satellites, software and subscriber equipment, (iii)
technological risks related to the development and implementation of the various
components of the Iridium System, (iv) customer acceptance of Iridium World
Services, (v) satellite launch, operation and maintenance risks, (vi) risks
associated with the need to obtain operating licenses in the numerous countries
where Iridium assumes it will provide its services, (vii) competition from
satellite and terrestrial communications services and (viii) Iridium's
dependence on Motorola, Inc. ("Motorola"), gateway operators and other members
of the Parent for the construction and operation of the Iridium System and the
distribution and marketing of Iridium World Services. These factors, and other
factors that may materially affect Iridium's operations, are described in
greater detail in the Securities and Exchange Commission filings of IWCL, Parent
and Iridium, including Exhibit 99 to this report 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 June 30, 1998, IWCL owned approximately
8.5% of the outstanding Class 1 Membership Interests in Parent.
On July 16, 1997, IWCL, the Parent and Capital, consummated a private
offering of (i) 300,000 units each consisting of (A) $1,000 principal amount of
13% Senior Notes due 2005, Series A of the Parent and Capital (the "Series A
Notes") and (B) one warrant ("Warrant") to purchase 5.2 shares of Class A Common
Stock and (ii) $500,000,000 aggregate principal amount of 14% Senior Notes due
2005, Series B of the Parent and Capital (the "Series B Notes") for aggregate
net proceeds to the Parent of approximately $746
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million. The Series A Notes and Series B Notes are guaranteed by IP, Roaming and
Facilities, a Delaware Corporation and a wholly-owned subsidiary of Iridium
which holds Iridium's real property.
In the aggregate, the Warrants entitle the holders thereof to purchase
1,560,000 shares of Class A Common Stock. The exercise price of the Warrants is
$20.90 per share of Class A Common Stock. The Warrants are exercisable at any
time after July 11, 1998, subject to certain conditions. The Warrants expire on
July 15, 2005. In connection with the issuance of the Warrants, the Parent
issued to IWCL warrants to purchase Class 1 Interests (the "Parent Interest
Warrants") having the same tenor and terms as the Warrants. The Parent Interest
Warrants entitle IWCL to purchase, in the aggregate, a number of Class 1
Interests equal to the aggregate number of shares of Class A Common Stock issued
in respect of the Warrants, subject to anti-dilution adjustments. IWCL has
agreed, subject to anti-dilution adjustments, to exercise one such warrant for
each share of Class A Common Stock issued pursuant to the Warrants.
On October 17, 1997, the Parent and Capital consummated a private offering
of $300,000,000 aggregate principal amount of 11.25% Senior Notes due 2005,
Series C of the Parent and Capital (the "Series C Notes" and together with the
Series A Notes and the Series B Notes, the "Senior Notes") for aggregate net
proceeds to the Parent of approximately $293 million. The Series C Notes are
guaranteed by IP, Roaming and Facilities.
On May 13, 1998, Iridium and Capital 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 Roaming, IP and Facilities. 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 $341 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.
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 and has the same purpose as Parent.
On December 18, 1997, Parent and Iridium effected an asset drop-down
transaction (the "Asset Drop-Down Transaction") pursuant to which substantially
all of the assets and liabilities of Parent were transferred to Iridium. The
Asset Drop-Down Transaction was effected for the purpose of providing the agent
for the secured lenders under Iridium's $1 billion Secured Bank Facility (as
defined) with an efficient means for obtaining a security interest in the
membership interests in Iridium.
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 $1.45
billion in aggregate principal amount of Senior Notes (as defined) 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. Each of Roaming and IP is a
guarantor of the Senior Notes and the Secured Bank Facility. The Senior Notes
and the Secured Bank Facility also are guaranteed by a new wholly-owned
subsidiary of Iridium, Facilities, a Delaware Corporation. Facilities is the
entity which will hold certain real property of Iridium.
Iridium Facilities Canada Inc. ("Facilities Canada") is a new, wholly-owned
subsidiary of Iridium. Facilities Canada was formed to hold certain real
property of Iridium located in Canada.
IWCL acts as a member of Parent and has no other business. The business of
Iridium constitutes substantially all of Parent's business. The business of
Iridium is described below. Any reference below to
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<PAGE> 25
Iridium relating to any event prior to the Asset Drop-Down Transaction should be
interpreted as a reference to the Parent, as predecessor to Iridium.
IWCL's sole assets are its Class 1 Interests and its Parent Interest
Warrants, and 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. Accordingly, management's discussion and analysis addresses the
financial condition and results of operations of Parent and Iridium.
RECENT DEVELOPMENTS
Iridium is currently devoting substantially all of its efforts to
establishing and commercializing the Iridium System. As such, Iridium's current
principal activities relate to managing the design, construction and development
of the system and preparing for its day-to-day operations.
Iridium, Motorola and the various gateway owners have made substantial
progress in the development and implementation of the Iridium System and related
activities and expect to commence commercial service on schedule in September
1998. As of July 20, 1998, Motorola has launched 72 Iridium satellites, 65 of
which are functioning properly. Motorola has contracted for two August 1998
maintenance launches, one with China Great Wall for two satellites and one with
Boeing for five satellites, which should increase the number of operational and
spare satellites to 72.
Installation of the final satellite software is scheduled to be completed
prior to September 23, 1998, the date commercial service is scheduled to
commence. However, delays in the development of this software have resulted in a
shortened schedule for subscriber trials. The delay in the availability of the
final constellation software has also affected Motorola's and Kyocera's ability
to test handsets, which could result in delays of handset deliveries,
particularly by Kyocera. Iridium believes that Motorola handsets will be
available in sufficient quantities to support the initial demand following
commercial activation, with Kyocera handsets available later in 1998.
Motorola has completed construction of the terrestrial facilities necessary
to command the in-space movements of the Iridium System's satellites, including
the Satellite and Network Operations Center and the associated tracking,
telemetry and command facilities. Iridium expects to provide virtually global
service initially through up to 12 gateways and 15 business offices. The
construction of the 12 gateway facilities is complete and the telecommunications
equipment has been installed at 11 locations. Equipment for the gateway in China
has been shipped and its installation has commenced. Gateway ground stations and
business office testing continues on the satellites, network, telephony, paging
and billing systems. Operations trials for voice services have been completed
successfully in 10 gateway territories. Business systems hardware and software
has been installed in 14 of the 15 business offices and nine business offices
have completed software acceptance testing.
Iridium has commenced the initial phase of the alpha trials, which focus on
business scenarios, including subscriber provisioning, SIM card validation and
call detail record processing. Constellation-based "network" alpha trials began
at 3 gateways on August 1, 1998. Beta tests, with subscriber participation, are
scheduled to commence in mid-September, and Iridium expects such tests to
continue through the scheduled commencement of commercial service.
In addition, Iridium has begun its $200 million 1998 global advertising
program. The global advertising program is designed to increase international
recognition of the Iridium brand and generate initial demand for Iridium
services.
Iridium has made significant progress to date in securing the worldwide
regulatory approvals necessary to build and operate the Iridium System. The
space segment of the Iridium System has been licensed by the United States, and
Iridium believes that international coordination has been completed successfully
between the Iridium System and all existing or planned systems that have been
identified through the coordination process. No other action is required from
any other country to license the space segment. With respect to the 12 gateways,
eight licenses and four experimental licenses to build and operate gateways have
been received. With respect to the subscriber units, each country in which
Iridium intends
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to operate must authorize use of Iridium subscriber equipment, including
allocation of subscriber link frequencies. The FCC licensed the operation of
handsets in the United States and, as of July 9, 1998, all or a substantial
portion of the authorizations necessary to operate the Iridium System had been
granted in an additional 88 jurisdictions. Iridium's gateway owners are
dedicating substantial effort to obtaining licensing for Iridium services in the
countries in their service territories with particular focus on obtaining
licenses by the commencement of commercial operations in those countries which
are expected to account for most of the demand for and usage of Iridium
services.
Iridium also has made significant progress in securing service providers
and roaming partners. As of June 30, 1998, Iridium or its gateway operators had
entered into over 200 service provider agreements and roaming agreements, which
collectively cover markets that make up a majority of Iridium's business plan.
LIQUIDITY AND CAPITAL RESOURCES
FUNDING REQUIREMENTS
Iridium expects to commence commercial operations on September 23, 1998.
Iridium currently estimates that aggregate cash funding requirements from the
commencement of development (June 1991) through the anticipated commencement of
commercial operations will be approximately $4.5 billion. At June 30, 1997 and
1998, Iridium had expended approximately $2.72 billion (or 60%) and
approximately $3.95 billion (or 88%), respectively, of such $4.5 billion
estimate. 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 June 30, 1997
and 1998, Iridium had expended, since inception, approximately $2.72 billion (or
49%) and approximately $3.95 billion (or 72%), respectively, of such $5.5
billion estimate. While Iridium has raised sufficient funds to meet its expected
pre-commercial operations project costs, Iridium expects to require significant
additional funding after commencement of commercial operations. 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 (assuming commencement
of commercial operations on September 23, 1998 and no excusable delays), in
addition to the cost of certain spare satellites at the completion of the
contract. The payments increase each year, ranging from quarterly payments of
$129.4 million in 1998 to $157.4 million in 2003 to $171.4 million in 2005. If
Iridium exercises its option to extend the Operations and Maintenance Contract
for an additional two years, the payments due for that two-year extension are
expected to aggregate approximately $1.33 billion (assuming commencement of
commercial operations on September 23, 1998 and no excusable delays). The
Terrestrial Network Development Contract provides for payments aggregating
approximately $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 Cellular Services into Iridium's
service offerings, there have been, and Iridium anticipates there will be,
amendments and interpretations of the Space System Contract, 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
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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 June 30, 1998, the Parent and Iridium incurred expenditures
totaling $3.2 billion to Motorola under the Space System Contract in respect of
completed milestones and expenditures totaling $157 million under the
Terrestrial Network Development Contract. Based on estimates and the planned
schedule as of June 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...................................... $345 $ -
Terrestrial Network Development Contract................... 48 117
Operations and Maintenance Contract........................ 129 537
</TABLE>
Iridium will also require funds for working capital, business software
development, interest on anticipated borrowings, financing costs and operating
expenses until some time after the commencement of commercial operations.
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"). These Commitments 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.
See "SOURCES OF FUNDING."
Iridium's interest expense will increase significantly as a result of its
financing plan. Prior to the receipt of revenues from commercial operations,
Iridium expects to service its interest expense out of available cash and
borrowings. 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
commercialization, 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 June 30, 1998, Iridium had indirectly received $1.94 billion from
equity investments in the Parent, and has the right to receive approximately $50
million due from South Pacific Iridium Holdings Limited pursuant to the terms of
a definitive purchase agreement. Iridium's indebtedness for borrowed money
equaled approximately $2.1 billion, including $1.45 billion in aggregate
principal amount of Senior Notes (as defined), approximately $65 million of
borrowings under the $275 million Guaranteed Bank Facility (as defined) and
approximately $350 million of borrowings under the Secured Bank Facility (as
defined).
On May 13, 1998, Iridium and Capital completed an offering of $350 million
principal amount of 10 7/8% Senior Notes due 2005, Series D. The Series D Notes
are guaranteed by Roaming, IP and Facilities. The net proceeds received were
approximately $341 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.
As of June 30, 1998, Iridium had drawn $65 million under a $275 million
unsecured borrowing facility with a syndicate of banks (the "Guaranteed Bank
Facility"). Borrowings under the Guaranteed Bank
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<PAGE> 28
Facility are guaranteed by Motorola (the "Motorola Guarantee"). On May 13, 1998,
in connection with the issuance of the Series D Notes, the commitment of the
bank lenders under the Guaranteed Bank Facility was further permanently reduced
from $450 million to $275 million. 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.
On December 18, 1997, pursuant to the Asset Drop-Down Transaction,
substantially all of the assets and liabilities of Parent were transferred to
Iridium, including, without limitation, the Senior Notes and the Guaranteed Bank
Facility, and the Parent was released from such liabilities.
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, (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
Commitments 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
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. There can be no
assurance, however, that the bank lenders will agree to increase the amount of
the Guaranteed Bank Facility or to extend the term of the Guaranteed Bank
Facility, if so requested by Iridium, or that any such other identical credit
facility would be available.
Iridium has 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 June 30, 1998, Iridium had drawn $350 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 prior to the defined commercial activation date. 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).
Borrowings under the Secured Bank Facility mature on December 31, 1998;
Iridium executed its right to extend such maturity until December 31, 1998.
Iridium demonstrated that it has sufficient available or committed funds for its
budgeted project costs through such extended maturity. Assuming approximately
$270 million of borrowings under the Guaranteed Bank Facility and $630 million
of borrowings under the Secured Bank Facility, Iridium expects to have
sufficient cash to meet its anticipated funding requirements through September
23, 1998, the date on which Iridium expects to commence commercial operations.
Iridium expects to seek other senior secured bank financing in order to meet its
expected funding requirements through at least year-end 1999, the last year in
which Iridium projects negative cash flow and a net increase in year-end
borrowing.
Additional financing may also need to be obtained through the issuance of
equity or debt securities in the public or private markets. The availability and
terms of any such financing are uncertain and are dependent, in part, on market
conditions existing at the time of any proposed financing. Iridium's estimated
funding requirements will increase, perhaps substantially, in the event of
unexpected cost increases or
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<PAGE> 29
schedule delays. Additional equity financing, if pursued, may be raised either
privately from strategic or financial investors, or through additional public
offerings. Depending on market conditions, Iridium may make additional senior
note offerings. However, there can be no assurance that Iridium will be able to
complete additional senior note offerings even if favorable market conditions
exist.
In the event Iridium is required to make significant purchases pursuant to
the Standby Purchase Commitments, it expects to use borrowings guaranteed by the
Motorola Equipment Guarantee (in respect of purchases from Motorola) and the
Kyocera Equipment Guarantee (in respect of purchases from Kyocera). Pursuant to
the Motorola Equipment Guarantee, Motorola would guarantee up to approximately
$175 million of additional indebtedness in respect of equipment purchases from
Motorola and, pursuant to the Kyocera Equipment Guarantee, Kyocera would
guarantee up to approximately $122.5 million of additional indebtedness in
respect of equipment purchases from Kyocera. Accordingly, the Standby Equipment
Purchase Commitments exceed the aggregate amounts of such Equipment Guarantees
by approximately $102.5 million. If Iridium's obligations under the Standby
Equipment Purchase Commitments exceed the amounts of the Equipment Guarantees,
there can be no assurance that Iridium will have sufficient funds, or be able to
secure sufficient financing, to satisfy its equipment purchase obligations.
As a result of Iridium's outstanding debt and the expected incurrence of
significant additional indebtedness required to meet its capital requirements,
Iridium will have substantial indebtedness. The debt instruments governing
Iridium's indebtedness are likely to contain restrictions on, among other
things, the incurrence of indebtedness, the granting of liens and the payment of
cash dividends. Iridium's ability to meet all of its debt service obligations
when due will require it to generate significant cash flow from operations or,
if necessary, make additional borrowings to refinance its outstanding
indebtedness. No assurance can be made that Iridium will be able to generate
sufficient cash flow to meet its debt service obligations or that it will be
able to refinance indebtedness. In addition, the debt instruments governing
future indebtedness are likely to contain restrictions on, among other things,
the incurrence of indebtedness.
OPERATIONS
Iridium is a development stage company and, as such, will not generate any
revenues from operations until the Iridium System is constructed and deployed,
and commercial operations commence, which is currently anticipated to be in
September 1998. From the commencement of development (June 1991) through June
30, 1998, Iridium had expended approximately $3.95 billion on the development,
construction and commercialization of the Iridium System, representing 88% of
Iridium's estimate of its cash funding requirements through the anticipated
commencement of commercial operations (September 23, 1998) and 72% of Iridium's
estimate of its cash funding requirements (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.
As of June 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 amounted to approximately $20.5 million from July 29, 1993 (the
"Initial Capital Contribution Date") to June 30, 1998. During the same period,
Iridium recorded a net loss of approximately $861 million. 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 June 30, 1997 to June 30, 1998, Iridium's net loss increased
substantially from $84 million to $448 million, respectively. This was primarily
the result of the following increases: $48 million for sales, general and
administrative expenses, $225 million for depreciation expense and $91 million
for interest expense. See "CAPITALIZATION OF COSTS", "OPERATING EXPENSES" and
"INTEREST EXPENSE."
As a development stage company, Iridium has incurred losses since inception
of its predecessor companies and will continue to do so for the foreseeable
future. Iridium's ability to become profitable and generate positive cash flow
is dependent on the successful and timely commencement of the operation of the
Iridium System, wide subscriber acceptance and numerous other factors.
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<PAGE> 30
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 $3.3 billion through June 30, 1998. In addition, costs
incurred in connection with the issuance by Parent of 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 June 30,
1998, total operating expenses were approximately $778 million. During the
period prior to the Initial Capital Contribution Date, total accumulated
expenditures of approximately $14.8 million were incurred, primarily to
reimburse Motorola for expenses associated with operating Iridium during the
period from its incorporation in 1991 through the Initial Capital Contribution
Date. Iridium expects a substantial increase in future operating expenditures
relating to sales, marketing and other costs associated with commercialization.
INTEREST EXPENSE
Iridium expects to finance a significant portion of its capital
requirements through borrowings. As a result of these borrowings, Iridium will
have significant interest costs. Interest costs are being capitalized while the
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 six months ended June 30, 1998, $160,628,000 of interest cost was
incurred. Interest expensed for the six months ended June 30, 1998 was
$90,857,000 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
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PART II
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
The Annual General Meeting of IWCL was held on May 21, 1998. All of
the members of the Board of Directors of IWCL were reelected as a slate for an
additional one-year term upon the following vote: For, 10,503,146 shares;
against/authority withheld, 24,188 shares; and abstain/exceptions, 2,850 shares.
An amendment to the Iridium Option Plan was approved upon the
following vote: For, 2,905,789 shares; against, 1,081,433 shares; abstain,
70,644 shares; and broker non-votes, 6,472,318 shares.
The appointment of KPMG Peat Marwick as independent auditors of IWCL
for 1998 was approved upon the following vote: For, 10,468,436 shares; against,
29,329 shares; and abstain, 32,419 shares.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1 Standby Purchase Agreement dated as of May 13,1998 by and between
Iridium Operating LLC and Motorola, Inc.
11.1 Computation of Loss Per Class A Common Share
11.2 Computation of Loss per Class 1 Interest
99.1 Certain of the Factors Which May Affect Forward
Looking Statements
</TABLE>
(b) Reports on Form 8-K
Not Applicable
31
<PAGE> 32
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
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
32
<PAGE> 33
IRIDIUM IP LLC
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
Acting Vice Chairman and Acting Chief Executive
Officer
/s/ Roy T. Grant
----------------
Roy T. Grant
Acting Chief Financial Officer
IRIDIUM ROAMING LLC
/s/ Edward F. Staiano
---------------------
Dr. Edward F. Staiano
Acting Vice Chairman and 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: August 12, 1998
33
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ---------------------- ----
<S> <C> <C>
10.1 Standby Purchase Agreement dated as of May 13,
1998 by and between Iridium Operating LLC and
Motorola, Inc. 35
11.1 Computation of Loss Per Class A Common Share 44
11.2 Computation of Loss per Class 1 Interest 45
99.1 Certain of the Factors Which May Affect Forward
Looking Statements 46
27 Financial Data Schedule 54
</TABLE>
34
<PAGE> 1
Exhibit 10.1
STANDBY PURCHASE AGREEMENT
THIS STANDBY PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of this 13th day of May, 1998 by and between Iridium Operating
LLC, a Delaware limited liability company ("Iridium"), and Motorola, Inc., a
Delaware corporation ("Motorola").
In order to stimulate the manufacture and distribution of Iridium
hand-held and mobile phones (each, a "Transceiver") and belt-worn pagers (each,
a "Pager") to be used in the IRIDIUM System (Transceivers and Pagers are
collectively referred to herein as "Subscriber Devices"), Iridium and Motorola
have agreed as follows:
1. Subscriber Device Purchases. Subject to Section 3 of this
Agreement, and upon receipt of a Purchase Notice by Motorola, Iridium agrees to
purchase (I) the number of Transceivers up to a total of (x) 100,000 minus (y)
the aggregate amount of Transceivers Paid For by Gateway Operators and Service
Providers, (as defined in the Iridium LLC Limited Liability Company Agreement)
as specified in the Purchase Notice, at a purchase price per Transceiver of Two
Thousand Fifty ($2,050.00) Dollars, and (II) the number of Pagers up to a total
of (x) 40,000, minus (y) the aggregate amount of Pagers Paid For by Gateway
Operators, (as defined in the Iridium LLC Limited Liability Company Agreement)
as specified in the Purchase Notice, at a purchase price per Pager of Four
Hundred Forty Nine ($449.00) Dollars.
The calculations set forth in subparagraphs (I) and (II) above are
intended to cover a commitment from Iridium and the Gateway Operators that a
total of 100,000 Transceivers and 40,000 Pagers will be purchased from Motorola
prior to December 31, 1998. Purchase orders for delivery dates after December
31, 1998 are not part of the commitment or calculations. In this Agreement,
Transceivers will be deemed "Paid For" if (i) payment for such Transceivers has
been made by or on behalf of the relevant Gateway Operator or Service Provider
pursuant to the terms of the purchase order applicable to such Transceiver; (ii)
such Transceivers have been shipped pursuant to a standby letter of credit; or
(iii) such Transceivers have been shipped without a standby letter of credit and
Iridium has not agreed to such shipment without a standby letter of credit. If
Iridium agrees to shipment without a standby letter of credit, then such
Subscriber Device shall not be deemed "Paid For" until Motorola has actually
received payment for such Transceivers. In this Agreement, Pagers will be deemed
"Paid For" if (i) payment for such Pagers has been made by or on behalf of the
relevant Gateway Operator pursuant to the terms of the purchase order applicable
to such Pager; or (ii) such Pagers have been shipped pursuant to a standby
letter of credit; or (iii) such Pagers have been shipped without a standby
letter of credit; and Iridium has not agreed to such
-35-
<PAGE> 2
shipment without a standby letter of credit. If Iridium agrees to shipment of
any Subscriber Devices without a standby letter of credit, then such Subscriber
Device shall not be deemed "Paid For" until Motorola has actually received
payment for such Subscriber Devices. Iridium agrees that it will in good faith
consider agreeing to the shipment of Subscriber Devices without a standby letter
of credit should Motorola request such consideration by Iridium.
As used in this Agreement, the term "Purchase Notice" shall mean one
of a series of written notices dated no earlier than January 1, 1999, or the
first business day thereafter, which is sent by Motorola and received by
Iridium, in which the aggregate number of Transceivers Paid For by Gateway
Operators and Service Providers and the aggregate number of Pagers Paid For by
Gateway Operators, all as of the date of such Purchase Notice, shall be
specified. Sales of Subscriber Devices to the U.S. Government by Motorola are
outside the terms of this Agreement and will not be included in any calculations
to determine Iridium's purchase obligations herein.
2. Delivery and Payment Obligations. Upon the purchase of
Subscriber Devices by Iridium pursuant to Section 1 hereof, Motorola shall
promptly ship to Iridium or its designee the Subscriber Devices so purchased.
All deliveries are FOB Libertyville. Title to the Subscriber Devices will pass
to Iridium at the FOB point. If any Subscriber Device has been previously
shipped by Motorola to a Gateway Operator and such Subscriber Device has not
been Paid For, then Motorola may fulfill its shipment obligations pursuant to
this Section 2 with respect to such Subscriber Device by assigning to Iridium
all of Motorola's rights against the relevant Gateway Operator with respect to
such Subscriber Device pursuant to the purchase order and other documents with
respect to such Subscriber Device. Payment for Subscriber Devices delivered to
Iridium is due and payable within ten (10) business days from date of invoice.
Motorola will invoice for Subscriber Devices upon shipment. Payment for
Subscriber Devices not Paid For by Gateway Operators is due and payable within
ten (10) business days of receipt of Purchase Notice by Iridium from Motorola.
If after the date of the Purchase Notice Motorola receives any payment with
respect to a Subscriber Device specified or any return thereof, Motorola shall
immediately pay over to Iridium such payment or shall deliver to Iridium or its
designee such returned Subscriber Device. As more fully described in a
Memorandum of Understanding, Iridium agrees to use the funds available under a
new $175 million credit agreement, which Motorola has conditionally agreed to
guarantee, only to make payments to Motorola, Inc. for amounts that Iridium owes
under this Standby Purchase Agreement, as well as other agreements with
Motorola, Inc., to the extent those amounts are owed but have not been paid to
the extent that other funds are not available.
3. Limitation on Purchases. The parties acknowledge that
purchases of Subscriber Devices by Gateway Operators will be made pursuant to
written purchase
-36-
<PAGE> 3
agreements between Motorola and such Gateway Operators (such agreements, the
"Purchase Agreements"). Motorola has the right, without receiving the consent of
Iridium, to modify, amend, waive, extend or otherwise change the Purchase
Agreements, and the Gateway Operators' obligations thereunder, except that
Motorola agrees that it will not consent to modifications, deletions or
additions to paragraph 5.2 of the Purchase Agreements. To the extent that
Motorola has not filled firm orders placed by Gateway Operators for reasons
under Motorola's control and the Gateway Operators and Motorola have been unable
to work out a reasonable extension of time for delivery dates after good faith
attempts to do so, (as described in Paragraph 5.3 of the Purchase Agreements
with Gateway Operators), Iridium shall be entitled to reduce the number of
Subscriber Devices specified in clauses (I)(x) and (II)(x) of Section 1 of this
Agreement by the amount of any such production.
4. Other Terms of Purchase. All terms of any purchase of
Subscriber Devices by Iridium pursuant to the Agreement, other than purchase
price, payment and delivery terms, shall be subject to the terms set forth in
Attachment A.
5. Termination. This Agreement shall terminate on the date that
(i) an aggregate of 100,000 Transceivers shall have been Paid For by the Gateway
Operators, or Service Providers or Iridium or any combination of them and (ii)
an aggregate of 40,000 Pagers shall have been Paid For by either the Gateway
Operators or Iridium or both.
6. Party Relationship. Each party will be deemed to be an
independent contractor and not an agent, joint venturer, or representative of
the other, and neither party may create any obligations or responsibilities on
behalf of or in the name of the other. Under no circumstances may Iridium hold
itself out to be a partner, employee, franchisee, representative, servant or
agent of Motorola. Iridium will not impose or create any obligation or
responsibility, express or implied, or make any promises, representations or
warranties on behalf of Motorola, other than as expressly provided herein.
7. Dispute Resolution. The parties agree that any claims or disputes
arising from this Agreement will be submitted to non-binding mediation prior to
initiation of any formal legal process; provided, however, that this provision
shall not preclude either party from resorting to judicial proceedings if: (i)
good faith efforts to resolve the dispute under mediation are unsuccessful; or
(ii) the claim or dispute relates to intellectual property rights; or (iii)
interim relief from a court is necessary to prevent serious and irreparable
injury to the party or to third parties.
8. Representations. This Standby Purchase Agreement constitutes the
valid and legally binding obligation of Iridium and Motorola enforceable in
accordance with its
-37-
<PAGE> 4
terms. The parties each represent that they have the power to execute and
deliver this Agreement and to perform the obligations hereunder. Iridium agrees
that it will take all necessary steps to obtain any required approvals for
performance under this Agreement from its directors and its securities holders,
and from anyone else whose approval or consent is required for Iridium's
performance of this Agreement.
9. Notices. All notices and other communications hereunder will be in
writing. Any notice or other communication hereunder shall be deemed duly
given: (i) when delivered, if personally delivered; (ii) when receipt is
electronically confirmed, if faxed (with a hard copy to follow via first class
mail, postage prepaid); or (iii) one day after deposit with a reputable
overnight courier, in each case addressed to the intended recipient as set forth
below:
If to Iridium:
Iridium Operating LLC
1575 Eye Street, NW
Washington, D.C. 20005
Attention: Chief Financial Officer
Fax #: (202) 408-3801
If to Motorola:
Bill Zancho
Director of Marketing and Business Development
Satellite Subscriber Products Division
Cellular Subscriber Sector
600 North U.S. Highway 45
Libertyville, Illinois 60048
Fax #: (847) 576-7847
and
Ken Elkin
Marketing Manager
Iridium Pager Operations
Messaging Systems Products Group
MS112 Boynton Beach, FL 33426
Fax #: (561) 739-6020
10. Governing Law: This Agreement shall be governed
by the laws of the State of Illinois.
-38-
<PAGE> 5
11. General: This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instruments. The failure of either
party to insist in any one or more instances upon the performance of any of the
terms or conditions herein or to exercise any right hereunder will not be
construed as a waiver or relinquishment of the future performance of any such
terms or conditions or the future exercise of such right but the obligation of
the other party with respect to such future performance will continue in full
force and effect. Except as otherwise expressly permitted hereunder, no
alterations or modifications of this Agreement will be binding upon either
Iridium or Motorola unless made in writing and signed by an authorized
representative of each party. If any term or condition of this Agreement will to
any extent be held by a court or other tribunal to be invalid, void or
unenforceable, then that term or condition will be inoperative and void insofar
as it is in conflict with law, but the remaining rights and obligations of the
parties will be construed and enforced as if this Agreement did not contain the
particular term or condition held to be invalid, void or unenforceable. Neither
party may disclose the terms of this Agreement to any party without the prior
written consent of the other party hereto; provided, however, that a party may
make such disclosure (I) upon order of a court of competent jurisdiction subject
to first providing the other party hereto with prompt written notice of such
court order to allow the other party to seek relief from such order, (ii) if so
required by law including but not limited to any federal or states securities
laws, or (iii) if requested in connection with any due diligence investigation
by such party's financial or legal advisors or by any lending institution or its
representatives. In the event that a party so discloses, other than in
accordance with the preceding sentence, the other party may immediately
terminate this Agreement.
IN WITNESS WHEREOF, the parties have hereunder signed their names in
the space provided below as of the date first above written.
-39-
<PAGE> 6
MOTOROLA, INC.
By: /s/
---------------------
Name: L.E. Mishler
Title:
IRIDIUM OPERATING, LLC
By: /s/
---------------------
Name: Roy Grant
Title: Vice President and Chief Financial Officer
-40-
<PAGE> 7
ATTACHMENT A
PURCHASE TERMS
The following terms apply to the Purchase of Subscriber Devices by
Iridium from Motorola to the extent that Iridium purchases Subscriber Devices
pursuant to the Standby Purchase Agreement:
1. WARRANTY
Subscriber Devices Warranty. Motorola will warrant each Subscriber Device
only to the original end user buyers or lessees in accordance with a limited one
year, parts and labor warranty which will be shipped with the Subscriber
Devices.
Accessory Warranty. Motorola will warrant each Accessory only to the
original end user buyers or lessees in accordance with a limited one year, parts
and labor warranty which will be shipped with the Accessories.
EXCEPT AS OTHERWISE PROVIDED IN THE LIMITED WARRANTIES, MOTOROLA
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. IF ANY PRODUCT IS DEFECTIVE AT TIME OF DELIVERY TO CUSTOMER,
CUSTOMER'S SOLE REMEDY WILL BE TO RETURN THE PRODUCT TO MOTOROLA FOR
REPLACEMENT, REPAIR, OR REFUND, AS DETERMINED BY MOTOROLA.
2. FORCE MAJEURE
Neither party shall be held liable for any delay or failure to perform due
to any cause beyond its reasonable control, including, without limitation, lack
of supplies due to a supplier's inability or failure to deliver materials,
except the obligation to pay money when due. The delivery schedule shall be
considered extended by a period of time equal to the time lost because of any
excusable delay.
3. EXPORT CONTROL
Iridium or Brightpoint shall be the exporter of record and shall be
responsible for obtaining all export licenses that may be required to export the
Subscriber Devices from the U.S. to Iridium's requested "ship to" location(s).
Iridium agrees to comply with all applicable export laws, regulations and
orders. Specifically, but without limitation, Iridium agrees that it will not
resell, re-export or ship, directly or indirectly, any
-41-
<PAGE> 8
Subscriber Device or technical data in any form without obtaining appropriate
export or re-export licenses from the United States Government.
4. TAXES
The prices set forth in the Standby Purchase Agreement are exclusive of
any amount for federal, state, provincial and/or local excise, sales, use,
property, retailer's, occupation or any other assessment in the nature of taxes
however designated, on the Subscriber Devices and/or services provided under
this Agreement. Iridium shall pay all applicable fees, custom duties,
assessments or taxes which may be assessed or levied by the government of any
applicable jurisdiction and any departments and subdivision thereof, as a result
of Iridium's performance under this Agreement or against any of the Subscriber
Devices purchased hereunder by Iridium.
5. PATENT AND COPYRIGHT INDEMNIFICATION
Motorola agrees to defend, at its expense, any suits against Iridium based
upon a claim that any Subscriber Device furnished hereunder directly infringe a
patent or copyright in the Gateway Operator's Marketing Area where Iridium sells
the Subscriber Device and to pay costs, fines, and damages finally awarded in
any such suit, provided that Motorola is notified promptly in writing of the
suit and at Motorola's request and at its expense is given control of said suit
and all requested assistance for defense of same. If the use or sale of any
Subscriber Devices furnished hereunder is enjoined as a result of such suit,
Motorola at its option and at no expense to Iridium, will obtain for Iridium the
right to use or sell said Subscriber Device or will substitute an equivalent
Device reasonably acceptable to Iridium and extend this indemnity thereto or
will accept the return of the Subscriber Device and reimburse Iridium the
purchase price therefor, less a reasonable charge for reasonable wear and tear.
This indemnity does not extend to any suit based upon any infringement or
alleged infringement of any patent or copyright by the alteration of any
Subscriber Devices furnished by Motorola or by the combination of any Subscriber
Devices furnished by Motorola and other elements nor does it extend to any
Subscriber Devices of Iridium's design or formula. The foregoing states the
entire liability of Motorola for patent or copyright infringement.
IN NO EVENT WILL MOTOROLA BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES TO
IRIDIUM ARISING FROM INFRINGEMENT OR ALLEGED INFRINGEMENT OF PATENTS,
COPYRIGHTS, OR OTHER INTELLECTUAL PROPERTY RIGHTS.
6. LIMITATION OF LIABILITY
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<PAGE> 9
EXCEPT FOR PERSONAL INJURY, AND EXCEPT FOR PARAGRAPH 16 (PATENT AND
COPYRIGHT INDEMNIFICATION) ABOVE, MOTOROLA'S TOTAL LIABILITY, WHETHER FOR BREACH
OF CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY IN TORT OR OTHERWISE, IS
LIMITED TO THE PRICE OF THE PARTICULAR PRODUCTS SOLD HEREUNDER WITH RESPECT TO
WHICH LOSSES OR DAMAGES ARE CLAIMED. CUSTOMER'S SOLE REMEDY IS TO REQUEST
MOTOROLA, AT MOTOROLA'S OPTION, TO EITHER REFUND THE PURCHASE PRICE OR REPAIR OR
REPLACE PRODUCT(S) THAT ARE NOT AS WARRANTED. IN NO EVENT WILL MOTOROLA BE
LIABLE FOR ANY LOSS OF USE, LOSS OF TIME, INCONVENIENCE, COMMERCIAL LOSS, LOST
PROFITS OR SAVINGS OR OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES TO THE FULL
EXTENT SUCH MAY BE DISCLAIMED BY LAW. MOTOROLA EXPRESSLY DISCLAIMS ANY LIABILITY
FOR FAILURE TO OBTAIN EQUIPMENT CERTIFICATION IN TIME FOR CUSTOMER'S SERVICE
LAUNCH; FOR ANY FAILURE OF THE IRIDIUM SYSTEM WHATSOEVER; AND FOR RANGE,
COVERAGE, AVAILABILITY OR OPERATION OF ANY COMMUNICATIONS SYSTEM.
7. LOGOS AND TRADEMARKS
All use of Motorola's trademarks, service marks, tradenames, slogan, and
logos by Iridium shall be in accordance with the terms specified in the
"Motorola Subscriber Devices Marketing Guidelines" incorporated herein by
reference. Iridium shall not deviate from the Motorola Subscriber Devices
Marketing Guidelines without Motorola's written approval, which shall not be
unreasonably withheld. Any goodwill deriving from such use by Iridium shall
inure to Motorola's benefit.
8. GOVERNMENT SALES
In the event that Iridium elects to sell Subscriber Devices to a
government entity, directly or indirectly, Motorola makes no representations
with respect to the ability of the Subscriber Devices or any of its other
products, services or prices, to satisfy any statutes, regulations or provisions
relating to such governmental sales.
-43-
<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 JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1997 1998 1997 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET LOSS APPLICABLE TO CLASS A COMMON SHARES:
Net loss $ 779 $ 20,933 $ 779 $ 38,359
---------- ----------- ----------- -----------
Net loss applicable to Class A Common shares $ 779 $ 20,933 $ 779 $ 38,359
========== =========== =========== ===========
AVERAGE NUMBER OF CLASS A SHARES:
Average number of Class A Common shares outstanding 2,769,231 12,058,897 1,392,265 12,033,944
Diluted adjustments (2):
Assumed exercise of options, warrants
and conversion of Class B Common Shares - 2,763,655 - 2,570,405
---------- ----------- ---------- -----------
Average number of Class A Common shares assumed to be
outstanding, assuming dilution 2,769,231 14,822,552 1,392,265 14,604,349
========== =========== =========== ===========
NET LOSS PER CLASS A COMMON SHARE:
Basic (1) $ 0.28 $ 1.74 $ 0.56 $ 3.19
Diluted (2) $ 0.28 $ 1.41 $ 0.56 $ 2.63
</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).
44
<PAGE> 1
Exhibit 11.2
IRIDIUM LLC
(A Development Stage Limited Liability Company)
COMPUTATION OF LOSS PER CLASS 1 INTEREST
(in thousands except Member Interest data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET LOSS APPLICABLE TO CLASS 1 INTERESTS:
Net loss $ 47,926 $ 244,775 $ 83,854 $ 448,341
Preferred dividend requirement 1,316 1,499 3,607 2,946
------------ ------------ ------------ ------------
Net loss applicable to class 1 interests $ 49,242 $ 246,274 $ 87,461 $ 451,287
============ ============ ============ ============
AVERAGE NUMBER OF CLASS 1 INTERESTS:
Average number of Class 1 Interests outstanding 124,627,234 141,298,702 123,625,227 141,272,496
Subscribed but unissued Class 1 Interests 1,532,967 - 770,716 -
Assumed exercise of options, warrants
and conversion of Class B Common Shares 11,266,689 18,566,305 10,425,446 18,074,080
Assumed conversion of Series A Class 2 Interest 911,951 765,463 869,544 738,679
------------ ------------ ------------ ------------
Average number of Class 1 Interests assumed to be
outstanding, assuming dilution 138,338,841 160,630,470 135,690,933 160,085,255
============ ============ ============ ============
NET LOSS PER CLASS 1 INTEREST:
Basic (1) $ 0.40 $ 1.74 $ 0.71 $ 3.19
Diluted (2) $ 0.35 $ 1.53 $ 0.64 $ 2.82
</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).
45
<PAGE> 1
EXHIBIT 99.1
CERTAIN FACTORS WHICH MAY AFFECT
FORWARD LOOKING STATEMENTS
The following risk factors should be carefully considered by
prospective investors in Iridium World Communications Ltd., Iridium LLC or
Iridium Operating LLC. Iridium World Communications Ltd. acts as a member of
Iridium LLC and has no other business. The business of Iridium Operating LLC
("Iridium") constitutes substantially all of Iridium LLC's business. The
business of Iridium is discussed below.
The date of this exhibit is August 13, 1998. The expected date of
commercial activation of the Iridium System is September 23, 1998. A great deal
of work needs to be done between the date of this report and commercial
activation.
DEVELOPMENT STAGE COMPANY; ABSENCE OF REVENUES
Iridium is a development stage enterprise with no operating history.
Investors have no operating and financial data about the Iridium System on
which to base an evaluation of the Iridium System's performance or an
investment in IWCL, Parent or Iridium. Iridium expects to realize significant
net losses at least until some time after the Iridium System commences
commercial operations, which is currently anticipated to be September 23, 1998.
The completion and maintenance of the Iridium System and implementation of
commercial service will require significant additional expenditures of funds.
Iridium currently has no source of revenues other than nominal interest income.
No assurances can be given when, or that, the Iridium System will become
commercially operational, or when, or that, Iridium will have revenues from
operations or become profitable.
POTENTIAL FOR DELAY AND COST OVERRUNS
Iridium's business plan assumes the Iridium System will commence
commercial operations on September 23, 1998. The construction schedule for
the satellites in the Iridium System requires an unprecedented rate of
satellite assembly for commercial telecommunications systems. As of July 20,
1998, Motorola, Inc. ("Motorola") had launched 72 Iridium satellites, 65 of
which are functioning properly. Motorola has contracted for two August 1998
maintenance launches, one with China Great Wall for two satellites and one with
Boeing for five satellites, which should increase the number of operational and
spare satellites to 72. A significant delay in the delivery of the satellites
needed for the space segment would materially and adversely affect Iridium's
operations.
A significant delay in the date the Iridium System becomes fully
operational would harm the competitive position of Iridium by eroding the timing
advantages Iridium currently anticipates, would delay the generation of revenue
by Iridium and might significantly affect Iridium's ability to pay interest on,
and the principal of, its indebtedness.
The operation of the Iridium System is dependent on the successful
construction and operation of gateways and the timely availability of necessary
regulatory licenses and approvals. Iridium closely monitors the progress of each
gateway and currently expects that at least nine and up to 12 gateways will be
in operation with voice functionality at the commencement of commercial
operations. Iridium expects paging functionality to be available at a portion of
the gateways by September 1998 with the remainder activated by October 1998.
However, there can be no assurance that one or more gateways will not fail to be
completed by the commencement of commercial operations, which could have a
material adverse effect upon Iridium. In particular, the China gateway has only
recently commenced equipment procurement and the Middle East-Africa gateway is
significantly behind schedule with its preparations for commercial operations.
Prior to commencement of commercial operations, Iridium must develop
and, in conjunction with each of the gateway owners, integrate and test software
related to the operation of the Iridium System, including the business
46
<PAGE> 2
support systems. Installation of the final satellite software is scheduled to be
completed prior to September 23, 1998, the date commercial service is scheduled
to commence. However, delays in the development of this software have resulted
in a shortened schedule for subscriber trials. A significant delay in the
development, deployment or implementation of such software systems would have a
material adverse effect on Iridium.
Iridium expects that Motorola and Kyocera Corporation ("Kyocera")
will produce handsets, pagers and other subscriber equipment for the Iridium
System. The delay in the availability of the final constellation software has
also affected the ability to test handsets, which could result in delays of
handset deliveries, particularly by Kyocera. Iridium believes that Motorola
handsets will be available in sufficient quantities to support the initial
demand following commercial activation, with Kyocera handsets available later in
1998. However, any additional significant delay in the development, manufacture
and sale of phones and pagers would have a material adverse effect on Iridium.
Because there is no current market for Iridium Services and subscriber
equipment, the financial incentive for manufacturers to produce significant
quantities of subscriber equipment in advance is limited. Moreover, there is a
risk that demand for Iridium Services will not materialize in a timely manner.
SIGNIFICANT ADDITIONAL FUNDING NEEDS
Iridium anticipates total cash funding requirements of approximately
$4.5 billion through September 23, 1998, the date on which Iridium expects to
commence commercial operations, and $5.5 billion (net of assumed revenues
following commercial activation) through year-end 1999, the last year in which
Iridium projects negative cash flow and a net increase in year-end borrowings.
Based on funds raised or conditionally committed as of June 30,
1998, Iridium expects to have sufficient cash to meet its anticipated funding
requirements through September 23, 1998, the date on which Iridium expects to
commence commercial operations. Iridium expects to seek other senior secured
bank financing in order to meet its expected funding requirements through at
least year-end 1999, the last year in which Iridium projects negative cash flow
and a net increase in year-end borrowings. There can be no assurance, however,
that conditionally committed funds will be available to Iridium, or that any
such other bank financing will be obtained by Iridium on terms and conditions
acceptable to it, and, if any of such financing is unavailable, there can be no
assurance that Iridium will be able to obtain alternative financing on terms and
conditions acceptable to it. Iridium's estimated funding requirements do not
reflect any contingency amounts and therefore those requirements will increase,
perhaps substantially, in the event of unexpected cost increases or schedule
delays.
RISK OF HIGHLY LEVERAGED CAPITAL STRUCTURE
Iridium is a development stage company with a highly leveraged
capital structure and expects to incur substantial additional indebtedness,
including secured indebtedness. The amount of debt needed to finance the Iridium
System could be increased by one or more factors outside the control of Iridium,
including cost increases related to the acquisition of the Iridium System, a
delay in the delivery date of the system and increases in prevailing market
interest rates. Iridium currently has no significant income-producing assets
from which to service its indebtedness.
Iridium's current and future debt service requirements could have
important consequences to investors in IWCL, Parent or Iridium, including the
following: (i) Iridium's limited ability to obtain additional financing for
future working capital needs or for other purposes; (ii) a substantial portion
of Iridium's cash flow from operations will be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing funds available for
operations; and (iii) Iridium's greater exposure to adverse economic conditions
than competing companies that are not as highly leveraged. In addition, the
discretion of Iridium's management with respect to certain business matters will
be limited by covenants contained in its debt instruments. Among other things,
such covenants limit or prohibit Iridium and its subsidiaries from incurring
additional indebtedness, creating liens on their assets, making certain loans,
investments or guarantees, issuing preferred stock, making certain asset or
stock dispositions and entering into transactions with affiliates and related
persons. Moreover, a failure to comply with the terms of any agreements with
respect to
47
<PAGE> 3
outstanding or additional financing could result in an event of default under
such agreements, which could result in the acceleration of the related debt and
acceleration of debt under other debt agreements that may contain
cross-acceleration or cross-default provisions.
TECHNOLOGY AND TECHNOLOGY IMPLEMENTATION RISKS; INABILITY TO FULLY TEST PRIOR TO
SPACE DEPLOYMENT
To build the Iridium System, Motorola and its subcontractors must
integrate a number of sophisticated technologies. The integration of this array
of diverse technologies is a complex task which has not previously been
attempted and is further complicated by the fact that a significant portion of
the hardware components associated with the Iridium System will be in space.
Despite the extensive testing of the components of the Iridium System on the
ground, the nature and complexity of the system is such that final confirmation
of the ability of the system to function in the intended manner, including the
ability of the Iridium System to handle the anticipated number of calls each
day, cannot be confirmed until a substantial portion of the system is deployed
in space. Errors involving hardware or software components in space may result
in service limitations and corresponding reductions in revenue.
Implementation and operation of the Iridium System, including the
business support systems necessary for such tasks as customer billing and
subscriber authentication, are also significantly dependent on software which
has been, is being or will have to be developed, integrated and tested and which
would have to be reprogrammed if errors require changes. Iridium believes that
the development of the software for the Iridium System, including the space
segment, is one of the largest and most complex software creation and
integration tasks ever undertaken in a commercial satellite communications
program. Installation of the final satellite software is scheduled to be
completed prior to September 23, 1998, the date commercial service is scheduled
to commence. However, delays in the development of this software have resulted
in a shortened schedule for subscriber trials. No assurance can be given that
the software necessary to Iridium's business will be completed when required,
including integration and testing, or that such software will function as
required.
The Iridium subscriber equipment is also an essential component
critical to the successful commercial operation of the Iridium System. An
inability to successfully develop and manufacture subscriber equipment in
sufficient numbers could delay commencement of commercial operations or limit
the capacity of the system and the quality of services offered. Such limitations
could affect subscriber acceptance of Iridium Services and as a result could
materially and adversely affect Iridium. The delay in the availability of the
final constellation software has also affected the ability to test handsets,
which could result in delays of handset deliveries, particularly by Kyocera.
Iridium believes that Motorola handsets will be available in sufficient
quantities to support the initial demand following commercial activation, with
Kyocera handsets available later in 1998. There can be no assurance that
Motorola or any other manufacturer will be able to develop on a timely basis, or
at all, portable, hand-held phones or belt-worn pagers that meet Iridium's
expectations and which can be mass produced at economical prices. See "--
Potential for Delay and Cost Overruns -- Development, Manufacture and
Distribution of Subscriber Equipment" and "-- Reliance on Motorola, Gateway
Owners and Other Third Parties."
CONSEQUENCES OF SATELLITE SERVICE LIMITATIONS ON CUSTOMER ACCEPTANCE
Iridium's ability to generate sufficient operating revenues will
depend upon customer acceptance of and satisfaction with Iridium Services, which
in turn will depend upon a variety of factors, including the price and technical
capabilities of the Iridium Services and equipment, and the extent, availability
and price of alternative telecommunications services.
Based upon current testing and simulations, Iridium subscribers
using Iridium Satellite Services via portable, hand-held phones should expect
some degradation in service quality and availability to occur in environments
where obstructions, such as trees, buildings and other natural and man-made
obstacles, are positioned between a satellite and the user. The severity of this
degradation will increase as the obstacles become larger and more densely
spaced. Only extremely limited satellite voice service, or no satellite voice
service, is expected to be available in densely packed
48
<PAGE> 4
urban environments or inside buildings with steel construction and metal coated
glass common in many urban high rise buildings (including, in particular, in
most hotels and professional buildings). In addition, because the structure of
automobiles will tend to obstruct the satellite signal, use of a hand-held
Iridium phone in a moving automobile will make the effect of environmental
obstructions temporary but more pronounced. The actual limitations will vary,
sometimes significantly, as actual situations and conditions change and as the
satellites move across the sky. The Iridium satellite paging service will also
be unable to provide service in certain environments where terrestrial paging
generally would. There can be no assurance that (i) Iridium's expectation will
be correct as to subscribers' willingness to accept service limitations, higher
prices and heavier hand-held phones and larger pagers than those to which such
subscribers may otherwise be accustomed in order to have the ability to make and
receive calls on a worldwide basis with a single phone or to receive pages on a
satellite pager or (ii) that the service limitations will not result in
significantly lower sales or lower usage of Iridium 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 Iridium data and facsimile services will be limited.
SATELLITE LAUNCH RISKS
In order for the Iridium System to be fully operational under its
current specifications and timetable, Iridium anticipates the need for Motorola
to successfully launch seven additional satellites by the end of August 1998.
Moreover, to maintain the system, additional satellites are expected to be
launched in the remainder of 1998 and each successive year during the term of
the Operations and Maintenance Contract. No other commercial satellite
communications system has required this number of launches to become fully
deployed and operational. There can be no assurance that Iridium's satellites
will be successfully deployed in a timely manner or that launch failures will
not occur and materially and adversely affect Iridium. The risk of a material
and adverse effect associated with an Iridium launch failure is exacerbated by
the fact that each launch vehicle will contain multiple satellites.
Impact of Excusable Delays
The terms of the Space System Contract provide that Motorola will
bear the responsibility of launching the satellites that comprise the space
segment. Nevertheless, Iridium retains the risk of cost overruns and delays
associated with excusable delays, including delays in launch provider schedules
due to prior delays of launches of non- Iridium satellites, and the risk of
economic damage due to any delay or reduced performance beyond the limited
remedies provided by the Space System Contract.
LIMITED LIFE OF SATELLITES; COST OF MAINTAINING THE SPACE SEGMENT; RISK OF
SATELLITE FAILURE OR DAMAGE
A significant portion of Iridium's tangible assets will be
represented by the satellites in the space segment. Iridium's business plan
currently assumes that the satellites will have a useful life of five years from
their respective launch dates. There can be no assurance that any satellite will
actually achieve such a useful life.
Maintaining the space segment is a complex undertaking which has not
previously been attempted on a commercial basis. The cost of maintaining the
space segment and the risk of loss of satellites are significant. Iridium has
entered into an Operations and Maintenance Contract with Motorola which provides
for the operation and maintenance of the space segment for its first five years
of operation at an aggregate cost to Iridium of approximately $2.88 billion,
assuming the space segment is delivered in September 1998 and assuming no
excusable delay occurs. Iridium has the option to extend the Operations and
Maintenance Contract for an additional two years for additional aggregate
payments aggregating $1.33 billion (based on the same assumption) and assuming
no excusable delay occurs. Under the Operations and Maintenance Contract,
Iridium will bear the risk of damage to satellites by the acts of third parties
(including but not limited to the degradation or complete loss of any satellite
due to contact with space debris of any size or character). Satellites operating
in the low earth orbit region, such as the Iridium satellites, face a higher
risk of damage from space debris than satellites operating in geostationary
orbit.
49
<PAGE> 5
As of July 20, 1998, Motorola had experienced the loss of seven of
the 72 Iridium satellites launched during the development of the Iridium system.
Premature failure or interruption of one or more satellites, including temporary
losses, that for whatever reason are not promptly corrected or replaced, could,
among other things, cause gaps in service availability, significantly degrade
service quality, increase costs in the event Iridium is liable, and result in
loss of revenue for the period that service is compromised and, as a result,
could materially and adversely affect Iridium.
RISKS ASSOCIATED WITH LICENSING AND SPECTRUM ALLOCATION
The operation of the Iridium System is and will continue to be
subject to United States and international regulation. This regulation is
pervasive and largely outside Iridium's direct control. Iridium, Motorola and
the various gateway owners have made substantial progress in receiving the
authorizations necessary to operate the Iridium System, but a significant number
of regulatory authorizations remain to be obtained, including (1) in each
country in which a gateway or system control terminal will be located, an
authorization to construct and operate those facilities, including necessary
gateway link spectrum assignments, (2) in each country in which Iridium
subscriber equipment will be operated, authority to market and operate that
equipment with the Iridium System, user link spectrum assignments, and
authorization to offer Iridium communications services and (3) international
coordination of the Iridium System under the auspices of the ITU or domestic
coordination in each country where Iridium Services are offered with other
entities using or proposing to use the spectrum required for the Iridium System
or adjacent spectrum, to ensure the avoidance of harmful interference.
COMPETITIVE RISKS
Certain sectors of the telecommunications industry are highly
competitive in the United States and in other countries. The uncertainties and
risks created by this competition are intensified by the continuous
technological advances that characterize the industry, regulatory developments
which affect competition and alliances between industry participants. While no
single wireless communications system serves the global personal communications
market today, Iridium anticipates that more than one system will serve this
market in some fashion in the future.
Iridium's business plan assumes that Iridium will be able to charge
a global mobility premium, over the cost of a hypothetical terrestrial-based
call, for its Satellite Services. If the market will not support such a premium,
Iridium's ability to compete may be materially adversely affected. Also, the
Iridium System will lack the operational capacity to provide local service to
large numbers of subscribers in concentrated areas and the Iridium System will
not afford the same voice quality, signal strength and degree of building
penetration in areas that are served by mature terrestrial wireless voice or
paging systems.
RELIANCE ON MOTOROLA, GATEWAY OWNERS AND OTHER THIRD PARTIES
Construction and Operation of the Iridium System
Iridium does not independently have and does not intend to acquire,
except by contracting with other parties, the ability to design, develop or
produce the components of the Iridium System or to launch the constellation of
satellites or to operate and maintain the system once it is fully deployed.
Motorola has agreed to provide these services to Iridium under the Space System
Contract, the Operations and Maintenance Contract and the Terrestrial Network
Development Contract. Thus, Iridium currently relies on Motorola to perform
these critical tasks.
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 the
gateways; connecting the Iridium System to PSTNs; marketing Iridium Services;
selecting, or acting as, service providers; and managing relations with Iridium
50
<PAGE> 6
System subscribers either directly or through service providers. Iridium is
dependent on the activities of its gateway operators for its success. Some
gateway operators are behind schedule in the steps necessary to establish and
implement their gateways. Other gateway operators have indicated that they may
not receive regulatory approvals for some of the countries in their territories
at the anticipated commencement of commercial operations in September 1998. In
particular, the China gateway and the Middle East-Africa gateway are
substantially behind schedule.
Distribution and Marketing of Iridium Services
The sales of Iridium Services and of Iridium subscriber equipment to
the ultimate consumer will be made by service providers which will be, or will
be selected by, Iridium's gateway operators. Iridium's business plan assumes
substantial sales of Iridium subscriber equipment by service providers prior to
the commencement of commercial services. Iridium's success will depend upon the
motivation and ability of such service providers to generate on a timely basis
demand for Iridium Services and subscriber equipment, and there can be no
assurance that such demand can be generated on a timely basis.
RISKS ASSOCIATED WITH PRINCIPAL SUPPLY CONTRACTS
Space System Contract
Iridium and Motorola are parties to the Space System Contract which
provides for the payment by Iridium to Motorola of $3.45 billion (subject to
certain adjustments) for the design, development, production and delivery in
orbit of the space segment. Furthermore, Motorola's aggregate liability under
the Space System Contract and related contracts with Iridium in the event the
system is not operational is subject to the Motorola Liability Limitations
(defined below) and in no event is Motorola required under the contract to
refund amounts previously paid by Iridium to Motorola. In addition, subject to
certain exceptions, Iridium bears the risk, including additional costs, if any,
resulting from excusable delays under the Space System Contract, as well as
certain of the risks of loss for satellites once placed in orbit.
The Space System Contract provides that, to the extent Motorola has
any liability to Iridium under the contract for any costs, damages, claims or
losses whatsoever arising out of or related to such contract, or any such
liability under the Operations and Maintenance Contract, the Terrestrial Network
Development Contract or any other contract executed between Iridium and Motorola
in connection with the Iridium System, or any provisions of any of the
foregoing, whether pursued as a breach of contract or as a tort or other cause
of action and whether accruing before or after completion of all the work
required under the contracts, such liability shall be limited to $100 million in
the aggregate.
Operations and Maintenance Contract
Iridium and Motorola are parties to the Operations and Maintenance
Contract, which obligates Motorola for a period of five years after completion
of the final milestone under the Space System Contract to operate the space
segment and to exert its best efforts to monitor, upgrade and replace the
hardware and software of the Iridium space segment as necessary to maintain
specified performance levels. Iridium has the right to extend the term of this
contract for an additional two years. This contract provides for specified
increasing quarterly payments by Iridium to Motorola that are expected to
aggregate approximately $2.88 billion, subject to certain adjustments.
The Operations and Maintenance Contract contains provisions relating
to indemnification, excusable delays, insurance, permits and licenses, waivers
of rights, events of default and other matters similar to those contained in the
Space System Contract. Motorola's liability under the Operations and Maintenance
Contract is subject to the Motorola Liability Limitations. In the event that the
Space System Contract is terminated for whatever reason, the Operations and
Maintenance Contract will also terminate.
51
<PAGE> 7
Terrestrial Network Development Contract
Iridium is also a party to the Terrestrial Network Development
Contract with Motorola, pursuant to which Motorola is obligated to design and
develop the gateway hardware and software, and license Iridium to use and permit
others to use intellectual property developed under the contract to procure the
development and manufacture of gateways from sources other than Motorola.
Motorola will be paid a total of approximately $321 million under the contract
in increments tied to the completion of milestones, including those relating to
acceptance tests of the completed gateway design. Motorola's liability under the
Terrestrial Network Development Contract is subject to the Motorola Liability
Limitations and the contract contains provisions relating to excusable delays,
waivers of rights, events of default and other matters similar to those
contained in the Space System Contract and the Operations and Maintenance
Contract.
RISK ASSOCIATED WITH INTERNATIONAL OPERATIONS AND DEVELOPING MARKETS
Iridium expects that its telecommunications services will be
available in almost every country. As a result, Iridium and its gateway
operators and service providers will be subject to certain multinational
operational risks, such as changes in domestic and foreign government
regulations and telecommunications standards, licensing requirements, tariffs or
taxes and other trade barriers, price, wage and exchange controls, political,
social and economic instability, inflation, and interest rate and currency
fluctuations. There can be no assurance that Iridium, its gateway operators or
service providers will not be adversely affected by such multinational risks.
LIMITED SATELLITE CAPACITY
To provide commercially adequate service, ensure user acceptance and
operate successfully, the IRIDIUM System will have to provide minimum levels of
availability of IRIDIUM Satellite Services, which will depend upon system
capacity. Various factors, including usage patterns, will have a significant
impact on the capacity of the IRIDIUM System for a particular geographic area
and on a system-wide basis. Most important among these are usage patterns and
spectrum allocation. Iridium could experience unexpected usage patterns which
could exceed the capacity of the IRIDIUM System through one or several gateways.
If Iridium faces significant capacity issues, its ability to increase its
spectrum assignment in any market is subject to significant regulatory hurdles.
There can be no assurance that the necessary spectrum assignments will occur or
that adverse and unanticipated usage patterns will not materialize. Failure to
achieve a commercially viable capacity level for any reason, including but not
limited to those mentioned in this section, would materially and adversely
affect Iridium.
CONFLICTS OF INTEREST WITH MOTOROLA
Motorola has and will have various conflicts of interest with
Iridium. Motorola is the creator and developer of the concept of the IRIDIUM
System, the principal supplier to Iridium, a founding investor of Iridium
(through its predecessors), a gateway owner, Iridium LLC's largest Class 1
Interest holder, a holder of warrants to acquire Class 1 Interests and a warrant
to acquire Series M Class 2 Interests and the guarantor of Iridium's borrowings
under its Guaranteed Bank Facility.
Although Motorola does not by itself control the Iridium Board and
is not permitted to participate in decisions or other actions by Iridium with
respect to the Space System Contract, Operations and Maintenance Contract and
the Terrestrial Network Development Contract, Motorola, through its position as
(i) the indirect holder of the largest ownership interest in Iridium, (ii)
potentially the largest holder of Class A Common Stock (through exchanges of
Class 1 Interests for shares of Class A Common Stock), (iii) the guarantor under
the Motorola Guarantee and, if issued, the Motorola Additional Guarantee and
(iv) the principal supplier to Iridium, could in certain situations exercise
significant influence over Iridium. For example, in addition to its
representation on the Iridium Board, Motorola could have control over Iridium as
or similar to that of a creditor through its position as a guarantor under the
Guaranteed Bank Facility.
52
<PAGE> 8
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 thereunder are subject to certain limitations which
allocate various risks to Iridium and may have the effect of increasing the
price paid by Iridium. Iridium's payment obligations under these agreements are
expected to comprise most of its expenses.
CONFLICTS OF INTEREST WITH GATEWAY OWNERS
The Iridium Board consists of representatives of certain of the
world's leading telecommunications companies. Almost all of the members of the
Iridium Board have been appointed by investors in Iridium who also are gateway
owners and service providers. Because Iridium will be a supplier to the gateways
and the service providers, the interests of Iridium are expected to conflict in
certain respects with the interests of the gateway owners and the service
providers. For example, this conflict of interest will be relevant in setting
the wholesale prices that Iridium will charge for airtime and other IRIDIUM
Services.
ALLEGED HEALTH RISKS
Certain media reports have suggested possible links between the use
of portable cellular telephones which integrate transmitting antennas into their
handsets and certain health risks, including cancer, as well as possible
interference between digital cellular telephones and pacemakers, hearing aids
and other electronic medical devices. The FCC has issued amended and updated
guidelines for evaluating environmental radio frequency radiation from
FCC-regulated transmitters. These guidelines are intended to protect the public
from health risks due to exposure to radio frequency energy. Similar guidelines
were issued in 1996 by the International Commission on Non-Ionizing Radiation
Protection, an international body assigned to develop guidelines regarding
non-ionizing radiation. Guidelines are also being considered by certain other
international agencies. No assurance can be given that in the future other
standards bodies will not issue standards that could require or otherwise result
in phone modifications which may materially and adversely affect Iridium.
53
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Iridium
LLC's financial statements for the year ended June 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000948421
<NAME> IRIDIUM LLC
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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