<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 MARCH 31, 1999
IRIDIUM WORLD COMMUNICATIONS LTD.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
BERMUDA 0-22637 52-2025291
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
CLARENDON HOUSE, 2 CHURCH STREET, HAMILTON HM 11, BERMUDA
(441) 295-5950
(Address, including zip code, and telephone
number, including area code, of Registrant's principal executive offices)
---------------
IRIDIUM LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-22637-01 52-1984342
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone
number, including area code, of Registrant's principal executive offices)
---------------
IRIDIUM OPERATING LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-22637-02 52-2066319
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone
number, including area code, of Registrant's principal executive offices)
---------------
<PAGE> 2
IRIDIUM CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-31741-03 52-2048739
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone
number, including area code, of Registrant's principal executive offices)
---------------
IRIDIUM IP LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-31741-01 52-2048736
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone
number, including area code, of Registrant's principal executive offices)
---------------
IRIDIUM ROAMING LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-31741-02 52-2048734
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone
number, including area code, of Registrant's principal executive offices)
---------------
IRIDIUM FACILITIES CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-44349-04 52-2083969
(State or other jurisdiction (Commission file Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1575 EYE STREET, N.W., WASHINGTON, D.C. 20005
(202) 408-3800
(Address, including zip code, and telephone
number, including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
<TABLE>
<CAPTION>
SHARES OUTSTANDING
CLASS AT MAY 1, 1999
--------------------------- ------------------------
<S> <C>
Iridium World
Communications Ltd. 19,729,130
Common Stock, Class A
$0.01 par value per share
</TABLE>
<PAGE> 3
IRIDIUM WORLD COMMUNICATIONS LTD.
----------
IRIDIUM LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
----------
IRIDIUM OPERATING LLC
(A WHOLLY-OWNED SUBSIDIARY OF IRIDIUM LLC)
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
----------
IRIDIUM CAPITAL CORPORATION
IRIDIUM IP LLC
IRIDIUM ROAMING LLC
IRIDIUM FACILITIES CORPORATION
----------
INDEX TO FORM 10-Q
---------
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
PART I FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 Financial Statements
IRIDIUM WORLD COMMUNICATIONS LTD.
Condensed Balance Sheets
March 31, 1999 and December 31, 1998 5
Unaudited Condensed Statements of Loss
For the three months ended March 31, 1999 and 1998 6
Unaudited Condensed Statements of Cash Flows
For the three months ended March 31, 1999 and 1998 7
Notes to Unaudited Condensed Financial Statements 8
IRIDIUM LLC
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 10
Unaudited Condensed Consolidated Statements of Loss
For the three months ended March 31, 1999 and 1998 11
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
<S> <C> <C>
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998 12
Notes to Unaudited Condensed Consolidated Financial Statements 13
IRIDIUM OPERATING LLC (INCLUDING: IRIDIUM CAPITAL CORPORATION,
IRIDIUM IP LLC, IRIDIUM ROAMING LLC, IRIDIUM FACILITIES CORPORATION)
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 16
Unaudited Condensed Consolidated Statements of Loss
For the three months ended March 31, 1999 and 1998 17
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998 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 Disclosures About Market Risk 33
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 33
ITEM 2 Changes in Securities and Use of Proceeds 33
ITEM 3 Defaults upon Senior Securities 33
ITEM 4 Submission of Matters to a Vote of Security Holders 33
ITEM 5 Other Information 33
ITEM 6 Exhibits and Reports on Form 8-K 34
SIGNATURES 35
EXHIBIT INDEX 37
</TABLE>
4
<PAGE> 5
ITEM 1. FINANCIAL INFORMATION
IRIDIUM WORLD COMMUNICATIONS LTD.
CONDENSED BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1999
1998 (UNAUDITED)
------------ -----------
<S> <C> <C>
ASSETS
Cash.................................................................................. $ - $ -
Investment in Iridium LLC............................................................. 119,702 302,549
------------ -----------
Total assets.............................................................. $ 119,702 $ 302,549
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities........................................................................... $ - $ -
Stockholders' equity:
Class A Common stock, voting, par value $0.01; 50,000,000 shares authorized;
12,180,648 and 19,729,130 issued and outstanding............................... 122 197
Class B Common stock, nonvoting, par value $0.01; 2,500,000 shares authorized;
20,625 issued and outstanding.................................................. - -
Additional paid-in capital........................................................ 246,053 489,224
Accumulated deficit............................................................... (126,473) (186,872)
------------ -----------
119,702 302,549
------------ -----------
Total liabilities and stockholders' equity................................ $ 119,702 $ 302,549
============ ===========
</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
MARCH 31,
--------------------------------
1998 1999
------------ -------------
<S> <C> <C>
Equity in loss of Iridium LLC............................... $ 17,426 $ 60,399
------------ -------------
Loss before income taxes.................................... 17,426 60,399
Income taxes................................................ - -
------------ -------------
Net loss.................................................... $ 17,426 $ 60,399
============ ============
Net loss per Class A Common share - basic and diluted ...... $ 1.45 $ 3.44
============ ============
Weighted average shares used in computing
net loss per Class A Common share - basic and diluted..... 12,008,654 17,541,493
============ ============
</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>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (17,426) $ (60,399)
Adjustments to reconcile net loss to net cash
used in operating activities -
Equity in loss of Iridium LLC................... 17,426 60,399
---------- ----------
Net cash used in operating activities....................... - -
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Iridium LLC.............................. (583) (243,246)
---------- ----------
Net cash used in investing activities....................... (583) (243,246)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from equity offering....................... - 242,400
Proceeds from Class B Common Stock...................... 275 -
Proceeds from exercise of stock options................. 308 846
---------- ----------
Net cash provided by financing activities................... 583 243,246
---------- ----------
Increase 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 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.
Iridium LLC, through its wholly-owned subsidiary Iridium Operating LLC
("Iridium"), a Delaware limited liability company, has completed its efforts to
develop and deploy a global wireless system (the "Iridium System") that
enables subscribers to send and receive telephone calls virtually anywhere in
the world, all with one phone, one phone number and one customer bill. Iridium
commenced commercial satellite phone service on November 1, 1998 and commercial
satellite paging service on November 15, 1998. Iridium is transitioning from a
development stage limited liability company to an operating limited liability
company.
IWCL's sole asset is its investment in Iridium LLC. As of December 31,
1998 and March 31, 1999, IWCL owned 12,180,648 and 19,729,130 Class 1 Interests,
respectively, representing approximately 8.6% and 13.2% of the total outstanding
Class 1 Interests in Iridium LLC, respectively.
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 March 31, 1999 and the results of its
operations and its cash flows for the three months ended March 31, 1998 and
1999. 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 Iridium LLC and
footnotes thereto included in their joint Annual Report on Form 10-K for 1998.
Since its inception on December 12, 1996 through March 31, 1999, IWCL has
not entered into any material operating transactions or incurred any material
expenses. The results of operations for the three months ended March 31, 1998
and 1999 are not necessarily indicative of the results of operations expected in
the future.
3. EARNINGS 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 Iridium
LLC's issuance of Series A Senior Notes, stock options, and Class B Common
Stock. Due to losses incurred during the three months ended March 31, 1998 and
1999, the impact of the warrants, stock options, and Class B Common Stock is
anti-dilutive and is not included in the diluted earnings (loss) per share
calculation.
4. STOCKHOLDERS' EQUITY
On January 21, 1999, IWCL issued 7,500,000 shares of Class A Common Stock
in a public offering resulting in net proceeds of $242,400,000. Pursuant to the
Share Issuance Agreement between IWCL and Iridium LLC, such proceeds were used
by IWCL to purchase 7,500,000 Class 1 Interests in Iridium LLC.
8
<PAGE> 9
IRIDIUM WORLD COMMUNICATIONS LTD.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
5. DEBT
IWCL has no material indebtedness. However, Iridium's $800 million
secured bank facility contains various covenants, including covenants that
require Iridium to satisfy certain minimum revenue and subscriber levels as of
March 31, 1999, June 30, 1999 and September 30, 1999. These minimum subscriber
and revenue covenants included the condition that, at March 31, 1999, Iridium
have cumulative cash revenues of at least $4 million, cumulative accrued
revenues of at least $30 million, at least 27,000 Iridium World Satellite
Service subscribers and at least 52,000 total subscribers. As a result of
various factors, Iridium's subscriber levels and revenues for its initial
commercial operations have been significantly below its prior estimates and the
required covenant levels. Accordingly, Iridium requested and received a waiver
of compliance with the March 31, 1999 revenue and subscriber conditions from the
lenders under the secured bank facility. This waiver is conditioned on Iridium's
compliance with the March 31, 1999 minimum revenue and subscriber levels by May
31, 1999.
Iridium now expects, however, that it will not meet the March 31, 1999
minimum revenue and subscriber levels on May 31, 1999 as is required by the
waiver. Iridium is currently in negotiations with the lenders under the
secured bank facility regarding an amendment to the secured bank facility to
modify the revenue and subscriber covenants or, if an amendment cannot be
agreed upon, to obtain a waiver of such covenants. The lenders are under no
obligation to provide an amendment or waiver and there can be no assurance
that the lenders will agree to such an amendment or waiver. Failure to agree
to an amendment of the secured bank facility, or to obtain an additional
waiver thereunder, would result in default and subject the entire amount
outstanding under the secured bank facility to acceleration by the lenders and
the pursuit of other remedies, including enforcing their security interests in
substantially all of the assets of Iridium. Any such action by the lenders
would have a material adverse effect on Iridium, IWCL and Iridium LLC.
Because an amendment has not been agreed to and Iridium has not
received a waiver, the entire outstanding balance of approximately $800
million, along with the entire outstanding balances on the guaranteed bank
facility, senior subordinated notes and notes payable, all of which have
cross-default and/or cross-acceleration provisions, are classified as current
in the condensed consolidated financial statements of Iridium. Iridium had
approximately $480 million outstanding under the guaranteed bank facilities,
$337 million of senior subordinated notes and $1.4 billion of notes payable
outstanding as of March 31, 1999.
The failure of Iridium to negotiate an amendment to the $800 million
secured bank facility, or the inability of Iridium to negotiate an amendment on
favorable terms, could have a material adverse impact on Iridium's financial
position and results of operations. Since IWCL's sole asset is its investment in
Iridium LLC, IWCL's financial position and results of operations could also be
adversely impacted.
6. SUBSEQUENT EVENT
In April and May, 1999, various purported securities class action
lawsuits were filed against IWCL, Iridium LLC, Iridium, Motorola Inc., and
several former officers and directors of IWCL, Iridium LLC and Iridium, in the
United States District Court for the District of Columbia, alleging violations
of the federal securities laws during the period September 9, 1998 through
March 29, 1999.
Management believes that the allegations in the legal proceedings
described above are without merit and intends to vigorously defend against the
allegations.
9
<PAGE> 10
IRIDIUM LLC
(A Development Stage Limited Liability Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Member Interest Data)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1999
1998 (UNAUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents.......................................................... $ 24,756 $ 195,443
Accounts receivable, net of allowance of $93 and $126.............................. 93 1,316
Due from affiliates................................................................ 17,031 10,699
Prepaid expenses and other current assets.......................................... 15,021 11,649
-------------- --------------
Total current assets........................................................... 56,901 219,107
Property and equipment, net............................................................ 3,584,209 3,412,809
Other assets........................................................................... 97,785 87,598
-------------- --------------
Total assets................................................................... $ 3,738,895 $ 3,719,514
============== ==============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities :
Accounts payable and accrued expenses.............................................. $ 165,539 $ 113,105
Due to Member, current portion..................................................... 131,532 104,672
Bank facilities.................................................................... - 1,280,000
Senior subordinated notes (net of discount)........................................ - 337,423
Notes payable (net of discount), $1,450,000 principal amount....................... - 1,406,766
-------------- --------------
Total current liabilities...................................................... 297,071 3,241,966
Bank facilities........................................................................ 1,125,000 -
Senior subordinated notes (net of discount)............................................ 323,484 -
Notes payable (net of discount), $1,450,000 principal amount........................... 1,405,735 -
Due to Member, net of current portion.................................................. 86,240 225,421
Other liabilities...................................................................... 24,202 37,524
-------------- --------------
Total liabilities.............................................................. 3,261,732 3,504,911
-------------- --------------
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, 46,016 and 47,684 interests issued
and outstanding; liquidation value of $46,016 and $47,684 .............. 46,016 47,684
Series B, redeemable, 1 interest issued and outstanding.................... - -
Series C, redeemable, 75 interests issued and outstanding.................. - -
Class 1 Interests, authorized 225,000,000 interests, 141,420,453 and
148,968,935 interests issued and outstanding.................................. 2,114,316 2,355,409
Deferred Class 1 Interest compensation............................................. (1,162) (1,082)
Adjustment for minimum pension liability........................................... (1,813) (1,813)
Deficit accumulated during the development stage................................... (1,680,194) (2,185,595)
-------------- --------------
Total members' equity.......................................................... 477,163 214,603
-------------- --------------
Total liabilities and members' equity.......................................... $ 3,738,895 $ 3,719,514
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
10
<PAGE> 11
IRIDIUM LLC
( A Development Stage Limited Liability Company )
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In Thousands Except Member Interest Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD FROM
MARCH 31, JUNE 14, 1991
----------------------------- (INCEPTION) THROUGH
1998 1999 MARCH 31, 1999
------------ ------------ -------------------
<S> <C> <C> <C>
Revenues............................................. $ - $ 1,451 $ 1,637
Operating expenses:
Sales, general and administrative................ 60,511 181,810 930,972
Depreciation and amortization.................... 107,791 205,901 879,242
------------ ------------ -------------
Total operating expenses.................... 168,302 387,711 1,810,214
------------ ------------ -------------
Operating loss....................................... 168,302 386,260 1,808,577
Other income and expenses:
Interest expense, net............................ 35,264 119,141 369,047
------------ ------------ -------------
Loss before provision for income taxes............... 203,566 505,401 2,177,624
Provision for income taxes........................... - - 7,971
------------ ------------ -------------
Net loss............................................. $ 203,566 $ 505,401 $ 2,185,595
============ ============ =============
Preferred dividend requirement....................... 1,447 1,668
------------ ------------
Net loss applicable to Class 1 Interests............. $ 205,013 $ 507,069
============ ============
Net loss per Class 1 Interest - basic and diluted.... $ 1.45 $ 3.45
============ ============
Weighted average interests used in computing
net loss per Class 1 Interest - basic and diluted.. 141,227,834 146,781,298
============ ============
</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>
PERIOD FROM
THREE MONTHS ENDED JUNE 14, 1991
MARCH 31, (INCEPTION)
----------------------- THROUGH
1998 1999 MARCH 31, 1999
---------- ---------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $ (203,566) $ (505,401) $ (2,185,595)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization.......................................... 107,791 205,901 879,242
Interest converted to additional debt.................................. - 13,939 157,905
Amortization of financing costs........................................ - 8,657 8,657
Expense recognized for warrants issued in
connection with debt guarantee and other compensation............ 5,261 315 128,356
Employee Class 1 Interest compensation................................ 50 80 524
Loss on disposal of assets............................................. - 39,270 39,357
Changes in assets and liabilities:
Increase in accounts receivable.................................. - (1,223) (1,316)
Decrease (Increase) in prepaid expenses and other current assets. (882) 3,372 (11,649)
Decrease (Increase) in due from affiliates....................... 44 6,331 (10,700)
Decrease (Increase) in other assets.............................. (11,506) 2,438 (16,652)
(Decrease) Increase in accounts payable and accrued expenses..... (11,627) 111,633 184,403
Increase in other liabilities.................................... 1,857 11,578 25,522
---------- ---------- --------------
Net cash used in operating activities................... (112,578) (103,110) (801,946)
---------- ---------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................................. (129,275) (123,649) (3,990,129)
---------- ---------- --------------
Net cash used in investing activities................... (129,275) (123,649) (3,990,129)
---------- ---------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class 1 and Class 2 Interests.......................... 583 242,446 2,223,838
Net proceeds from issuance of senior notes and warrants.............................. - - 1,618,959
Borrowings under guaranteed bank line of credit...................................... 75,000 - 2,131,500
Payments under guaranteed bank line of credit........................................ - (145,000) (1,651,500)
Borrowings under senior secured line of credit....................................... - 300,000 1,210,000
Payments under senior secured line of credit......................................... - - (410,000)
Decrease in restricted cash.......................................................... 350,220 - -
Deferred financing costs............................................................. (830) - (135,279)
---------- ---------- --------------
Net cash provided by financing activities............... 424,973 397,446 4,987,518
---------- ---------- --------------
Increase in cash and cash equivalents.................................................. 183,120 170,687 195,443
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................................... 9,040 24,756 -
---------- ---------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................... $ 192,160 $ 195,443 $ 195,443
========== ========== ==============
</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 have completed their
efforts to develop and deploy a global wireless system (the "Iridium System")
that enables subscribers to send and receive telephone calls virtually anywhere
in the world - all with one phone, one phone number and one customer bill.
Iridium commenced commercial satellite phone service on November 1, 1998 and
commercial satellite paging service on November 15, 1998. The Parent, including
its subsidiaries, is transitioning from a development stage limited liability
company to an operating limited liability company.
Iridium, Inc., the predecessor to the Parent, 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. 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").
As a result of a series of private placements and the offerings 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 18%
as of March 31, 1999, before considering unexercised warrants held by Motorola.
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. 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. The Parent's only
significant asset is its investment in Iridium.
The Iridium System is subject to regulation by the Federal Communications
Commission ("FCC"), and by foreign administrations and regulatory bodies. On
January 31, 1995, Motorola obtained a license from the FCC to construct, launch
and operate the Iridium System, subject to certain conditions.
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 March 31, 1999, and the results of
their operations and their cash flows for the three month periods ended March
31, 1998 and 1999, and the period from June 14, 1991 (inception) through March
31, 1999. These condensed consolidated financial statements are unaudited, and
do not include all related footnote disclosures. The results of operations for
the three months ended March 31, 1998 and 1999 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 significant
revenues are generated. 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 for 1998.
3. MEMBERS' EQUITY
The Parent declared approximately $1,447,000 and $1,668,000 of in-kind
dividends to holders of Series A Class 2 Membership Interests during the three
month periods ended March 31, 1998 and 1999, respectively.
On January 21, 1999, IWCL issued 7,500,000 shares of Class A Common Stock
in a public offering resulting
13
<PAGE> 14
IRIDIUM LLC
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
in net proceeds to IWCL of approximately $242,400,000. Pursuant to the Share
Issuance Agreement between IWCL and Iridium LLC, all of such proceeds were used
to purchase 7,500,000 Class 1 Interests in the Parent. Upon receipt, Parent
transferred the proceeds from the sale of Class 1 Interests to Iridium. Iridium
has used a portion of such proceeds to fund operations.
4. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 1998 and 1999, $79,447,000 and
$121,365,000, respectively, of interest costs were incurred. For the three
months ended March 31, 1999, all interest was expensed. Interest expensed for
the three months ended March 31, 1998 was $40,000,000 with the remaining
interest capitalized to the system under construction. Interest paid was
$75,408,000 and $102,881,000 during the three months ended March 31, 1998 and
1999, respectively.
5. EARNINGS PER CLASS 1 INTEREST
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 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 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 months ended March 31,
1998 and 1999, the impact of other potentially dilutive securities is
anti-dilutive and is not included in the diluted earnings (loss) per Class 1
Interest calculation.
6. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income. In 1998 and 1999, the amounts
associated with the components of other comprehensive income relate to the
Parent's adjustment for minimum pension liability and are not material.
7. SATELLITE LOSS
In March 1999, Iridium disposed of a satellite due to mechanical
malfunction, resulting in a loss of approximately $39 million which is included
as a component of general operating expense in the condensed consolidated
statement of loss. The satellite was replaced, by Motorola, with an in-orbit
spare satellite as part of the Operating and Maintenance Contract between
Iridium and Motorola.
8. DEBT
Iridium's $800 million secured bank facility contains various covenants,
including covenants that require Iridium to satisfy certain minimum revenue and
subscriber levels as of March 31, 1999, June 30, 1999 and September 30, 1999.
These minimum subscriber and revenue covenants included the condition that, at
March 31, 1999, Iridium have cumulative cash revenues of at least $4 million,
cumulative accrued revenues of at least $30 million, at least 27,000 Iridium
World Satellite Service subscribers and at least 52,000 total subscribers. As a
result of various factors, Iridium's subscriber levels and revenues for its
initial commercial operations have been significantly below its prior estimates
and the required covenant levels. Accordingly, Iridium requested and received a
waiver of compliance with the March 31, 1999 revenue and subscriber conditions
from the lenders under the secured bank facility. This waiver is conditioned on
Iridium's compliance with the March 31, 1999 minimum revenue and subscriber
levels by May 31, 1999.
Iridium now expects, however, that it will not meet the March 31, 1999
minimum revenue and subscriber levels on May 31, 1999 as is required by the
waiver. Iridium is currently in negotiations with the lenders under the secured
bank facility regarding an amendment to the secured bank facility to modify the
revenue and subscriber covenants or, if an amendment cannot be agreed upon, to
obtain a waiver of such covenants. The lenders are under no obligation to
provide an amendment or
14
<PAGE> 15
IRIDIUM LLC
(A Development Stage Limited Liability Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
waiver and there can be no assurance that the lenders will agree to such an
amendment or waiver. Failure to agree to an amendment of the secured bank
facility, or to obtain an additional waiver thereunder, would result in default
and subject the entire amount outstanding under the secured bank facility to
acceleration by the lenders and the pursuit of other remedies, including
enforcing their security interests in substantially all of the assets of
Iridium. Any such action by the lenders would have a material adverse effect on
Iridium, IWCL and the Parent.
Because an amendment has not been agreed to and Iridium has not received
a waiver, the entire outstanding balance of approximately $800 million, along
with the entire outstanding balances on the guaranteed bank facility, senior
subordinated notes and notes payable, all of which have cross-default and/or
cross-acceleration provisions, are classified as current in the accompanying
condensed consolidated financial statements. Iridium had approximately $480
million outstanding under the guaranteed bank facilities, $337 million of senior
subordinated notes and $1.4 billion of notes payable outstanding as of March 31,
1999.
9. SUBSEQUENT EVENT
In April and May, 1999, various purported securities class action
lawsuits were filed against IWCL, Parent, Iridium, Motorola Inc., and several
former officers and directors of IWCL, Parent and Iridium, in the United States
District Court for the District of Columbia, alleging violations of the federal
securities laws during the period September 9, 1998 through March 29, 1999.
Management believes that the allegations in the legal proceedings
described above are without merit and intends to vigorously defend against the
allegations.
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>
MARCH 31,
DECEMBER 31, 1999
1998 (UNAUDITED)
------------ -----------
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents.................................... $ 24,756 $ 195,443
Accounts receivable, net of allowance of $93 and $126........ 93 1,316
Due from affiliates.......................................... 17,031 10,699
Prepaid expenses and other current assets.................... 15,021 11,649
------------ -----------
Total current assets..................................... 56,901 219,107
Property and equipment, net...................................... 3,584,209 3,412,809
Other assets..................................................... 97,237 87,122
------------ -----------
Total assets............................................. $ 3,738,347 $ 3,719,038
============ ===========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities :
Accounts payable and accrued expenses........................ $ 165,539 $ 113,105
Due to Parent's Member, current portion...................... 131,532 104,672
Bank facilities.............................................. - 1,280,000
Senior subordinated notes (net of discount).................. - 337,423
Notes payable (net of discount), $1,450,000 principal amount. - 1,406,766
------------ -----------
Total current liabilities................................ 297,071 3,241,966
Bank facilities.................................................. 1,125,000 -
Senior subordinated notes (net of discount)...................... 323,484 -
Notes payable (net of discount), $1,450,000 principal amount..... 1,405,735 -
Due to Parent's Member, net of current portion................... 86,240 225,421
Other liabilities................................................ 24,202 37,524
------------ -----------
Total liabilities........................................ 3,261,732 3,504,911
------------ -----------
Commitments and Contingencies
Member's equity :
Member's Interest............................................ 2,158,178 2,401,011
Deficit accumulated during the development stage............. (1,679,750) (2,185,071)
Adjustment for minimum pension liability..................... (1,813) (1,813)
------------ -----------
Total member's equity.................................... 476,615 214,127
------------ -----------
Total liabilities and member's equity.................... $ 3,738,347 $ 3,719,038
============ ===========
</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>
THREE MONTHS ENDED PERIOD FROM
MARCH 31, JUNE 14, 1991
----------------------------------------- (INCEPTION) THROUGH
1998 1999 MARCH 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues............................................... $ - $ 1,451 $ 1,637
Operating expenses:
Sales, general and administrative.................. 60,461 181,730 930,448
Depreciation and amortization...................... 107,791 205,901 879,242
----------------- ----------------- -----------------
Total operating expenses....................... 168,252 387,631 1,809,690
----------------- ----------------- -----------------
Operating loss......................................... 168,252 386,180 1,808,053
Other income and expenses:
Interest expense, net.............................. 35,264 119,141 369,047
----------------- ----------------- -----------------
Loss before provision for income taxes ................ 203,516 505,321 2,177,100
Provision for income taxes............................. - - 7,971
----------------- ----------------- -----------------
Net loss............................................... $ 203,516 $ 505,321 $ 2,185,071
================= ================= =================
</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
THREE MONTHS ENDED MARCH 31, JUNE 14, 1991
---------------------------------- (INCEPTION) THROUGH
1998 1999 MARCH 31, 1999
--------------- -------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (203,516) $ (505,321) $ (2,185,071)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............................. 107,791 205,901 879,242
Interest converted to additional debt...................... - 13,939 157,905
Amortization of financing costs............................ - 8,657 8,657
Expense recognized for warrants issued in
connection with debt guarantee........................... 5,261 315 128,356
Loss on disposal of assets................................. - 39,270 39,357
Changes in assets and liabilities:
Increase in accounts receivable.......................... - (1,223) (1,316)
Decrease (Increase) in prepaid expenses and other current
assets................................................. (882) 3,372 (11,649)
Decrease (Increase) in due from affiliates............... 44 6,331 (10,700)
Decrease (Increase) in other assets...................... (10,958) 2,438 (16,652)
(Decrease) Increase in accounts payable and accrued
expenses............................................... (11,627) 111,633 184,403
Increase in other liabilities............................ 1,857 11,578 25,522
--------------- -------------- -----------------
Net cash used in operating activities.................. (112,030) (103,110) (801,946)
--------------- -------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (129,275) (123,649) (3,990,129)
--------------- -------------- -----------------
Net cash used in investing activities.................. (129,275) (123,649) (3,990,129)
--------------- -------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Parent's Class 1 and Class 2
Interests.................................................... 583 242,446 2,223,838
Net proceeds from issuance of senior notes and warrants........ - - 1,618,959
Borrowings under guaranteed bank line of credit................ 75,000 - 2,131,500
Payments under guaranteed bank line of credit.................. - (145,000) (1,651,500)
Borrowings under senior secured line of credit................. - 300,000 1,210,000
Payments under senior secured line of credit................... - - (410,000)
Decrease in restricted cash.................................... 350,220 - -
Deferred financing costs....................................... (830) - (135,279)
Transfer to Parent............................................. 2,552 - -
--------------- -------------- -----------------
Net cash provided by financing activities.............. 427,525 397,446 4,987,518
--------------- -------------- -----------------
Increase in cash and cash equivalents............................ 186,220 170,687 195,443
CASH AND CASH EQUIVALENTS, beginning of period................... 5,940 24,756 -
--------------- -------------- -----------------
CASH AND CASH EQUIVALENTS, end of period......................... $ 192,160 $ 195,443 $ 195,443
=============== ============== =================
</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"), has completed its efforts to develop and deploy a global
wireless system (the "Iridium System") that enables subscribers to send and
receive telephone calls virtually anywhere in the world - all with one phone,
one phone number and one customer bill. Iridium commenced commercial satellite
phone service on November 1, 1998 and commercial satellite paging service on
November 15, 1998. Iridium is transitioning from a development stage limited
liability company to an operating limited liability company.
Iridium, Inc., the predecessor to the Parent, 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. 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").
As a result of a series of private placements and the offerings 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 18%
as of March 31, 1999, before considering unexercised warrants held by Motorola.
On December 18, 1997, the Parent entered into an asset drop-down
transaction (the "Asset Drop-Down Transaction") with 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. 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. The Parent's only significant asset is
its investment in Iridium.
The Iridium System is subject to regulation by the Federal Communications
Commission ("FCC"), and by foreign administrations and regulatory bodies. On
January 31, 1995, Motorola obtained a license from the FCC to construct, launch
and operate the Iridium System, subject to certain conditions.
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 March 31, 1999, and the results of
their operations and their cash flows for the three month periods ended March
31, 1998 and 1999, and the period from June 14, 1991 (inception) through March
31, 1999. These condensed consolidated financial statements are unaudited, and
do not include all related footnote disclosures. The results of operations for
the three months ended March 31, 1998 and 1999 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 substantial revenues
are generated. 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 for 1998.
3. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 1998 and 1999, $79,447,000 and
$121,365,000, respectively, of interest costs were incurred. For the three
months ended March 31, 1999, all interest was expensed. Interest expensed for
the three months ended March 31, 1998 was $40,000,000 with the remaining
interest capitalized to the system under
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
construction. Interest paid was $75,408,000 and $102,881,000 during the three
months ended March 31, 1998 and 1999, respectively.
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income. In 1998 and 1999, the amounts
associated with the components of other comprehensive income relate to Iridium's
adjustment for minimum pension liability and are not material.
5. SATELLITE LOSS
In March 1999, Iridium disposed of a satellite due to mechanical
malfunction, resulting in a loss of approximately $39 million which is included
as a component of general operating expense in the condensed consolidated
statement of loss. The satellite was replaced, by Motorola, with an in-orbit
spare satellite as part of the Operating and Maintenance Contract between
Iridium and Motorola.
6. DEBT
Iridium's $800 million secured bank facility contains various covenants,
including covenants that require Iridium to satisfy certain minimum revenue and
subscriber levels as of March 31, 1999, June 30, 1999 and September 30, 1999.
These minimum subscriber and revenue covenants included the condition that, at
March 31, 1999, Iridium have cumulative cash revenues of at least $4 million,
cumulative accrued revenues of at least $30 million, at least 27,000 Iridium
World Satellite Service subscribers and at least 52,000 total subscribers. As a
result of various factors, Iridium's subscriber levels and revenues for its
initial commercial operations have been significantly below its prior estimates
and the required covenant levels. Accordingly, Iridium requested and received a
waiver of compliance with the March 31, 1999 revenue and subscriber conditions
from the lenders under the secured bank facility. This waiver is conditioned on
Iridium's compliance with the March 31, 1999 minimum revenue and subscriber
levels by May 31, 1999.
Iridium now expects, however, that it will not meet the March 31, 1999
minimum revenue and subscriber levels on May 31, 1999 as is required by the
waiver. Iridium is currently in negotiations with the lenders under the secured
bank facility regarding an amendment to the secured bank facility to modify the
revenue and subscriber covenants or, if an amendment cannot be agreed upon, to
obtain a waiver of such covenants. The lenders are under no obligation to
provide an amendment or waiver and there can be no assurance that the lenders
will agree to such an amendment or waiver. Failure to agree to an amendment of
the secured bank facility, or to obtain an additional waiver thereunder, would
result in default and subject the entire amount outstanding under the secured
bank facility to acceleration by the lenders and the pursuit of other remedies,
including enforcing their security interests in substantially all of the assets
of Iridium. Any such action by the lenders would have a material adverse effect
on Iridium, IWCL and Iridium LLC.
Because an amendment has not been agreed to and Iridium has not
received a waiver, the entire outstanding balance of approximately $800
million, along with the entire outstanding balances on the guaranteed bank
facility, senior subordinated notes and notes payable, all of which have
cross-default and/or cross-acceleration provisions, are classified as current
in the accompanying condensed consolidated financial statements. Iridium had
approximately $480 million outstanding under the guaranteed bank facilities,
$337 million of senior subordinated notes and $1.4 billion of notes payable
outstanding as of March 31, 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
7. IRIDIUM SUBSIDIARIES
The Series A Senior Notes, Series B Senior Notes, Series C Senior Notes
and Series D Senior Notes (collectively the "Senior Notes"), which approximate
$1.45 billion of aggregate principal, 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, Iridium Facilities Corporation and Iridium (Potomac) LLC
(collectively, the "Guarantor Subsidiaries" and together with Capital, the
"Iridium Subsidiaries"). Each of the Iridium Subsidiaries is a wholly-owned
subsidiary of Iridium. Iridium Canada Facilities Inc., a wholly-owned foreign
subsidiary of Iridium, has not guaranteed the Senior Notes, and had operations
since inception that were inconsequential to the business of Iridium. 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 was
formed by Iridium on February 6, 1998. Iridium Canada Facilities Inc. was formed
by Iridium on March 19, 1998. Iridium (Potomac) LLC was formed by Iridium on
February 17, 1999.
The following is summarized financial information of Capital as of March
31, 1999 and for the period from inception through March 31, 1999. Full
financial statements of Capital are not presented because management believes
they are not material to investors.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
(THOUSANDS)
<S> <C>
Current assets........ $ 0
Total assets.......... 0
Current liabilities... 0
Total liabilities..... 0
</TABLE>
- ------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
INCEPTION THROUGH
MARCH 31, 1999
-------------------
<S> <C>
Net revenues.......... $ 0
Operating expenses.... 0
Net loss.............. 0
</TABLE>
Iridium has recognized the obligations relating to the Senior Notes
because Capital has no operations to service such obligations.
The following is summarized financial information of the Guarantor
Subsidiaries as of March 31, 1999 and for the period from inception of each of
the Guarantor Subsidiaries through March 31, 1999. Full financial statements of
the Guarantor Subsidiaries are not presented because management believes they
are not material to investors.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
Current assets............ $ 0
Total assets.............. 0
Current liabilities....... 0
Total liabilities......... 0
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
INCEPTION THROUGH
MARCH 31, 1999
-------------------
<S> <C>
Net revenues.............. $ 0
Operating expenses........ 0
</TABLE>
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
<TABLE>
<S> <C>
Net loss.................. 0
</TABLE>
8. SUBSEQUENT EVENT
In April and May, 1999, various purported securities class action
lawsuits were filed against IWCL, Parent, Iridium, Motorola Inc., and several
former officers and directors of IWCL, Parent and Iridium, in the United States
District Court for the District of Columbia, alleging violations of the federal
securities laws during the period September 9, 1998 through March 29, 1999.
Management believes that the allegations in the legal proceedings
described above are without merit and intends to vigorously defend against the
allegations.
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This quarterly report is filed jointly by Iridium World Communications
Ltd., or "IWCL", Iridium LLC, or "Parent", Iridium Operating LLC, or "Iridium",
Iridium Capital Corporation, or "Capital", Iridium Roaming LLC, or "Roaming",
Iridium IP LLC, or "IP", and Iridium Facilities Corporation, or "Facilities".
Unless otherwise indicated, the information contained in this report is
presented as of May 13, 1999.
IWCL is a member of Parent and has no other business. IWCL has no
operations other than those related to its interests in Parent. IWCL's sole
assets are its membership interests in Parent and its warrants to acquire
membership interests in Parent and, accordingly, IWCL's results of operations
reflect its proportionate share of the results of operations of Parent on an
equity accounting basis. As of March 31, 1998, IWCL owned approximately 13.3%
of the total outstanding Class 1 Interests in Parent. The business of Iridium
constitutes substantially all of the business of Parent.
Accordingly, the management's discussion and analysis section of this
report focuses on the financial condition and results of operations of Iridium.
RECENT DEVELOPMENTS - IRIDIUM IS EXPERIENCING SUBSTANTIAL DIFFICULTIES
TRANSITIONING FROM A DEVELOPMENT STAGE COMPANY TO AN OPERATING COMPANY
In the fourth quarter of 1998, Iridium began the transition from a
development stage company into an operating company. Iridium has experienced
significant difficulties in making this transition, including that its
subscriber ramp-up and revenue generation have been substantially below its
expectations. Iridium believes the factors that have negatively affected its
results include initial difficulties in the distribution of phones and pagers
and an inability of Iridium and its gateways to effectively market and
distribute Iridium World Services. In addition, Iridium believes that it will be
necessary to revise its business plan to increase subscriber demand and
revenue generation. Initiatives Iridium is considering include changing its
pricing structure and restructuring its indebtedness.
As a result of its substantially lower than anticipated subscriber
ramp-up and revenue generation, Iridium is facing additional financial and
operational risks and challenges, including (i) the risk of default under its
secured bank facility on May 31, 1999 and related cross-defaults under its
guaranteed bank facilities, senior notes and senior subordinated notes, (ii)
the need to raise substantial additional funding and (iii) the need to revise
its business plan to (a) increase subscriber ramp-up and revenues from
operations and, simultaneously, (b) decrease its relatively high current fixed
costs, including interest and operating expenses. These risks and challenges
are described in greater detail below. For additional information regarding
the challenges and risks Iridium faces, see Exhibit 99 to this report.
Secured Bank Facility and Guaranteed Bank Facilities. On December 23,
1998, Iridium closed on three new bank credit facilities providing for an
aggregate amount of up to approximately $1.55 billion of borrowings -- the $800
million secured bank facility due December 29, 2000 and the $750 million
(collectively) Motorola guaranteed bank facilities (which includes a $475
million term credit facility due December 29, 2000 and a $275 million revolving
credit facility due December 31, 2001). The secured bank facility is secured
by, among other things, substantially all of Iridium's assets. Borrowings under
the Motorola guaranteed bank facilities are guaranteed by Motorola. Pursuant to
the Motorola MOU and the Motorola ARG (two agreements among Motorola, Parent
and Iridium regarding Motorola's credit support of Iridium and the compensation
due from Iridium and Parent for such support which are described in greater
detail in the registrants' annual report on Form 10-K for 1998), Iridium is
required to compensate Motorola with equity and cash for, among other things,
providing guarantees of Iridium's borrowings under the Motorola guaranteed bank
facilities.
23
<PAGE> 24
Iridium Expects that it Will Not Satisfy the Secured Bank Facility Revenue and
Subscriber Covenants. Iridium's secured bank facility contains various
covenants, including covenants that require Iridium to satisfy certain minimum
revenue and subscriber levels as of March 31, 1999, June 30, 1999 and September
30, 1999. These minimum subscriber and revenue covenants include the condition
that, at March 31, 1999, Iridium have cumulative cash revenues of at least $4
million, cumulative accrued revenues of at least $30 million, at least 27,000
Iridium World Satellite Service subscribers and at least 52,000 total
subscribers. As a result of various factors, Iridium's subscriber levels and
revenues have been significantly below its prior estimates. Accordingly,
Iridium requested and received a waiver of compliance with the March 31, 1999
revenue and subscriber conditions from the lenders under the secured bank
facility. This waiver is conditioned on Iridium's compliance with the March 31,
1999 minimum revenue and subscriber levels by May 31, 1999, and does not affect
or constitute a waiver of any other term of the secured bank facility,
including the minimum revenue and subscriber conditions at June 30, 1999 and
September 30, 1999
As of March 31, 1999, Iridium had $195,000 of cumulative cash
revenues, $1.637 million of cumulative accrued revenues, 7,188 Iridium World
Satellite Service subscribers and 10,294 total subscribers. Iridium now expects
that it will not satisfy the secured bank facility's May 31, 1999 (extended from
March 31, 1999) minimum subscriber and revenue covenants and also expects that
it will not be able to satisfy the June 30, 1999 and September 30, 1999
covenants. Iridium has engaged the lenders under the secured bank facility in
negotiations regarding a waiver of, or amendment to, these covenants. The
lenders are under no obligation to provide such a waiver or amendment and
Iridium can provide no assurance that a waiver or amendment will be received.
If a waiver or amendment is not received, a default would occur and the lenders
under the secured bank facility would have the right to, among other remedies,
accelerate the payment of the $800 million principal amount of the facility
(and all other amounts due thereunder) and enforce their security interests in
substantially all of the assets of Iridium, including the Iridium System. A
default under the secured bank facility likely would have a material adverse
effect on Iridium and on Parent and IWCL. In addition, if an amendment or waiver
is received, in consideration for agreeing to such an amendment or waiver, the
lenders under the secured bank facility likely would require Iridium to agree
to additional covenants and provide additional compensation.
Cross Default and Cross Acceleration of Indebtedness. In addition, if
there is a default under the secured bank facility or the lenders under the
secured bank facility accelerate Iridium's obligations or pursue certain other
remedies, then as a result of cross-default (guaranteed bank facilities) and/or
cross-acceleration (senior notes and senior subordinated notes) provisions, the
outstanding indebtedness under Iridium's guaranteed bank facilities, senior
notes and senior subordinated notes could be accelerated by the holders
thereof. As of March 31, 1999, Iridium had approximately $480 million
outstanding under the guaranteed bank facilities, approximately $1.45 billion
of senior notes outstanding and approximately $337 million of senior
subordinated notes outstanding.
Substantial Subscriber Ramp-up and Revenue Generation Problems.
Iridium believes that its slower than expected subscriber ramp-up and revenue
generation have been initially the result of problems with the initial
distribution of subscriber equipment, a shortage of fully-trained service
providers and sales personnel and a lack of effective marketing and
distribution of Iridium World Services by Iridium, its gateways and its service
providers. During the initial roll-out of Iridium World Services, (i) Kyocera
experienced significant difficulties in achieving Iridium's quality control
standards and was unable to ship significant quantities of phones until early
March of 1999, (ii) there were substantial difficulties in distributing phones
and pagers to various markets around the world, (iii) although Motorola's
satellite phones and pagers were available, the production of cellular
cassettes for its dual mode satellite/cellular phones and some other
accessories was delayed, and (iv) Iridium and its gateway operators had
difficulty identifying and training service providers and their sales staffs.
Iridium believes that, as a result of various factors, significant
portions of its target markets have developed negative impressions about the
quality and pricing of Iridium World Services. Iridium is in the process of
developing and implementing various initiatives to appropriately address this
problem. For example, Iridium has found that its initial service pricing was
too complex and has undertaken a process of simplifying these prices as part
of the revisions to its business plan.
Revision of Business Plan -- Revenue Generation and Cost Structure.
While Iridium believes that the initial problems with the availability of
satellite phones and pagers largely have been addressed, Iridium believes that
its strategy for marketing and distribution of Iridium World Services,
including its method for implementing its business strategy with its gateways
and service providers, needs to be revised. Accordingly, Iridium and its
gateways are in the process of revising Iridium's business plan to increase
subscriber ramp-up and revenue generation. The initiatives Iridium and its
gateways are developing likely will take time to finalize and implement.
Iridium also is in the process of revising its revenue and subscriber estimates
in light of its initial marketing and distribution difficulties and its
expected revisions to its business plan. Iridium expects this revision will
result in significantly lower estimates of revenues from operations and
accordingly, will adversely affect its prior expectation about its financial
condition, including (i) its ability to meet the minimum revenue and subscriber
covenants and other terms of the secured bank facility, (ii) its future sources
of funds from revenues from operations and (iii) its financing needs.
Iridium expects that it estimates regarding future funds from
operations will be significantly below its prior estimates and expects that it
will require substantial additional funding.
Efforts to Reduce Fixed Costs. Simultaneously with its efforts to
increase revenues, Iridium is the process of exploring various alternatives for
reducing its high current fixed costs, including substantial interest and
operating expenses. These alternatives include debt restructuring and operating
cost reductions.
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Retention of Donaldson, Lufkin and Jenrette. On May 13, 1999, Iridium
retained Donaldson, Lufkin and Jenrette, ("DLJ"), to assist it in evaluating
and reviewing alternatives to restructure its indebtedness and reduce financing
costs.
Claircom Acquisition. On December 22, 1998, Parent and Iridium Aero
Acquisition Sub, Inc., or "Aero", a Delaware corporation and a wholly-owned
subsidiary of Parent, entered into a stock purchase agreement pursuant to which
Aero agreed to acquire all of the outstanding capital stock of Claircom
Communications Group, Inc., a Delaware corporation and a provider of in-flight
phone service for commercial and executive aircraft, from ATGI, Inc., a
Delaware corporation and a wholly-owned subsidiary of AT&T Wireless Services,
Inc., and Rogers Cantel Inc. Aero agreed to acquire the Claircom shares for an
estimated aggregate price of approximately $65 million, consisting of
approximately $25.6 million in cash to be paid at closing and approximately
$39.4 million of notes of Claircom which will be guaranteed by Parent and
issued to the sellers of the Claircom shares immediately prior to closing. The
aggregate purchase price is subject to certain adjustments, including working
capital adjustments and adjustments for capital expenditures made for the
benefit of Claircom prior to the closing. The Claircom notes are to have a term
of nine years and pay interest at a rate of 8% per annum, but not require any
payments for the first two years following their issuance -- interest accrued
during the first two-year period is to be added to the principal amount of the
notes. These Claircom notes also are to contain certain restrictive covenants,
including restrictions on dividends, and are to be secured by substantially all
of the assets of Claircom and a pledge of the Claircom shares by Aero.
It is uncertain whether this acquisition will be consummated. Parent
and Aero currently do not have sufficient cash available to satisfy the $26.5
million cash payment required at closing and their ability to raise cash to
fund such payment is substantially constrained by Iridium's current financial
difficulties. While Iridium has sufficient funds to conclude this transaction,
the payment by Iridium would require approval of the lenders under the secured
bank facility. Iridium is currently evaluating whether the acquisition is in
the best interests of Iridium and Parent in light of its current financial
difficulties.
LIQUIDITY AND CAPITAL RESOURCES
Iridium's Expectations About Its Future Operations and Funding
Requirements Are Forward Looking. The statements in this report regarding
Iridium's future funding requirements and funding sources for 1999 and
thereafter are estimates and are forward looking. Actual results are likely to
differ, and may differ materially, from the information expressed or implied in
such statements. These estimates are based on a number of assumptions,
including Iridium's expectations about its ability to generate revenues from
operations and to obtain additional financing, and should be viewed in light of
the following facts: (i) Iridium expects that it will fail to meet the May 31,
1999 minimum subscriber and revenue covenants under its secured bank facility
(these conditions were extended from March 31, 1999 by waiver) and such a
failure (in the absence of an applicable amendment or waiver) generally would
give the lenders under the facility the right to pursue various remedies,
including enforcing their security interests in substantially all of the
assets of Iridium and could result in the acceleration of Iridium's other
approximately $2.27 billion in indebtedness; (ii) Iridium has only a six month
history of operations and no meaningful revenues and there is no operational
service that provides a direct comparison to Iridium's services; (iii) Iridium
expects to need substantial additional external funding and the availability of
additional sources of funding is constrained by many factors, including factors
beyond Iridium's control; and (iv) Iridium faces many challenges and risks.
There are many factors that could cause these forward looking statements to be
inaccurate. See "Recent Developments -- Iridium is Experiencing Substantial
Difficulties in Transitioning from a Development Stage Company to an Operating
Company" and Exhibit 99 to this report for further discussion of some of the
factors which could result in Iridium's forward looking statements proving to
be incorrect.
Transition to an Operating Company -- Shift in Operations. Prior to
the fourth quarter of 1998, Iridium devoted substantially all of its operations
efforts to the design, construction and development of the Iridium System and
to preparation for the commercial operation of the Iridium System. Iridium
expects that its efforts for 1999 and the two to three years thereafter will
focus on the operation of the Iridium System, the provision of global wireless
telecommunications services and the attraction and retention of customers.
Transition to an Operating Company -- Shift in Factors Affecting
Financial Condition. Prior to year-end 1998, Iridium's funding requirements
principally were driven by the cost of the construction and deployment of the
Iridium System and interest expense (in 1997 and 1998). During this development
stage period, Iridium had no meaningful revenue and, accordingly, relied on
outside funding. Iridium expects that its operational funding requirements for
1999 and the two to three years thereafter principally will be driven by the
costs of operating and maintaining the satellite constellation, the costs of
providing Iridium services and interest expense. In addition, the principal
considerations of Iridium's management in evaluating Iridium's financial
condition have shifted from obtaining financing on favorable terms for the
construction of the Iridium System and the roll-out of commercial service to
generating revenues, obtaining additional funding in amounts sufficient to
satisfy its funding requirements, and reducing expenses in light of
substantially lower than expected subscriber ramp-up and revenue generation.
Currently, Iridium is not generating sufficient funds from operations
to satisfy its operational cash needs and, accordingly, is continuing to rely
on outside funding. Iridium expects that its funding requirements will
substantially exceed its revenues for 1999 and a significant period thereafter
and substantial external funding will be required.
Funding Requirements
Estimated Funding Requirements for 1999. For the first quarter of 1999
Iridium had incurred approximately $361 million (including payments due to
vendors that were deferred as described below). Iridium expects that its
aggregate funding requirements for 1999 and for the final three quarters of
1999 will be approximately $1.54 billion and 1.18 billion, respectively
(including payments due to vendors that have been or are expected to be
deferred). This estimate includes Iridium's estimate of its operating costs for
(i) Iridium System operation, (ii) the acquisition of Claircom and (iii)
working capital, interest and other financing costs. This estimate may be
revised as a result of Iridium's revision of its business plan. Iridium is
evaluating all components of its cost structure in an effort to significantly
reduce costs.
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Iridium System Construction and Operation. 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, or "O&M", 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 was used to make payments to Motorola under the space system contract
and the terrestrial network development contract. The O&M contract represents
a significant funding requirement of Iridium.
As of March 31, 1999, Iridium had incurred all of the approximately
$3.44 billion aggregate estimated cost of the space system contract. On March
8, 1999, Iridium paid $50 million under the space system contract and the
remaining $6 million is expected to be paid in the second quarter 1999. As of
March 31, 1999, Iridium had incurred approximately $303 million of the $323
million aggregate estimated cost of the terrestrial network development
contract. Under an amendment to the terrestrial network development contract,
Motorola has agreed to permit Iridium to defer its obligations to make the
remaining payments due to Motorola. As of March 31, 1999, Iridium had deferred
payment of approximately $77 million of its obligation under the terrestrial
network development contract and expects to defer an additional $19 million by
year end 1999.
Iridium expects payments under the O&M contract to be one of its most
significant funding requirements during commercial operation of the Iridium
System. The O&M contract has a five-year term (ending in November, 2003) and is
extendable, at Iridium's option, for an additional two years. Payments under
the O&M contract are currently payable monthly and are expected to aggregate
approximately $2.89 billion over the initial five-year term of the contract. If
Iridium exercises its option to extend the O&M contract for an additional two
years, the payments due for that two-year extension are expected to aggregate
approximately $1.34 billion. In addition, Iridium is obligated to pay for
certain spare satellites, if any, upon the completion of the contract. The
monthly payments under the O&M contract increase each year, ranging from
payments of $44.8 million in 1999 to $52.6 million in 2003 and $57.3 million in
2005 (if extended). Under the Motorola MOU, Motorola has agreed to permit
Iridium to defer its obligations to pay up to an aggregate of $400 million of
payments due to Motorola under the O&M contract until December 29, 2000. As of
March 31, 1999, Iridium had deferred payment of approximately $220.6 million of
its obligations under the O&M contract and expects to defer an aggregate of
$400 million of such obligations prior to September 1, 1999.
Working Capital, Financing Costs and Software Development. Iridium has
required, and will continue to require, funds for working capital, business
software development, interest on borrowings, financing costs and operating
expenses. Iridium estimates that these costs aggregated approximately $1.27
billion from July 29, 1993, the inception date of Iridium's predecessor, through
March 31, 1999, with approximately $177 million incurred in the first quarter of
1999. Iridium estimates that its costs in calendar year 1999 for these items
will aggregate approximately $830 million.
Claircom Acquisition. The acquisition of Claircom has an estimated
aggregate purchase price of approximately $65 million, consisting of
approximately $25.6 million in cash to be paid at closing and approximately
$39.4 million of notes of Claircom which will be guaranteed by Parent and issued
to the sellers of the Claircom shares immediately prior to closing. It is
uncertain whether this acquisition will be consummated. Iridium is currently
evaluating whether the Claircom acquisition is in the best interests of Iridium
in light of its current financial difficulties.
Estimated Funding Requirements Following 1999. Iridium estimates that
its funding requirements for the two to three year period following 1999 will be
driven by recurring costs similar to those expected in 1999. However, Iridium
currently does not have any arrangement with Motorola to defer costs scheduled
to be incurred after July 1999 under the O&M contract. Motorola is under no
obligation to agree to any additional deferral.
Sources of Funding
Overview. Based on its preliminary view of the revisions that will be
made to its business plan, Iridium expects that its aggregate of approximately
$1.08 billion of additional, available sources of funding outlined below will
not be sufficient to satisfy its expected funding requirements and Iridium
expects that its funding requirements will exceed its available sources by a
significant amount. In addition, the availability of several of the sources of
funding outlined below is contingent upon conditions beyond Iridium's control
and may not be available under certain circumstances. There can be no
assurance that Iridium will have access to sufficient funding to satisfy its
funding requirements.
Estimated Sources of Funds for 1999. As of March 31, 1999, Iridium
estimates that it will have available for the remainder of 1999 aggregate
sources of external funding of approximately $1.08 billion from the secured bank
facility, the guaranteed bank facilities, vendor financing, and additional
Motorola guaranteed borrowings. Iridium expects that its costs (including
approximately $276 million expected to be deferred) for the remainder of 1999
will be approximately $1.18 billion. To the extent that Iridium's revenues do
not exceed the actual difference between its costs and available sources for the
remainder of 1999 (an estimated difference of approximately $100 million) and to
the extent that its anticipated sources of funding are unavailable, Iridium will
need to seek additional financing.
Sources of Funding Beyond 1999. Iridium expects that its currently
available funding will be exhausted in the fourth quarter of 1999. Iridium is
in the process of revising its revenue and subscriber estimates in light of its
initial marketing and distribution difficulties and
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expects that these estimates, when finalized, will be significantly below its
prior estimates and will result in a substantial expected funding gap (the
difference between estimated funding requirements and estimated revenues)
through at least 2000. Iridium will need to close this expected funding gap
through a combination of obtaining additional outside funding and reducing its
cost structure. A failure to effectively close this expected funding gap likely
would have a material adverse effect on Iridium.
In addition, Iridium expects that, in order to (i) receive an
amendment to, or waiver of, the minimum subscriber and revenue covenants in the
secured bank facility, (ii) restructure its indebtedness or (iii) obtain
additional outside funding, it will have to demonstrate a credible plan for
closing this expected funding gap.
Secured Bank Facility. As of March 31, 1999, Iridium had drawn the
entire amount available under the $800 million secured bank facility. Borrowings
under the secured bank facility mature on December 29, 2000. Iridium's
obligations under the secured bank facility are secured by security interests in
substantially all of Iridium's assets, Parent's equity interest in Iridium and
the reserve capital call (the commitment of 17 of Parent's strategic investors
to purchase up to 18,206,550 class 1 interests at a price of $13.33 per class 1
interest, representing an aggregate purchase price of up to approximately $243
million).
The secured bank facility contains various covenants. One group of
covenants requires Iridium to satisfy certain minimum revenue and subscriber
levels, including the conditions that (i) at March 31, 1999, it have cumulative
cash revenues of at least $4 million, cumulative accrued revenues of at least
$30 million, at least 27,000 Iridium World Satellite Service subscribers and at
least 52,000 total subscribers, (ii) at June 30, 1999, it have cumulative cash
revenues of at least $50 million, cumulative accrued revenues of at least $150
million, at least 88,000 Iridium World Satellite Service subscribers and at
least 213,000 total subscribers and (iii) at September 30, 1999, it have
cumulative cash revenues of at least $220 million, cumulative accrued revenues
of at least $470 million, at least 173,000 Iridium World Satellite Service
subscribers and at least 454,000 total subscribers. As a result of various
factors, Iridium's subscriber levels and revenues for its initial commercial
operations have been significantly below its prior estimates. Accordingly,
Iridium requested and received a waiver of compliance with the March 31, 1999
revenue and subscriber conditions from the lenders under the secured bank
facility. This waiver is conditioned on Iridium's compliance with the March 31,
1999 minimum revenue and subscriber levels by May 31, 1999.
As described above under "Recent Developments - Iridium is
Experiencing Substantial Difficulties Transitioning from a Development Stage
Company to an Operating Company - Iridium Expects that it Will Not Satisfy the
Secured Bank Facility Revenue and Subscriber Covenants", Iridium expects that
it will not satisfy the May 31, 1999 (extended from March 31, 1999) minimum
subscriber and revenue covenants. Iridium has engaged the lenders under the
secured bank facility in negotiations regarding a waiver of, or amendment to
these covenants. The lenders are under no obligation to provide such waiver or
amendment and Iridium can provide no assurance that a waiver or amendment will
be received. A failure to receive a waiver or amendment likely would have a
material adverse effect on Iridium. See "Recent Developments - Iridium is
Experiencing Substantial Difficulties Transitioning from a Development Stage
Company to an Operating Company".
Guaranteed Bank Facilities. The guaranteed bank facilities consist of
a $475 million term credit facility that matures on December 29, 2000 and a $275
million revolving credit facility that matures on December 31, 2001, each with a
different, but partially overlapping, syndicate of lenders. As of March 31,
1999, Iridium had drawn an aggregate of approximately $480 million under these
facilities (approximately $470 million under the term facility and approximately
$10 million under the revolving facility). Pursuant to the terms of the
guaranteed bank facilities, Iridium cannot have access to more than an aggregate
of approximately $745 million of borrowings in order to ensure that the Motorola
$750 million guarantee covers additional obligations of Iridium to the lenders
under these facilities. The guaranteed bank facilities do not have covenants
that directly address minimum revenues or subscriber levels, however, they do
have a cross default provision that would be triggered by a default under the
secured bank facility. Borrowings under the guaranteed bank facilities are
guaranteed by Motorola. Pursuant to the Motorola MOU and the Motorola ARG (each
described below), Parent and Iridium are required to compensate Motorola with
equity and cash interest for, among other things, guaranteeing borrowings under
the guaranteed bank facilities.
Motorola Vendor Financing and O&M Bank Facility Guarantee. Under the
Motorola MOU, described below, Motorola has agreed to permit Iridium to defer
its obligations to pay up to an aggregate of $400 million of payments due to
Motorola under the O&M contract until December 29, 2000. As of March 31, 1999,
Iridium had deferred approximately $220.6 million of its obligations under the
O&M contract and expects to defer an aggregate of $400 million of such
obligations prior to September 1, 1999.
Iridium has agreed under a memorandum of understanding with Motorola
and Parent, or "MOU", that it will use its best efforts to obtain a bank
facility to refinance the payment of all such deferrals prior to October 1,
1999. Motorola has conditionally committed under the Motorola MOU to guarantee
up to $400 million of borrowings under such Motorola guaranteed O&M bank
facility. Iridium intends to finance the payment of $400 million of deferred
amounts with the Motorola guaranteed O&M bank facility prior to October 1, 1999.
However, many factors, including changes in the bank lending market and
Iridium's ability to
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generate revenues from commercial operations could adversely affect Iridium's
ability to obtain the Motorola guaranteed O&M bank facility. In addition,
Motorola's commitment to guarantee the Motorola guaranteed O&M bank facility is
subject to certain conditions. Accordingly, there can be no assurance that
Iridium will be able to obtain the Motorola guaranteed O&M bank facility or
otherwise refinance its deferred obligations to Motorola under the O&M
contract. Iridium is required to compensate Motorola pursuant to the Motorola
ARG for Iridium's deferral of payments under the O&M contract and for
Motorola's guarantee of the Motorola guaranteed O&M bank facility with cash and
equity compensation, including warrants to purchase class 1 interests and
warrants to purchase class A common stock.
Motorola MOU; Conditional Commitment of Motorola to Guarantee
Additional Borrowings. In connection with the establishment of the secured
bank facility and the guaranteed bank facilities, Motorola, Parent and Iridium
entered into the Motorola MOU, which amended and restated a previous memorandum
of understanding. Under the Motorola MOU, Motorola has agreed to, among other
things, (i) guarantee up to $750 million of obligations under the guaranteed
bank facilities, (ii) consent to and agree to an amendment to the guaranteed
bank facilities and the related guarantee agreement (or to enter into a new
bank credit facility and guarantee agreement on the same terms (other than
pricing)) that together provide for a $350 million increase in the Motorola
guaranteed borrowings available thereunder, (iii) permit Iridium to defer its
obligations to pay up to an aggregate of $400 million of payments under the O&M
contract until December 29, 2000, (iv) guarantee up to $400 million of
additional borrowings under a bank credit facility with terms (other than
pricing) identical in all material respects to the guaranteed credit facilities
on the condition that such additional guaranteed borrowings be used exclusively
to make payments to Motorola for deferred obligations under the O&M contract
(as described in (iii) above), (v) subordinate certain of its claims vis-a-vis
Iridium to the lenders under the secured bank facility and (vi) consent to an
amendment to the $275 million revolving credit facility component of the
guaranteed bank facilities that would extend the maturity of such facility to
beyond the maturity of the senior notes (which are due July 15, 2005). Iridium
has agreed under the Motorola MOU that it will compensate Motorola for
providing guarantees, deferral rights and other credit support (collectively,
the "Motorola exposure", which generally includes the aggregate amount
guaranteed, or permitted to be deferred, by Motorola) pursuant to the Motorola
ARG, described below. In addition, while Motorola has agreed to consent to (i)
a $350 million increase in the amount of guaranteed borrowings available under
the guaranteed bank facilities (or a new credit facility with terms (other than
pricing) identical in all material respects) and (ii) an extension of the
maturity of the $275 million revolving credit facility component of the
guaranteed bank facilities, there can be no assurance that the lenders under
the guaranteed credit facilities would agree to such amendments or that such a
new credit facility would be available.
Motorola's obligation to defer receipt of up to $400 million in
payment under the O&M contract is unconditional. All of Motorola's other
obligations under the Motorola MOU, including, without limitation, its
obligation to consent to and agree to an amendment to the guaranteed bank
facilities and the related guarantee agreement (or to enter into a new bank
credit facility and guarantee agreement on the same material terms (other than
principal)) that together provide for a $350 million increase in the Motorola
guaranteed borrowings available thereunder, are conditioned on Iridium
complying with the terms of the Motorola MOU, Motorola ARG, the O&M contract
and other agreements with Motorola, including Iridium's payment obligations
under each such agreement. For further discussion of the terms of the Motorola
MOU, see the registrants' report on Form 10-K for 1998.
Motorola ARG. In connection with the establishment of the secured
bank facility and the guaranteed bank facilities, Motorola, Parent and Iridium
also entered into the Motorola agreement regarding guarantee, or "ARG", which
amended and restated a previous agreement. Payments under the Motorola ARG are
based on the amount and duration of Motorola exposure and are due and payable
quarterly.
From the date of the original Motorola ARG through March 31, 1999, for
providing guarantees of Iridium's bank credit facilities and other credit
support, Motorola had earned warrants to purchase an aggregate of (i) 7,741,346
class 1 interests at a price of $.00013 per interest and an aggregate of (ii)
90,722 class 1 interests at a price of $20.90 per interest. The amount of
equity compensation Motorola will earn in the future, under the Motorola ARG,
depends upon the amount of future Motorola exposure, is expected to be
substantial and could increase significantly for a variety of reasons,
including if Iridium is unable to reduce the Motorola exposure to $275 million
or less prior to October 1, 1999. While Iridium has agreed with Motorola that
it will use its best efforts to reduce the Motorola exposure to $275 million or
less as soon as possible, Iridium's ability to repay or replace borrowings
guaranteed by Motorola or pay or finance (without a Motorola guarantee)
deferrals of amounts due to Motorola depends on a variety of factors, including
Iridium's ability to generate revenues and factors beyond Iridium's control
such as the condition of the bank lending and securities markets.
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OPERATIONS
Iridium commenced commercial satellite phone service on November 1,
1998 and commercial satellite paging service on November 15, 1998. Prior to
November 1, 1998, Iridium's only source of income was interest income on the
cash and investment balances from the proceeds of equity and debt commitments in
Iridium, which interest income amounted to approximately $25.5 million from July
29, 1993, the inception date of Iridium's predecessor, to March 31, 1999.
During the same period, Iridium recorded a net loss of approximately $2.17
billion.
During the first quarter of 1999, Parent incurred a net loss of
$505 million, or $3.45 per Class 1 Interest, compared to a $204 million net
loss, or $1.45 per Class 1 Interest, for the corresponding period in 1998. This
was primarily the result of the following increases in expenses: $98 million for
amortization and depreciation expense due to the depreciation of a greater
number of satellites; $80 million for sales, general and administrative expenses
due to increased activities associated with Iridium's transition from a
development stage company into commercial operations; and $84 million for
increased interest expense. In addition, during the first quarter of 1999,
Iridium disposed of a satellite due to mechanical malfunction resulting in a
non-cash loss of approximately $39 million on write-down of the asset. The
satellite was replaced by Motorola with an in-orbit spare satellite as part of
the O&M Contract between Iridium and Motorola. See "-- Capitalization of
Costs", "-- Operating Expenses" and "-- Interest Expense" below.
CAPITALIZATION OF COSTS
All payments by Iridium under the space system contract have been
capitalized. The satellite components of the space system contract are being
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 over a seven year estimated life. 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 $3.74 billion through March 31, 1999. In addition,
costs incurred in connection with the issuance by Iridium of class 1 interests
are reflected as a reduction of Iridium'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 have
been capitalized through the date of commencement of commercial operations.
A portion of the payments made under the O&M 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 O&M contract not capitalized will be expensed as incurred.
OPERATING EXPENSES
For the period from July 29, 1993, the inception date of Iridium's
predecessor, through March 31, 1999, total operating expenses were
approximately $1.8 billion, with $388 million of that amount incurred in the
first quarter of 1999. In light of lower than expected subscriber ramp-up and
revenue generation, Iridium is re-evaluating all of its budgeted operating
expenses with a view to making significant reductions.
INTEREST EXPENSE
Iridium has financed, and expects to continue to finance, a
significant portion of its capital requirements through borrowings. As a result
of these borrowings, Iridium has had, and expects it will have, significant
interest costs. Interest costs were capitalized while the Iridium System was
under construction and are now being depreciated. This resulted in all interest
costs being capitalized during
29
<PAGE> 30
1995, 1996 and 1997. For the year ended December 31, 1998, approximately $443
million of interest cost was incurred. Interest expensed for the year ended
December 31, 1998 was approximately $273 million with the remaining
approximately $170 million of interest capitalized to the system under
construction. In the first quarter of 1999, Iridium expensed all interest costs
which totaled $121 million. 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
consolidated balance sheets.
On May 13, 1999, Iridium retained DLJ to assist it in evaluating and
reviewing alternatives to restructure its indebtedness and reduce financing
costs.
INCOME TAXES
Iridium reports its income as a partnership for United States federal
income tax purposes and accordingly, is not expected to be directly subject to
U.S. federal income tax. Iridium may, however, be subject to tax in some
state, local or foreign jurisdictions on portions of its income. IWCL is
directly subject to U.S. federal income tax on the portion of its income which
is effectively connected with the U.S. business of Iridium. IWCL pays no income
tax under Bermuda law.
YEAR 2000 READINESS DISCLOSURE
General
Iridium's Year 2000 Program or "Y2K Program" addresses information-technology
or "IT", and non-IT problems that may exist within the Iridium System,
including Iridium's suppliers, roaming partners, service providers and other
material distributors.
Until recently, only two digits were used to represent the year in dates
recorded in computer systems. This practice did not anticipate the problem
generated by the turn of the century, after which dates entered as "00" could
be understood by computers to mean 1900 instead of 2000. This and other date
handling processes could result in the incorrect performance of computer
calculations and functionality involving dates.
Y2K Program
The Y2K Program encompasses the Iridium space and ground facilities, as well as
the relevant operations of Iridium's material suppliers and distributors, and
addresses both IT and non-IT systems.
The Y2K Program is divided into five major phases - Awareness, Inventory and
Risk Assessment, Repair and Renovation, Verification and Validation, and
Implementation and Monitoring. The Awareness Phase is intended to ensure the
establishment of the Y2K Program and the awareness of potential risks and Year
2000 issues. This phase, which involves communicating the status and progress
of the Y2K Program within Iridium and to third parties, is an on-going activity
and will continue as Iridium proceeds through the other phases. Iridium has
substantially completed all critical tasks in this phase. The process of
communication, however, is ongoing and will continue through first quarter
2000.
The Inventory and Risk Assessment Phase involves the performance of an
inventory of all Iridium hardware, software and infrastructure, as well as
material vendors, to identify potential Year 2000 issues and to determine the
action required, if any, to mitigate the risk to Iridium. Through its gateways,
Iridium is contacting its third party roaming partners and service providers to
determine the Year 2000 status of their systems, as well as their plans to
bring them into compliance. That process is ongoing. Material items are those
believed by Iridium to have a significant impact on the business from a
customer service, financial or legal perspective. This phase is being performed
by Iridium's internal Y2K team.
The assessment of Iridium developed systems and those of Iridium's key
suppliers has been completed. The results have indicated that fewer upgrades
than initially planned are needed. This has allowed Iridium to accelerate the
Y2K Program, now targeted for completion on July 1, 1999. The gateways are
still completing their evaluation of their internally developed systems and the
status of this analysis is not finalized.
30
<PAGE> 31
The Repair and Renovation Phase is intended to ensure that the appropriate
items as identified in the inventory and risk assessment are upgraded to meet
Year 2000 readiness criteria. This may include software updates, hardware
upgrades, development of new processes, new business practices, training
programs, etc.
The Repair and Renovation Phase has substantially completed for internal
Iridium LLC systems and the products provided by Motorola. The Iridium
Business Support Systems were initially developed to be Y2K ready and required
only server, operating system, and infrastructure upgrades provided by
suppliers. The upgrades required for the satellite and ground infrastructure
products provided by Motorola are completed.
The Verification and Validation Phase ensures that critical business processes,
systems and infrastructure are verified and tested to ensure Year 2000 issues
will not cause major disruption in the on-going operation of the Iridium
business. Verification and testing of those systems under Iridium's direct
control will be performed by Iridium's internal Y2K team with the support of
our technicians and certain of the principle suppliers of those systems. The
systems developed by Iridium and those developed by Motorola have completed
testing and these upgrades are now Y2K ready.
Finally, during the Implementation and Monitoring Phase, the Year 2000 upgrades
will be installed into Iridium's operating systems, as necessary. Iridium LLC
plans to have all internal critical systems installed and operational by July
1,1999.
An ongoing monitoring activity will be employed to identify and correct
unforeseen Year 2000 critical issues that may arise. In addition, the Y2K
Program plan addresses the monitoring of future upgrades for new products and
services to ensure that no new Y2K problem is introduced into Y2K ready
systems.
State of Readiness
With the completion of the Y2K Verification and Validation Phase, Iridium has
determined that the company is well positioned to be ready for the year 2000.
The Iridium Business Support Systems were developed to be Y2K ready and the
upgrades were minimal. Typical upgrades included server software and operating
systems and these upgrades are now Y2K ready.
Motorola, the supplier of the Iridium satellite and ground systems, has
completed their testing and the system upgrades are now Y2K ready. Kyocera and
Motorola, the suppliers of the handsets and pagers have indicated that these
products are Y2K ready.
Costs
The total cost associated with required modifications to become Year 2000 ready
is not expected to be material to Iridium's financial position or results of
operations. The current estimated total cost to Iridium of the Y2K Program is
$2 million. Iridium estimates that the amount expended on the Y2K Program
during calendar year 1998 was approximately $180,000, all of which was expensed
by Iridium. The costs for the first quarter of 1999 were approximately
$720,000. The gateway costs are not expected to be material as the majority of
the systems are provided to the gateways under maintenance contracts.
The estimated $2 million cost includes the costs of existing maintenance
contracts, internal labor and a small consulting budget for miscellaneous
tasks. Because Iridium does not require a large remediation effort, the Y2K
activities are substantially absorbed within the existing departmental cost
structure. This estimate does not reflect all Y2K costs because, for example,
the Iridium Business Support Systems were developed from the outset to handle
Year 2000 issues, and the cost of this capability was not separately identified
by the supplier.
31
<PAGE> 32
Other significant or critical non-Year 2000 information technology projects
under Iridium's direct control have not been materially delayed or impacted by
Year 2000 initiatives.
Risks
Potential risks to Iridium have been differentiated between risks related to
Iridium handset services versus risks related to Iridium services dependent
upon the existing telecom structure in the world.
Based on the results of the assessment of the Iridium Systems and the Motorola
provided space and ground systems, the reasonably likely worst case scenario
that would impact Iridium handset to Iridium handset service would be a power
failure at a ground station location. To mitigate this, Iridium gateways have
back-up generators at all critical ground station locations. Additional
contingency planning will be conducted to evaluate and implement rerouting
procedures where this risk is determined to be significant. In the event a
gateway is not prepared for the transition to the new millennium, Iridium will
implement a contingency plan to operate the network without the gateway.
The reasonably likely worst case scenario for services that depend upon the
transmission of calls over an existing wireless or landline network is the
failure of a call to be completed due to a failure in the existing telecom
network. The back-up use of an Iridium handset to Iridium handset call would
mitigate this risk. In addition, the gateway business owners are working with
the local network providers to identify critical areas of risk. If it is
determined that a critical issue exists in an interconnection arrangement, the
gateway will determine if rerouting is appropriate.
The Y2K Program is expected to significantly reduce our level of uncertainty
about the Year 2000 problem and, in particular, about the Year 2000 compliance
and readiness of our material partners. Iridium believes that, with the
completion of the Y2K Program as scheduled, the potential of significant
interruptions of normal operations should be reduced.
Contingency Plans
Based on the information developed throughout the Y2K Program, Iridium has
begun to develop contingency plans for critical systems and processes. These
plans will include an analysis of the requirement to reroute calls due to
interruption in power at certain gateway ground stations or failure of a
gateway to be Y2K ready. Other plans will address back up and restore
processes to secure critical data, staffing to monitor critical processes
throughout the transition and manual processes for critical operations where
appropriate.
Readers are cautioned that the discussion of Iridium's efforts and expectations
related to Year 2000 are forward-looking statements and should be read in
conjunction with Exhibit 99 to this report.
32
<PAGE> 33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Iridium's long-term debt includes both fixed and variable interest rate
instruments, and the fair market value of Iridium's fixed long-term debt is
sensitive to changes in interest rates. Iridium runs the risk that market rates
will decline and the required payments will exceed those based on current market
rates. Under its current policies, Iridium does not use interest rate derivative
instruments to manage its exposure to interest rate changes. For additional
information see the registrant's joint annual report on Form 10-K for 1998.'
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Class Action Litigation. Starting in late April 1999 and
continuing in May 1999, various purported securities class action lawsuits were
filed against IWCL, Parent, Iridium, Motorola Inc. and several former officers
and directors of IWCL, Parent and Iridium in the United States District Court
for the District of Columbia.
The complaints in these lawsuits purport to be class actions on behalf
of the purchasers of securities of IWCL and Iridium during the period September
9, 1998 through March 29, 1999. The complaints generally allege that defendants
violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 thereunder by making material misstatements and by failing
to disclose certain allegedly material information regarding the
commercialization of the Iridium System. The complaints also assert claims
against individual defendants alleging violations of Section 20(a) of the
Exchange Act. The complaints also allege that, in violation of Section 20A of
the Exchange Act, certain of the individual defendants disposed of IWCL's class
A common stock while the price of that stock was artificially inflated by
allegedly false and misleading statements and omissions. The complaints seek
unspecified damages, attorneys' and experts' fees and costs, and such other
relief as the court deems proper.
As of May 6, 1999, the purported class actions commenced in the United
States District Court for the District of Columbia were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
PLAINTIFF CASE NUMBER FILED
- ------------------------------------------------------------------------------
<S> <C> <C>
Parker Freeland 99CV01002 4/22/99
- ------------------------------------------------------------------------------
Teck Young 99CV01017 4/26/99
- ------------------------------------------------------------------------------
Richard Ackerman 99CV01036 4/27/99
- ------------------------------------------------------------------------------
Brian Kleinman 99CV01053 4/28/99
- ------------------------------------------------------------------------------
Ramona Anne Marshall 99CV01058 4/29/99
- ------------------------------------------------------------------------------
Kenneth F. Turner 99CV01096 5/4/99
- ------------------------------------------------------------------------------
Jeffrey S. Hargrove 99CV01117 5/6/99
- ------------------------------------------------------------------------------
</TABLE>
The registrants anticipate that additional class action complaints
containing similar allegations may be filed in the future.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
33
<PAGE> 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
11.1 Computation of Loss Per Class A Common Share
11.2 Computation of Loss per Class 1 Interest
27.1 Financial Data Schedule of Iridium LLC
27.2 Financial Data Schedule of Iridium Operating LLC
27.3 Financial Data Schedule of Iridium World
Communications Ltd.
99.1 Certain of the Factors Which May Affect Forward
Looking Statements
(b) Reports on Form 8-K
Iridium World Communications Ltd., Iridium LLC, Iridium Operating LLC, Iridium
Capital Corporation, Iridium IP LLC, Iridium Roaming LLC and Iridium Facilities
Corporation filed an 8-K on January 27, 1999 reporting a press release
announcing revenues for the fourth quarter.
Iridium World Communications Ltd., Iridium LLC, Iridium Operating LLC, Iridium
Capital Corporation, Iridium IP LLC, Iridium Roaming LLC, and Iridium Facilities
Corporation filed an 8-K on March 3, 1999 reporting a press release issued by
Iridium LLC in response to inquires regarding the company's financial
arrangements due to a delay in subscriber ramp-up caused by distribution
problems.
Iridium World Communications Ltd., Iridium LLC, Iridium Operating LLC, Iridium
Capital Corporation, Iridium IP LLC, Iridium Roaming LLC, and Iridium Facilities
Corporation filed an 8-K on March 29, 1999 reporting press releases issued by
Iridium LLC announcing that (i) Iridium Operating LLC had requested and received
a waiver of compliance with the March 31, 1999 revenue and subscriber covenants
under its secured bank facility and (ii) Roy Grant, CFO of Iridium World
Communications Ltd., Iridium LLC, Iridium Operating LLC and Iridium Capital
Corporation will resign from the registrants effective April 16, 1999.
Iridium World Communications Ltd., Iridium LLC, Iridium Operating LLC, Iridium
Capital Corporation, Iridium IP LLC, Iridium Roaming LLC and Iridium Facilities
Corporation filed an 8-K on April 26, 1999 reporting that on April 22, 1999 and
April 26, 1999 press releases were issued by Iridium LLC announcing that (i)
Edward F. Staiano resigned as Vice Chairman and CEO of Iridium LLC, the Iridium
LLC Board of Directors formed an Executive Committee and appointed an interim
CEO; and (ii) Iridium reported its first quarter results.
34
<PAGE> 35
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/John A. Richardson
---------------------
John A. Richardson
interim Chief Executive Officer
IRIDIUM LLC
/s/ John A. Richardson
----------------------
John A. Richardson
Vice Chairman and interim Chief Executive Officer
/s/ Leo Mondale
---------------
Leo Mondale
Senior Vice President and Chief Financial Officer
IRIDIUM OPERATING LLC
/s/ John A. Richardson
----------------------
John A. Richardson
Vice Chairman and interim Chief Executive Officer
/s/ Leo Mondale
---------------
Leo Mondale
Senior Vice President and Chief Financial Officer
IRIDIUM CAPITAL CORPORATION
/s/ John A. Richardson
----------------------
John A. Richardson
interim Chief Executive Officer
/s/ Leo Mondale
---------------
Leo Mondale
Chief Financial Officer
IRIDIUM IP LLC
/s/ John A. Richardson
----------------------
John A. Richardson
interim Chief Executive Officer
/s/ Leo Mondale
---------------
Leo Mondale
Chief Financial Officer
35
<PAGE> 36
IRIDIUM ROAMING LLC
/s/ John A. Richardson
----------------------
John A. Richardson
interim Chief Executive Officer
/s/ Leo Mondale
---------------
Leo Mondale
Chief Financial Officer
IRIDIUM FACILITIES CORPORATION
/s/ John A. Richardson
----------------------
John A. Richardson
interim Chief Executive Officer
/s/ Leo Mondale
---------------
Leo Mondale
Chief Financial Officer
Date: May 17, 1999
36
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ---------------------- ----
<S> <C> <C>
11.1 Computation of Loss Per Class A Common Share
11.2 Computation of Loss per Class 1 Interest
27.1 Financial Data Schedule of Iridium LLC
27.2 Financial Data Schedule of Iridium Operating LLC
27.3 Financial Data Schedule of Iridium World Communications Ltd
99.1 Certain of the Factors Which May Affect Forward
Looking Statements
</TABLE>
37
<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 MARCH 31,
-----------------------------------------------
1998 1999
---------------------- ----------------------
<S> <C> <C>
NET LOSS APPLICABLE TO CLASS A COMMON SHARES:
Net loss $ 17,426 $ 60,399
Incremental equity loss pick-up upon assumed exercise of
options, warrants and conversion of Class B Common Shares 1,789 4,092
---------------------- ----------------------
Net loss applicable to Class A Common shares $ 19,215 $ 64,491
====================== ======================
AVERAGE NUMBER OF CLASS A SHARES:
Average number of Class A Common shares outstanding 12,008,654 17,541,493
Diluted adjustments (2):
Assumed exercise of options and warrants 1,369,630 1,362,272
---------------------- ----------------------
Average number of Class A Common shares assumed to be
outstanding, assuming dilution 13,378,284 18,903,765
====================== ======================
NET LOSS PER CLASS A COMMON SHARE:
Basic (1) $ 1.45 $ 3.44
Diluted (2) $ 1.44 $ 3.41
</TABLE>
(1) The assumed exercise of options and warrants and coversion of Class B Common
Shares in periods of net loss are anti-dilutive and are not included in the
computation and presentation of loss per Class A Common share.
(2) The assumed exercise of options and warrants are anti-dilutive but are
included in the calculation of diluted loss per Class A Common share in
accordance with Regulation S-K, Item 601 (a) (11).
<PAGE> 1
Exhibit 11.2
IRIDIUM LLC
(A Development Stage Limited Liability Company)
COMPUTATION OF LOSS PER CLASS 1 INTEREST
(in thousands except Member Interest data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1998 1999
-------------------- --------------------
<S> <C> <C>
NET LOSS APPLICABLE TO CLASS 1 INTERESTS:
Net loss $ 203,566 $ 505,401
Preferred dividend requirement 1,447 1,668
-------------------- --------------------
Net loss applicable to class 1 interests $ 205,013 $ 507,069
==================== ====================
AVERAGE NUMBER OF CLASS 1 INTERESTS:
Average number of Class 1 Interests outstanding 141,227,834 146,781,298
Assumed exercise of options and warrants 18,219,622 17,209,062
Assumed conversion of Series A Class 2 Interest 738,679 851,751
-------------------- --------------------
Average number of Class 1 Interests assumed to be
outstanding, assuming dilution 160,186,135 164,842,111
==================== ====================
NET LOSS PER CLASS 1 INTEREST:
Basic (1) $ 1.45 $ 3.45
Diluted (2) $ 1.28 $ 3.08
</TABLE>
(1) The assumed exercise of options and warrants in periods of net loss are
anti-dilutive and are not included in the computation and presentation of
loss per Class 1 Interest.
(2) The assumed exercise of options, warrants, and conversion of Series A Class
2 Interests are anti-dilutive but are included in the calculation of diluted
loss per Class 1 Interest in accordance with Regulation S-K, Item 601 (a)
(11).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IRIDIUM
LLC'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000948421
<NAME> IRIDIUM LLC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 195,443
<SECURITIES> 0
<RECEIVABLES> 1,442
<ALLOWANCES> 126
<INVENTORY> 0
<CURRENT-ASSETS> 219,107
<PP&E> 4,278,373
<DEPRECIATION> 865,564
<TOTAL-ASSETS> 3,719,514
<CURRENT-LIABILITIES> 3,241,966
<BONDS> 0
0
47,684
<COMMON> 2,355,409
<OTHER-SE> (2,188,490)
<TOTAL-LIABILITY-AND-EQUITY> 3,719,514
<SALES> 1,451
<TOTAL-REVENUES> 1,451
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 387,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,141
<INCOME-PRETAX> (505,401)
<INCOME-TAX> 0
<INCOME-CONTINUING> (505,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (505,401)
<EPS-PRIMARY> (3.45)
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IRIDIUM
OPERATING LLC'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001051721
<NAME> IRIDIUM OPERATING LLC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 195,443
<SECURITIES> 0
<RECEIVABLES> 1,442
<ALLOWANCES> 126
<INVENTORY> 0
<CURRENT-ASSETS> 219,107
<PP&E> 4,278,373
<DEPRECIATION> 865,564
<TOTAL-ASSETS> 3,719,038
<CURRENT-LIABILITIES> 3,241,966
<BONDS> 0
0
0
<COMMON> 2,401,011
<OTHER-SE> (2,186,884)
<TOTAL-LIABILITY-AND-EQUITY> 3,719,038
<SALES> 1,451
<TOTAL-REVENUES> 1,451
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 387,631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,141
<INCOME-PRETAX> (505,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (505,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (505,321)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IRIDIUM
WORLD COMMUNICATIONS LTD.'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001035442
<NAME> IRIDIUM WORLD COMMUNICATIONS LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 302,549
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 489,421
<OTHER-SE> (186,872)
<TOTAL-LIABILITY-AND-EQUITY> 302,549
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 60,399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (60,399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (60,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,399)
<EPS-PRIMARY> (3.44)
<EPS-DILUTED> 0.00
</TABLE>
<PAGE> 1
EXHIBIT 99.1
RISK FACTORS
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. or "IWCL" acts as a member of Iridium
LLC, or "Parent", and has no other business. The business of Iridium Operating
LLC, or "Iridium", constitutes substantially all Parent's business. Some of the
factors that may affect the business of Iridium are discussed below. In this
exhibit, "we", "our" and words of similar import mean Iridium. Unless otherwise
indicated, the information contained in this Exhibit is presented as of May 13,
1999.
You are cautioned that the statements in this exhibit have not been
revised to reflect subsequent events or circumstances after the date on which
they were made. The registrants undertake no obligation to update this
information to reflect events or developments that occur or arise after the date
of this report.
<TABLE>
<S> <C>
RISK OF ERROR IN FORWARD In the fourth quarter of 1998, Iridium began its transition
LOOKING STATEMENTS from a development stage company into an operating
company. Iridium has experienced significant
Many of the statements difficulties in making this transition. As a result of
in this report are these difficulties, Iridium currently is revising its business
forward looking and actual strategy. In addition, Iridium is facing the risk of
results may be materially default under its $800 million secured bank facility
different from those on May 31, 1999 for failure to satisfy the facility's
expressed or implied by minimum subscriber and revenue covenants, and is facing related
these statements. defaults (based on cross-defaults or cross-accelerations) under its
In particular, you approximately $2.27 billion in other indebtedness. Accordingly,
should recognize that many statements contained in this report are forward looking.
statements about the Examples of these forward looking statements include
following topics are forward the statements concerning Iridium's expectations about its:
looking:
- ability to obtain an amendment or waiver from the
lenders under the secured bank facility
- Whether Iridium will obtain - operations;
an amendment or waiver from - revenues;
the lenders under the - markets;
secured bank facility; - funding needs;
- Iridium's expectations - funding sources;
regarding the revisions it - prospects;
will make to its business - technical capabilities;
plan and the expected - pricing of its services;
effects of the revisions on - availability and distribution of phones and pagers;
future revenues and costs; - competitors and their services;
- Iridium's estimates of - equipment suppliers', gateway operators', service
the amount of its providers' and roaming partners' actions;
funding needs; - regulatory activities (including its ability to obtain or
- Iridium's estimates concerning maintain the authority to operate its satellite services in
the availability of virtually any country in the world).
existing funding sources;
- Iridium's expectations Forward looking statements are inherently predictive and
about its ability to speculative and we cannot assure you that our forward looking
obtain additional statements will prove to be correct. Actual results and
financing; developments are likely to be different, and may be materially
- Iridium's expectations different, from those expressed or implied by these state-
about its ability to ments. You should carefully review the other risk factors set
generate revenues from forth herein for a discussion of some of the factors which
commercial operations; could result in any forward looking statement proving to be
and inaccurate.
- Iridium's expectations
about how much revenue In particular, investors should recognize that forward looking
it will generate from statements are based on a number of assumptions about future
commercial operations. events, many of which are beyond our control. For
example, many of the statements in this report assume that
The forward looking state- Iridium will effectively address its initial inability to
transition smoothly from a development stage company into
an operating company and assume, among other
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ments are based on a num- things, that:
ber of assumptions and - Iridium will obtain an amendment or waiver from the lenders
one or more of these under the secured bank facility with respect to the facility's
assumptions is likely to minimum subscriber and revenue covenants;
be incorrect. - Iridium will develop and implement a revised business plan;
- Iridium, its gateways and their service providers will
satisfactorily remedy their initial inability to effectively
market and distribute Iridium World Services, including correcting
the initial negative impression of Iridium's services and pricing;
- there will be a sufficient number of customers for, and
usage of, the Iridium System to generate revenues in the
amounts sufficient for Iridium to operate its business under its
revised business plan (this assumption is reflected in many of
the forward looking statements included in this report);
- the Iridium System will provide service acceptable to the
market and will meet all systems specifications set forth in
its development contracts and will have service
characteristics across Iridium's various service offerings
that are at least as favorable as those that Iridium
expects;
- Motorola and Kyocera will manufacture, and Iridium and its
service providers will distribute, a sufficient number of
portable, hand-held phones and pagers for use with the
Iridium System on a timely basis;
- there will continue to be a sufficient number of
operational gateways to maintain the service quality and system
capacity Iridium expects;
- Iridium's satellite navigation software, communications
software and its business support systems software will
continue to function as expected under the various service
demands the Iridium System actually experiences;
- Iridium will contract with, and integrate into its various
operations, a sufficient group of roaming partners to ensure
that Iridium World Roaming Service meets Iridium's market
coverage expectations;
- the operation of the Iridium System will not be impaired by
the loss of satellites or the need to put replacement
satellites in orbit and Iridium will not be required to
bear the costs of satellite replacement;
- in the various jurisdictions in which Iridium operates or
expects to operate, there will be no material change in
legislation or regulations or the administration thereof
that will have an adverse effect on the business of
Iridium, including Iridium's expectation that it will be
able to provide its services on a virtually global basis;
- there will be no material adverse changes in any of
Iridium's existing material contracts or the ability of
Iridium's various contractors to perform their obligations
(including Motorola's ability to perform under the O&M
contract); and
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- the capacity of the Iridium System, as affected by, among
other things, spectrum allocation and customer usage patterns,
will meet or exceed Iridium's expectations.
Iridium's prior expectations One or more of these assumptions is likely to be incorrect and,
about important matters, including accordingly, actual results and developments are likely to be
the ability of Iridium and its different, and may be materially and adversely different
gateways and their service providers from those expressed or implied by any forward looking
to attract subscribers for Iridium statements. For example, Iridium's prior expectations regarding
World Services and generate revenues, the number of customers for, usage of and revenues generated by,
have proven to be incorrect by a Iridium World Services during the first six months of operations
substantial amount as a result of were incorrect by a substantial amount.
many factors. There can be no
assurance that the forward looking Iridium does not intend to publish updates or revisions of the
statements contained in this report forward looking statements included in this report or the materials
will not prove to be similarly incorporated by reference in this report or of this
inaccurate. discussion of some of the factors that could cause actual
results to differ from those expressed or implied in the
forward looking statements.
IRIDIUM HAS A HIGHLY LEVERAGED Iridium is a highly leveraged company and has incurred substantial
CAPITAL STRUCTURE; IRIDIUM indebtedness, including indebtedness that is secured by substantially
WILL BE IN DEFAULT UNDER ITS all of its assets. Iridium expects that it will need to incur significant
SECURED BANK FACILITY ON MAY additional indebtedness or access other sources of financing. While
31, 1999, IF IT DOES NOT RECEIVE significant Iridium expected that it would generate substantial revenues
AN AMENDMENT OR WAIVER FROM ITS shortly after beginning commercial operations, Iridium currently is not
LENDERS generating meaningful revenues. However, Iridium has substantial fixed
interest and operating costs and, accordingly, Iridium expects that
its available sources of funding will be exhausted in the fourth
quarter of 1999 and that it will need to both significantly reduce its
costs and obtain additional financing to fund its operating costs
Iridium had borrowed thereafter. In addition, the amount of funds needed to finance the
approximately Iridium System could be further increased by one or more factors
$3.07 billion outside Iridium's control, including:
as of May 1, 1999 - the inability to generate revenues in the amount and within
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the time frame Iridium expects;
- cost increases for the operation of the Iridium System; and
- increases in applicable interest rates.
Iridium is not generating Whether additional financing is available is not within Iridium's
meaningful revenues, but has control, and there is a substantial risk that additional financing
substantial fixed interest and will not be available.
operating costs. Accordingly,
Iridium expects that its
available sources of funding
will be exhausted in the fourth
quarter of 1999 and it will need
to both significantly reduce costs
and obtain additional financing.
There is a substantial risk that
additional financing will not be
available to Iridium.
Iridium expects that it will not In the secured bank facility, Iridium has covenanted, among
meet the minimum revenue and other things, that it will satisfy certain minimum revenue and
subscriber covenants under its subscriber levels as of a series of dates. Iridium expects
$800 million secured bank facility and, that it will not meet the minimum revenue and subscriber
accordingly, as soon as May 31, 1999 covenants under its $800 million secured bank facility and,
Iridium could be in default under the secured accordingly, as soon as May 31, 1999 Iridium could be in default under
bank facility, which could result in the secured bank facility, which could result in related
related cross-defaults under its approximately cross-defaults under its approximately $2.27 billion in other
$2.27 billion in other indebtedness. indebtedness. The current subscriber and revenue covenants
(giving effect to the previous deferral of the March 31, 1999
covenants to May 31, 1999) are:
- at May 31, 1999 it have cumulative cash revenues of at
least $4 million, cumulative accrued revenues of at least $30
million, at least 27,000 Iridium World Satellite Service
subscribers and at least 52,000 total subscribers;
- at June 30, 1999 it have cumulative cash revenues of at
least $50 million, cumulative accrued revenues of at least $150
million, at least 88,000 Iridium World Satellite Service
subscribers and at least 213,000 total subscribers; and
- at September 30, 1999 it have cumulative cash revenues of
at least $220 million, cumulative accrued revenues of at least
$470 million, at least 173,000 Iridium World Satellite
Service subscribers and at least 454,000 total subscribers.
Iridium has engaged the lenders under the secured bank facility
in negotiations regarding a waiver of, or an amendment to, these
covenants. The lenders are under no obligation to provide such a
waiver or amendment.
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The lenders under the
secured bank facility
are under no obligation
to provide an amendment
or waiver
If the lenders under the If Iridium is unable to satisfy the covenants in the secured
secured bank facility bank facility, the lenders under the secured bank facility
declare a default, they generally would have the right to declare a default and could
could pursue various pursue various remedies, including enforcing their security
remedies, including interests in substantially all of the assets of Iridium (which
enforcing their security include the Iridium System and represent substantially all of
interests in substantially Iridium's assets) and Parent's equity interest in Iridium. In
all of the assets of addition, as a result of cross-default provisions in the
Iridium (which include guaranteed bank facility (approximately $480 million
the Iridium System outstanding) and cross-acceleration provisions that apply to
and represent Iridium's senior notes (approximately $1.45 billion outstanding)
substantially all of and senior subordinated notes (approximately $340 million
Iridium's assets) and in outstanding), a default under the secured bank facility could
Parent's equity interest in result in related defaults and acceleration of Iridium's
Iridium. Such actions approximately $2.27 billion in other indebtedness.
likely would trigger
cross-default and In addition, Iridium's current and future debt service requirements could
cross-acceleration have important consequences on its business, including:
provisions of Iridium's - limiting Iridium's ability to obtain additional financing;
other outstanding indebtedness. - reducing the amount of funds available for operations
because a substantial portion of Iridium's cash flow from
operations will be dedicated to the payment of principal
and interest on its indebtedness; and
- increasing Iridium's sensitivity to adverse economic
conditions.
As a result of Iridium's highly leverged capital structure, Iridium's
management is not able to make decisions freely about certain
business matters because the secured bank facility, the Motorola
guaranteed bank facilities and the indentures relating to its
senior notes include certain covenants that, among other things,
restrict the ability of Iridium and its subsidiaries to:
- dispose of assets;
- incur additional indebtedness;
- guarantee obligations of others;
- prepay other indebtedness or amend other debt instruments;
- pay dividends;
- create liens on assets;
- make investments, loans or advances;
- make acquisitions;
- engage in mergers or consolidations;
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- change the business conducted by Iridium;
- make certain asset or stock dispositions; and
- enter into certain transactions with affiliates and related
persons.
IRIDIUM WILL HAVE Iridium estimates that its funding requirements for 1999 and the
SIGNIFICANT ADDITIONAL two to three years thereafter principally will be driven by the
FUNDING NEEDS costs of operating and maintaining the satellite constellation, the
costs of providing Iridium services and interest expense.
Iridium is in the process
of revising its revenue Iridium estimates that its cash funding requirements for 1999
and subscriber estimates will be approximately $1.54 billion. Iridium expects that its
in light of its initial financing requirements for the two to three year period following
operating difficulties 1999 will be driven by costs similar in type to those expected
and expects that, when in 1999. Iridium expects to satisfy its 1999 funding needs from
finalized, these revisions committed funding, revenues and additional external funding.
will demonstrate that Iridium expects that its currently available funding will be exhausted by
Iridium is likely to need the end of 1999. Iridium is in the process of revising its revenue and
significant additional subscriber estimates in light of its initial marketing and distribution
funding. difficulties and in light of additional experience with respect to the
potential market and expects that these estimates, when finalized, will be
significantly below its prior estimates and will result in a substantial
expected funding gap (the difference between estimated funding requirements
and estimated revenues) through at least 2000. Because Iridium's currently
available funding is expected to be exhausted in the fourth quarter of 1999,
Iridium will need to close this expected funding gap through a combination of
(i) obtaining additional outside funding and (ii) reducing its cost
structure. A failure to effectively close this expected funding gap likely
would have a material adverse effect on Iridium.
These estimates are forward looking and Iridium's actual
funding requirements are likely to differ, and may differ
materially, from these estimates. Iridium's estimated funding
requirements should be viewed in light of the following facts:
- Iridium has only a six month history of operations and no
meaningful revenues and there is no operational service
that provides a direct comparison to Iridium;
- Iridium is in the process of revising its subscriber and
revenue estimates because initial sales of Iridium World
Services have been significantly below expectations;
- Iridium's estimates assume, among other things, that
there will be a sufficient number of customers for, and usage
of, the Iridium System to generate substantial revenues; and
- The availability of the additional sources of funding
Iridium expects to be able to use is not completely within
Iridium's control and is conditioned on Iridium satisfying
certain conditions.
Many factors, including the factors discussed in this section,
could adversely affect Iridium's ability to generate revenues
and could increase its costs of operations and, accordingly,
its funding needs.
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IRIDIUM IS TRANSITIONING FROM Iridium is transitioning from a development stage company into
A DEVELOPMENT STAGE COMPANY an operating company. Iridium has experienced substantial
INTO AN OPERATING COMPANY;OVER difficulties in making this transition. In addition, Iridium is
ITS FIRST SIX MONTHS OF OPERATIONS, highly leveraged and has relatively high current interest and
IRIDIUM WAS UNABLE TO EFFECTIVELY operating expenses and, accordingly, will be required to
MAKE THIS TRANSITION;IRIDIUM generate significant revenues to fund its obligations.
HAS NO MEANINGFUL REVENUES AND ONLY Accordingly, Iridium must effectively and quickly address its
A SIX MONTH HISTORY OF OPERATIONS; inability to make a smooth transition to an operating company.
IRIDIUM'S FUTURE REVENUES MAY NOT Iridium has only a six month history of operations on which
COVER ITS EXPENSES investors can evaluate its performance and has no significant
revenues. In addition, many of the services Iridium offers are
new and there is no operational service that provides a direct
comparison. Further, Iridium has accumulated significant losses
in the development and construction of the Iridium System and
expects to continue to accumulate significant losses until it
has substantial revenues from operations.
Iridium is a start-up Iridium has incurred significant indebtedness to fund the
company with substantial development and construction of the Iridium System. Until
debt, only a six month Iridium has substantial revenues from operations, it will rely
operating history and no on additional indebtedness or other financing to pay its
significant revenues. expenses and to make payments on its indebtedness.
We cannot give you any assurance about:
- Whether or when Iridium will have sufficient customers or
revenues to satisfy its funding requirements or its obligations
under its bank facilities and debt securities.
- Whether Iridium will ever be profitable.
RISK OF LOW SERVICE The Iridium System is not intended to provide communication
DEMAND BECAUSE OF PRICING, services that compete with land-line telecommunications and
SERVICE QUALITY, EQUIPMENT land-based cellular services. Instead, the Iridium System is
CHARACTERISTICS, COMPETITION designed to complement such services. Iridium World Satellite
AND OTHER MARKET FACTORS Services is priced significantly higher than most land-based
phone services, and Iridium customers are not expected to
discontinue their use of land-based wireless services.
Many market factors, Iridium's previous estimates of its funding needs assumed there
including pricing, could would be substantial demand for Iridium services in 1999
prevent Iridium from and that Iridium would be able to charge a premium over the cost
generating revenue in the of a land-based call for its satellite services because such
amount and within the time services provide global mobility. Because demand for Iridium's
frame previously anticipated services has not been significant, Iridium is considering changing
the pricing for Iridium World Services, which would result in
substantially lower expected revenues than previously anticipated.
In addition to pricing, a number of other market factors, including
service quality, equipment characteristics and competition, could
adversely affect demand for Iridium services.
The price of Iridium's Motorola's multi-mode phone generally has an initial retail
phones and pagers may ad- price of at least $2,300 and Motorola's alphanumeric pager
versely affect customer generally has an initial retail price of at least $500.
demand for Iridium's The retail prices for Kyocera phones and pagers are
services. similar to the retail prices for Motorola's equipment. These
prices substantially exceed current prices for cellular phones
and pagers and, Iridium believes, have adversely affected the demand
for Iridium's services. If phone and pager retail prices are not reduced,
this factor likely will continue to have an adverse effect on Iridium.
Iridium does not have control over the retail prices of phones and pagers.
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Iridium does not Under Iridium's pricing strategy it sets wholesale prices for
control its retail its services and its service providers control the price to the
prices and, if they are customer. Service providers may price Iridium services at a
set too high, demand level that is too high, thereby reducing total demand without
for Iridium's services an offsetting increase in per minute revenue to Iridium.
may be adversely Moreover, competition may force Iridium and its service
affected. Prices in the providers to reduce prices below those assumed in Iridium's
telecommunications in- revenue estimates. In addition, pricing for telecommunication
dustry have been services, including long distance rates, has trended downward
dropping, which may in recent years. This downward trend may make it difficult for
adversely affect Iridium to maintain or raise its wholesale prices.
Iridium's ability to
generate revenues.
The Iridium System does not afford the same voice quality,
signal strength and degree of building penetration as mature
land-based cellular or paging systems. This difference in
service quality could adversely affect demand for Iridium
services.
The larger sized The Kyocera and Motorola phones are larger and heavier than
Iridium phones and pagers today's pocket-sized cellular phones and have a significantly
may adversely affect longer and thicker antenna. Motorola's pager is slightly larger
customer demand for than today's standard alphanumeric belt-worn pagers. The larger
Iridium services. size of Iridium's phones and pagers may adversely affect
customer demand for Iridium services.
In addition, competition, including competition from other
satellite systems and from the extension of land-based
telecommunications systems to areas that are currently not
serviced by landline or land-based wireless phone or paging
systems, could reduce demand that might otherwise exist for
Iridium's services.
FACTORS AFFECTING Iridium's ability to generate sufficient operating revenues
CUSTOMER ACCEPTANCE OF will depend upon customer satisfaction with Iridium services.
SATELLITE-BASED SERVICE Iridium believes that customer satisfaction depends on a
variety of factors, including:
The use of satellites - price of its services, phones and pagers;
in the Iridium System - the technical capabilities of Iridium's equipment;
expands coverage but - the quality of the services Iridium offers, including voice
satellite voice and quality, call completion rates and dropped call rates; and
paging services have - the extent, availability and price of alternative
certain service telecommunications services.
limitations that cus-
tomers may not be Satellite-based communications over the Iridium System
willing to accept. experience degradation in service quality in certain places and
are completely unavailable in some places. In particular:
- Satellite-based services are adversely affected in places
where obstructions, such as buildings and other natural and
man-made obstacles, are positioned between a satellite and
the user.
- These adverse effects on satellite calls increase as the
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obstacles become larger and more densely spaced.
- In densely packed urban areas or inside buildings no
meaningful satellite voice service is available.
- Use of an Iridium phone in a moving automobile for a
satellite call makes the effect of obstructions temporary but
more pronounced because the structure of automobiles tends
to obstruct the satellite signal.
- The actual limitations on satellite-based services vary,
sometimes significantly, as conditions change and as the
satellites move in their orbits.
The Iridium satellite paging service also experiences
degradation in certain places. These limitations on
satellite-based services are more significant than current
limitations on service experienced by customers of land-based
cellular systems and traditional paging systems. During the
first six months of operations, it has not become clear to
Iridium whether Iridium customers are willing to accept these
limitations.
For Iridium to succeed, its customers must accept:
- the service limitations described above;
- higher prices for Iridium's satellite services than the
current prices for cellular and paging services; and
- heavier hand-held phones and larger pagers than those
currently used for most cellular and paging services.
In addition, Iridium's current financial difficulties may adversely
affect customer demand for its services because customers may be
unwilling to invest in a service that may not continue.
The Iridium System has not been designed to provide high-speed
data and facsimile transmission capability. Iridium expects
that the appeal of its services may be adversely affected by this
limitation.
Also, the Iridium System lacks the operational capacity to
provide service to a very large number of customers in
concentrated areas using the system simultaneously.
POTENTIAL UNDERSUPPLY OF PHONES AND PAGERS; Iridium phones and pagers are an essential part of the Iridium
DISTRIBUTION AND SERVICE system. Iridium believes that Motorola's and Kyocera's
PROVIDER CONCERNS inability to manufacture and distribute a significant
number of phones and pagers at the commencement
Insufficient supply of of commercial operations constrained Iridium's initial
Iridium telephones and marketing and distribution efforts. Future undersupplies
pagers could harm of subscriber equipment could adversely affect
Iridium. Iridium's commercial operations and
its ability to generate meaningful revenues.
Distribution Concerns. The initial global distribution of phones
and pagers is one of Iridium's most significant challenges as it
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transitions from a development stage company into an operating
company. While Iridium's service providers, who are responsible
for direct sales to customers, are disparately located across the
globe, the supply sources of phones and pagers are limited.
Getting phones and pagers from production locations to a large
number of service providers spread over the globe is a significant
challenge. Hurdles that must be overcome include customs and
tax clearance in each of the countries to which the phones and
pagers are shipped and coordination with numerous local and regional
distribution channels.
Service Provider Concerns. Iridium believes one of its most
significant challenges is identifying, contracting with, motivating
and training service providers in a number of countries to
identify potential Iridium customers, to accurately inform such
customers about Iridium World Services, to market Iridium
phones and pagers and to distribute the equipment and
provide customer service once sales have been made. Iridium has
also experienced difficulties coordinating sales to customers with
operations that span more than one gateway service territory.
There can be no assurance that Iridium and its gateway operators
and service providers will be able to distribute phones and pagers
to various parts of the world or market Iridium services on an
effective and timely basis. A failure to distribute phones and
pagers and Iridium World Services on a global and timely basis
would adversely affect Iridium.
RISKS RELATING TO LOW DE- There is a risk that sufficient demand for Iridium services will not
MAND FOR PAGERS AND PHONES; materialize in a timely manner unless Iridium and its
POTENTIAL NEED FOR SUBSIDIES gateway operators or service providers subsidize the cost of
Iridium phones and pagers. Neither Iridium nor, to Iridium's
Iridium may have to knowledge, its gateway owners and service providers currently
subsidize the price of plan to provide any such subsidies. The costs associated with
phones and pagers to those subsidies, including Iridium's portion of those costs,
stimulate demand for could be significant. Iridium's projected funding needs
its services. do not reflect any costs associated with subsidization.
TECHNOLOGY RISKS For the Iridium System to operate properly, Motorola and its
subcontractors must make a number of sophisticated and diverse
technologies work together -- this is a complex task that has
Integrating the Iridium not been attempted before. This task is further complicated by
system's various the following facts:
technologies, including - the Iridium System is expected to operate 24 hours a day;
software and com- - most of the Iridium System's hardware is in space; and
munications hardware, - system-wide testing, maintenance and repair could adversely
was an extremely complex affect Iridium's ability to provide the service quality it
task and future anticipates.
operations could reveal
serious problems that Iridium believes that the development and implementation of the
cannot be corrected software for the Iridium System was one of the largest and most
without adversely complex software creation and integration tasks ever undertaken
affecting Iridium's in the telecommunications industry. The Iridium System
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services. software, including the software that controls the satellites
and the on-the-ground business support systems necessary for
customer billing, has not been subject to the demands of
commercial operations at the levels Iridium will need to be
successful. This software will have to be reprogrammed if
errors are revealed.
POTENTIAL FOR DELAYED OR The Iridium System is the first satellite-based global personal
IMPAIRED OPERATIONS communications system. However, other companies are
attempting to develop satellite-based systems to compete with
If Iridium's transition Iridium. A significant part of Iridium's strategy is to
from a development capitalize on its first-to-market advantage. If Iridium's
stage company into a transition from a development stage company into an operating
company with company is further delayed or its ability to provide the services it
substantial commercial expects is impaired, there likely would be:
operations is further delayed - harm to the competitive advantage Iridium expects to
or its ability to achieve under its current strategy;
provide services - further delay in Iridium's generation of revenue; and
is impaired, its - a significant adverse effect on Iridium's ability to repay its
ability to generate revenues indebtedness.
and its competitive position
may be materially harmed. A significant delay in Iridium's transition to a company with
substantial commercial operations or a significant impairment
of its ability to provide the services it expects could occur
if:
- significant errors in the design and implementation of the
Iridium System are discovered during commercial operations;
- commercial operations reveal that significant improvements
in service quality are needed if Iridium services are to
generate the demand Iridium expects; or
- a significant number of satellites fail to operate for any
reason. See "-- Risks Related to the Satellites", below.
RELIANCE ON MOTOROLA, Operation of the Iridium System. Iridium relies extensively
GATEWAY OWNERS AND OTHER on third parties to perform functions critical to its
THIRD PARTIES operations. Iridium does not independently have, and does not
intend to acquire, except by contracting with other parties,
Iridium relies the ability to:
extensively on third - develop or produce replacements for the components of the
parties to perform Iridium System;
functions critical to - launch additional or replacement satellites; or
its operations. - operate and maintain the Iridium System.
Currently, Iridium relies on Motorola to provide these critical
functions.
Gateway Operators. Iridium is dependent on the activities
of its gateway operators for its success. Iridium has obtained
commitments from its investors who are gateway operators that
they will continue to use their reasonable best efforts to
perform certain critical functions including:
- obtaining the necessary licenses, if any, from the
jurisdictions in their gateway territories;
- operating their gateways;
- maintaining the connections between the Iridium System and
the PSTNs;
- marketing Iridium Services;
- contracting with, or acting as, service providers; and
- managing relationships with Iridium's customers either
directly or through service providers.
Distribution and Marketing of Iridium Services. Iridium's
success also depends upon the motivation and ability of its
gateways and service providers to generate current demand for Iridium
Services, phones and pagers. Service providers are responsible
for the sales of Iridium Services and of Iridium subscriber
equipment to the ultimate consumer. Service providers are, or
are selected by, Iridium's gateway operators. Iridium's
business plan assumes the service providers would make
substantial sales of Iridium phones, pagers and services as
Iridium transitioned from a development stage company into an
operating company. However, as a result of many factors,
including the failure of Iridium to adequately train and supply its
service providers, demand for Iridium services has not been
generated on a timely basis. See "-- Risk of Low Service
Demand Because of Pricing, Service Quality, Equipment
Characteristics, Competition and Other Market Factors" and
"-- Potential Undersupply of Phones and Pagers; Distribution
Concerns". Iridium, its gateway owners and service providers are
developing various initiatives to address this problem. There can be
no assurance that these initiatives will be effective.
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RISKS RELATED TO THE A significant portion of Iridium's tangible assets are its low earth
SATELLITES orbit satellites and the related land-based control facilities.
Maintaining this equipment is a complex and costly undertaking
The risk of satellite which has not been attempted previously on a commercial basis.
loss or damage is In particular, the costs of satellite loss or failure are significant.
significant, and the
effect of satellite
losses or damage could The loss or failure of one or more satellites, including
be substantial. temporary losses, that for whatever reason are not promptly
corrected by fixing or replacing the problem satellite, could
cause:
- gaps in service availability;
- significantly degraded service quality;
- increased costs; and
- losses of revenue for the period that service is
interrupted or impaired.
Accordingly, the loss or failure of any satellite or satellites
could materially and adversely affect Iridium. A satellite can
be lost or fail for a variety of reasons, including:
- colliding with something, including space debris, another
man-made object or space phenomena such as comets or
meteors;
- mechanical anomalies or malfunctions; and
- failure of the rocket, by explosion or otherwise, that was
to place the satellite in orbit.
Space debris and other in-space risks. Iridium's satellites operate
in low earth orbit and, as a result, face a higher risk of damage
from space debris than satellites that operate farther away from
the earth.Because objects in low earth orbit are moving at
different speeds, the Iridium satellites can be more readily hit by
space debris -- which can include sand, pebbles, dust and rocks
shed by comets, as well as the remains of man-made objects
floating in space. Even a very small piece of space debris can
cause significant damage to a satellite.
Mechanical Anomalies and Malfunctions. During the initial
deployment of the Iridium System, Iridium experienced problems
or "anomalies" with several of its satellites. Those anomalies,
which in some cases included control problems and the
satellite's failure to function as expected, caused those
satellites to be excluded from Iridium's initial constellation.
You should note that:
- anomalies such as occurred with respect to those
satellites, or other anomalies with comparable effects, could
occur in the future;
- such anomalies could have a significant adverse effect on
Iridium;
- from time to time certain events could occur that may cause
Iridium or Motorola to conclude that one or more
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malfunctioning satellites should not be included in the satellite
constellation, and the unavailability of such satellite
could have an adverse effect on the operation of the
Iridium System; and
- while Motorola has absorbed the direct financial
consequences of all satellite losses to date, there can be no
assurance Motorola will do so in the future.
The O&M contract with Motorola provides for the operation and
maintenance of Iridium's space assets (including the satellite
constellation) for Iridium's first five years of operation.
Iridium has the option to extend the O&M contract for an
additional two years. Under the O&M contract, Motorola bears
the risk of satellite malfunction, but Iridium bears the risk
of damage to satellites by the acts of third parties, including
the degradation or complete loss of any satellite due to
contact with space debris.
Launch-related risks. Motorola expects that it will need to launch
additional satellites from time to time to maintain
the Iridium System. Accordingly, a launch failure or failures
could have a material adverse effect on Iridium. Satellites are
launched on launch vehicles, or rockets. Launches of satellites
can fail because:
- a rocket crashes, aborts or explodes (which recently
happened to one of Iridium's competitors); or
- satellites are damaged as they are loaded into the rocket,
during the launch, or as they are deployed from the rocket.
In addition, launches can be delayed for many reasons,
including poor weather conditions, other launch failures or
government actions. Placing multiple satellites in each Iridium
launch vehicle significantly increases the risk that a launch
failure will have a material and adverse effect on Iridium.
Life Expectancy of the Satellites; Financial Effect of Loss of Satellites.
Iridium's business plan currently assumes that each of the
satellites will have an average useful life of at least five years
from its initial date of commercial service. Iridium's satellites
may not, however, remain in operation for an average of at least
five years as Iridium expects. If a significant number of satellites
do not remain in operation for the full five years, Iridium's
operations,including its ability to provide service and generate
revenues,could be materially harmed and its costs of operating
will likely increase.
COMPETITION RISKS Certain sectors of the telecommunications industry are highly
competitive in the United States and other countries. The
Iridium faces direct uncertainties and risks created by this competition are intensified
competition from a by the continuous technological advances that characterize the
variety of operating industry, regulatory developments that affect competition and
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and planned satellite alliances between industry participants.
systems and land-based
services.
Satellite Services Competitors. While Iridium is the only company that
currently serves the global satellite personal
communications market with hand-held phones and belt-worn
pagers, Iridium anticipates that more than one system may serve
this market in some fashion in the future. Iridium believes that its
most likely direct competition will come from the planned ICO
telecommunications service and from one or more of the other
Federal Communications Commission licensed MSS applicants:
- Loral/Qualcomm Partnership, L.P. (on behalf of Globalstar);
- MCHI (on behalf of Ellipso); and
- Constellation Communications Inc. (on behalf of
ECCO/Aries).
Iridium also expects to encounter competition from Inmarsat,
which currently serves the global satellite communications
market as well as from regional mobile satellite systems, three
of which have been launched (Asia Pacific Mobile
Telecommunications Satellite, Afro-Asian Satellite and PT Asia
Cellular Satellite) and several of which are in the planning
stage.
Other Competitors. Iridium's World Roaming Service
offering, which allows Iridium subscribers to roam onto a
variety of cellular networks, faces competition from existing
and will face additional competition from future land-based
cellular interprotocol roaming services, which provide roaming
services across similar cellular networks. GTE Mobilnet ("GTE")
and Deutsche Telekom Mobil ("DeTeMobil") of Germany
currently offer GlobalRoam, a two-way cellular roaming service
between certain North American cellular networks and cellular
networks in certain European countries. AT&T Wireless Service
of the United States and Vodafone of the United Kingdom offer
CellCard, a service that is very similar to GlobalRoam. Two
other proposed mobile satellite systems, ICO and Globalstar,
and at least one regional geostationary orbit satellite system,
ACeS, have indicated that they may also offer some form of
dual-mode satellite/cellular service, which may include
interprotocol roaming capabilities such as those expected to be
offered by Iridium. In addition, a number of rental services,
primarily in the United States, provide cellular phones to
persons traveling in countries with cellular standards that
differ from the traveler's home market.
Currently, the world's large cellular network owners and
operators are considering adopting a coordinated standard for
future cellular networks. If such a coordinated standard is
agreed upon and new networks are built, Iridium's ability to
provide interprotocol roaming would cease to be an advantage.
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Iridium does not expect that such systems would be available on
a global basis until sometime after 2002.
COMPETITION FOR SERVICE In addition to competing for customers for its service,
PROVIDERS AND SPECTRUM Iridium also expects to compete with various other
ALLOCATION communications services for local service providers. A failure
to effectively compete with these services could materially and
adversely affect Iridium's ability to effectively market and
distribute its services and equipment.
Iridium will face Furthermore, ICO could have an advantage in obtaining
competition from other spectrum allocations and local operating approvals in a number
services for local of countries because it is affiliated with Inmarsat, an
service providers international satellite organization, and investors in ICO and
Inmarsat include many state-owned telecommunications
companies, which may have influence with the regulatory
authorities in their countries.
RISKS ASSOCIATED WITH The Iridium System's operation is subject to regulation by
LICENSING the United States and other national administrations. This
regulation is pervasive and largely outside Iridium's control.
Iridium cannot Iridium, Motorola and the various gateway owners have made
currently offer its substantial progress in receiving the authorizations necessary
services in every to operate the Iridium System, but a significant number of
country. regulatory authorizations necessary for Iridium to meet its
service coverage objectives have not yet been obtained. In
certain countries in which Iridium expects its customers will
want to use Iridium's services, the authority to offer
Iridium's services and operate Iridium Satellite phones has not
been received, and unless Iridium receives such authorizations,
service in those countries will be limited or will not exist at
all.
Iridium has covenanted In the secured bank facility, Iridium has covenanted, among
in its secured bank other things, that it will maintain, or cause to be maintained,
facility that it will the regulatory authority to offer Iridium World Satellite
maintain the authority Service in a minimum number of countries. While Iridium
to offer Iridium believes it will be able to satisfy this covenant, the
World Satellite Service regulation of satellite voice services generally is outside
in a minimum number of Iridium's control. If Iridium is unable to satisfy this or
countries. Failure to certain other covenants in the secured bank facility, the
satisfy this and other lenders under the secured bank facility generally would have
covenants would give the right to declare a default and could pursue various
the lenders under remedies, including enforcing their security interests in
secured bank facility substantially all of the assets of Iridium (which
the right to declare an include the Iridium System and represent substantially all of
event of default. Iridium's assets) and Parent's investment in Iridium.
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LIMITED SATELLITE-BASED Iridium's ability to supply satellite-based service depends upon
SERVICE CAPACITY the capacity of the Iridium System. Various factors, including
customer usage patterns, have a significant effect on the Iridium
If Iridium experiences System's capacity for a particular geographic area and on a
unexpected customer system-wide basis. The most important factors include:
usage patterns or its - customer usage patterns; and
available spectrum is - the amount of spectrum (the frequencies at which Iridium is
fully utilized, the ability allowed to operate the Iridium System) available to the Iridium
of customers to place or system.
receive calls may be
adversely affected. Iridium could experience unexpected customer usage patterns
that could exceed the capacity of the Iridium System at one or
more gateways -- similar to an overload of regional circuits
on a land-based system. If Iridium faces significant capacity
issues, its ability to acquire additional spectrum (which can
be thought of as similar to adding more "lines" to a land-based
system) is subject to significant regulatory hurdles. If
adverse usage patterns occur or other significant constraints
are placed on the Iridium System, customers may have difficulty
in placing or receiving calls on the system, which could
materially and adversely affect Iridium.
RISKS ASSOCIATED WITH Iridium has three principal supply contracts (each with
PRINCIPAL SUPPLY CONTRACTS Motorola):
- the space system contract for the design, development,
Iridium's major construction and delivery in orbit of the space segment which
contracts relating to has an aggregate cost of approximately $3.435 billion and
the Iridium System are is substantially complete;
of limited duration, and - the O&M contract, which runs for five years from November,
Motorola's liability 1998 (extendable, at Iridium's option, for an additional two
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under them is years), covers the operation of the space segment of the
significantly limited. Iridium System, including monitoring, upgrading and
replacing the hardware and software necessary to maintain
specified performance levels, and has an aggregate cost
(subject to certain adjustments) of approximately $2.89
billion over the initial five year term; and
- the terrestrial network development contract for the design
and development of the gateway hardware and software, which
is expected to be complete by year end 1999 and has an
aggregate cost (subject to certain adjustments) of
approximately $356 million.
These contracts are of limited duration and Motorola's
liability under them is significantly limited. The contracts
provide that if Motorola has any liability to Iridium under the
space system contract, the O&M contract, the terrestrial
network development contract or any other contract between
Iridium and Motorola in connection with the Iridium System,
that liability may be limited to $100 million in the aggregate
in virtually all circumstances. In addition, under the space
system contract, Motorola is not required to refund amounts
Iridium previously paid to it. Subject to certain exceptions,
Iridium bears the risk, including additional costs, if any,
resulting from excusable delays under the space system
contract, as well as certain of the risks of loss for
satellites in orbit. The O&M contract and the terrestrial
network development contract have similar provisions regarding
excusable delays, waivers and limitations on liability. See
"Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources"
for a description of certain of Motorola's and Iridium's
obligations under these contracts.
The obligations Motorola is required to perform under these
contracts are highly specialized and, if Motorola becomes
unable to perform its obligations under these contracts, it
would be very difficult, if not impossible, for Iridium to
engage a replacement contractor in a timely manner or at all.
See "-- Reliance on Motorola, Gateway Owners and Other Third
Parties".
CONFLICTS OF INTEREST Motorola has and will have various conflicts of interest
WITH MOTOROLA with Iridium. Motorola is:
- the creator and developer of the concept of the Iridium
Because of Motorola's system;
varying roles with - responsible for the design, construction, operation and
respect to Iridium, maintenance of the Iridium System;
there are a number of - a founding, and the largest single, investor in Iridium;
significant conflicts of interest - a gateway owner;
between Iridium and - Iridium's largest class 1 interest holder (and potentially
Motorola. the largest class A common stock holder in IWCL because class
1interests are exchangeable for class A common stock);
- a holder of warrants to acquire additional substantial
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membership interests in Iridium;
- the guarantor of a substantial amount of Iridium's borrowings;
and
- entitled to receive significant additional equity and cash
from Iridium for guaranteeing Iridium's borrowings and
permitting Iridium to defer payments under the O&M
contract.
Motorola's Influence on Iridium. Motorola does not by
itself control the Iridium Board of Directors and it is not
permitted to participate in Iridium's decisions or other
actions concerning the space system contract, O&M contract or
the terrestrial network development contract. However, Motorola
could in certain situations exercise significant influence over
Iridium because:
- Motorola currently has the right to appoint 6 of the 27
members of the Iridium Board of Directors and its
representation could increase if it provides further
financial support to Iridium; and
- Motorola could have control over Iridium similar to that of
a creditor through its position as a guarantor of some of
Iridium's borrowings and as a creditor under various
material contracts.
In addition, under the Motorola MOU and the Motorola ARG,
Iridium has agreed with Motorola that, among other things, it
will:
- compensate Motorola for providing guarantees, deferral
rights and other credit support (collectively, the "Motorola
exposure", which generally includes the aggregate amount
guaranteed by or permitted to be deferred by Motorola);
- use its best efforts to reduce the Motorola exposure to no
more than $275 million by the earliest possible date, including
obtaining bank credit agreements not guaranteed by Motorola
and using revenues from operations, if available, to reduce
the available borrowings under the guaranteed credit
facilities;
- not have outstanding in excess of (a) $1.7 billion of
indebtedness for borrowed money that is secured by the assets
of Iridium or (b) $1.62 billion of senior notes;
- not make certain acquisitions without Motorola's consent;
and
- provide Motorola with the right (in addition to Motorola's
rights to representation based on its holdings of class 1
interests) to appoint one additional director to the Board
of Directors of Iridium any time the Motorola exposure
exceeds $275 million and the right to appoint a second
additional director to the Board of Directors of Iridium
any time the Motorola exposure exceeds $750 million.
Motorola's Contractual Relations with Iridium. Motorola
and Iridium entered into the space system contract, the O&M
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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 O&M contract were
negotiated and therefore these negotiations were not con-
ducted on an arm's-length basis. Moreover, although these
agreements provide for specific prices, Motorola's obligations
and liabilities are subject to certain limitations which
allocate various risks to Iridium and may have the effect of
increasing the price paid by Iridium. Iridium's payment
obligations under these agreements have comprised, and are
expected to continue to comprise, most of Iridium's expenses.
CONFLICTS OF INTEREST The Iridium Board of Directors consists of representatives
WITH GATEWAY OWNERS of certain of the world's leading telecommunications companies.
Almost all of the members of the Iridium Board of Directors
Iridium has certain have been appointed by investors in Iridium who also are
conflicts of interest gateway owners and service providers. Because Iridium is a
with its gateway owners supplier to the gateways and the service providers, the
and service providers interests of Iridium are expected to conflict in certain
respects with the interests of its gateway owners and the
service providers. For example, this conflict of interest is
relevant when the wholesale prices that Iridium will charge for
satellite airtime and other Iridium Services are set -- some
gateway operators and service providers may prefer prices that
are higher or lower than the system optional prices because
their customers are less or more price sensitive.
YEAR 2000 READINESS Iridium is addressing the Year 2000 issue. The "Year 2000 issue"
DISCLOSURE refers to the fact that many computer software application and
operations programs (including embedded chips) written in the
In a reasonably likely worst past may not properly recognize dates ending in "00" as meaning
case scenario, (i) a power 2000 rather than 1900. This could result in the incorrect
failure at a ground station performance of computer calculations and functionality involving
location could impact Iridium dates. Iridium's Year 2000 Program, or "Y2K Program",
handset to Iridium handset addresses information-technology,
service; or (ii) a call could or "IT", and non-IT problems that
fail to be completed due to a may exist within the Iridium System, including Iridium's
failure in the existing wireless suppliers, roaming partners, service providers and other material
or landline telecom network distributors. The Y2K program encompasses Iridium's space and
for those Iridium services that ground facilities,as well as the relevant operations of Iridium's
depend upon the transmission material suppliers and distributors, and addresses both IT and
of calls over such networks. non-IT systems.
Iridium has established a Iridium has performed an initial inventory of all
program to assess and mitigate Iridium hardware, software and infrastructure, as well as material
these and other risks, but vendors, to identify potential Year 2000 issues and to determine
cannot provide assurance the action required, if any, to correct the problem. Through the
that all actions necessary to gateways, Iridium is contacting its third party roaming partners
correct a Year 2000 problem and service providers to determine the Year 2000 status of their
will be completed in a timely systems, as well as their plans to bring them into compliance. The
manner. assessment of Iridium developed systems and those of Iridium's
key suppliers has been completed. The results have indicated
that necessary upgrades can be installed by, and the Y2K
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Program substantially completed by, July 1, 1999. The gateways are still
completing their evaluation of their internally developed systems
and the status of this analysis is not finalized. However, Iridium
has every indication that the systems critical to the completion of
an Iridium call from one Iridium handset to another Iridium
handset is expected to be Y2K ready by July 1, 1999. We also
have determined that the systems critical to billing and
settlements are expected to be Y2K ready by July 1, 1999.
In a reasonably likely worst case scenario (i) a power failure at a
ground station location could impact Iridium handset to Iridium
handset service; or (ii) a call could fail to be completed due to a
failure in the existing wireless or landline telecom network for
those Iridium services that depend upon the transmission of calls
over such networks. Iridium has established a program to assess
and mitigate these and other risks, but cannot provide assurance
that all actions necessary to correct a Year 2000 problem will be
completed in a timely manner. Iridium believes that if the Y2K
Program is completed as scheduled, the potential of significant
interruptions of normal operations should be reduced. However,
Iridium cannot assure you that its systems and the systems of
those third parties on which its operation relies will be compliant
in a timely manner or that there will not be a material disruption
of Iridium's business or a material adverse effect on Iridium's
liquidity, financial condition or results of operations because of a
Year 2000 problem.
RISKS ASSOCIATED WITH Iridium intends to make its services available in almost
INTERNATIONAL OPERATIONS AND every country. As a result, Iridium and its gateway operators
DEVELOPING MARKETS and service providers are subject to risks related to each
country's domestic and international policies and risks related
Certain risks related to economic conditions in many regions of the world, such as:
to the domestic and - changes in domestic and foreign government regulations and
international policies telecommunications standards;
and economies of the - licensing requirements, tariffs or taxes and other trade
various countries in which barriers;
Iridium operates could - price, wage and exchange controls;
adversely affect Iridium. - political, social and economic instability;
- inflation; and
- interest rate and currency fluctuations.
Iridium, its gateway operators or service providers could be
adversely affected on a country-specific, regional or
system-wide basis by these factors. See "-- Potential
Undersupply of Phones and Pagers; Distribution Concerns" and
"-- Reliance on Motorola, Gateway Owners and Other Third
Parties".
DEPENDENCE ON KEY MANAGE- Iridium's success depends upon the efforts of its management
MENT AND QUALIFIED PERSONNEL team and its ability to attract and retain qualified management
and personnel. Iridium has no employment contract with any
Iridium relies on key employee and is subject to the possibility of loss of one or
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employees with whom it more key employees at any time. For example, in the first quarter
does not have of 1999 Iridium's CEO and its CFO resigned. Iridium also relies upon
employment agree- several employees of Motorola who play a key role in the
ments performance of Motorola's obligations under the O&M contract.
Iridium has no control over the relationship between Motorola
and its employees. The loss of one or more of these key
employees could adversely affect Iridium. In addition,
Iridium's success will be dependent in part upon gateway
operators having qualified personnel at the various gateways to
execute significant aspects of Iridium's licensing, marketing
and distribution efforts.
RISKS ASSOCIATED WITH If significant and rapid growth in demand for Iridium World
GROWTH Services is achieved it would require Iridium and its gateways
to make additions to personnel and management information
Currently, the capacity systems to manage that growth while continuing to meet customer
of the Iridium System service expectations. In addition, because Iridium's assigned
cannot grow above spectrum (frequency band) and satellite infrastructure
certain limits. characteristics set inherent capacity limitations, growth above
certain levels currently is not possible.
RISKS ASSOCIATED WITH IWCL is a Bermuda company. IWCL's Bermuda legal counsel
INCORPORATION UNDER BERMUDA has advised IWCL that uncertainty exists about whether Bermuda
LAW courts will:
- enforce judgments obtained in other jurisdictions
Bermuda law may not (including the United States) against IWCL or its officers or
permit you to sue IWCL directors under the securities laws of those
for certain securities jurisdictions; or
law claims, and you may - entertain actions in Bermuda against IWCL or its officers
not be able to enforce a or directors under the securities laws of other jurisdictions.
U.S. court's judgment
against IWCL. There is no treaty in effect between the United States and
Bermuda providing for enforcement of U.S. judgments. In
addition, there are grounds upon which Bermuda courts may
refuse to enforce judgments of U.S. courts, and certain
remedies available under the U.S. federal securities laws would
not be allowed in Bermuda courts, as they may be contrary to
Bermuda's public policy.
RISK IWCL WILL LOSE MAN- Under the LLC agreement, IWCL has certain special rights
AGEMENT RIGHTS UPON A including:
CHANGE IN CONTROL; - the right to designate two members of the Iridium Board of
IRIDIUM'S INFLUENCE OVER THE Directors, one of whom will act as a Vice Chairman of Iridium;
IWCL BOARD OF DIRECTORS and
- the right to block certain significant transactions
IWCL could lose its involving Iridium.
special management
rights in Iridium if Iridium will have the right to terminate these special rights
there is change in following an IWCL "change in control", which includes
control of IWCL. circumstances in which:
- an entity other than Iridium becomes the beneficial owner
of more than 30% of IWCL's outstanding common stock; or
- there is a change in a majority of the members of IWCL's
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Board of Directors over a two year period that is not approved
by a vote of 66 2/3% of the members of the IWCL Board then
still in office who were directors at the beginning of the
two year period or whose election or nomination for
election was previously so approved.
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